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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 681 - i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE THE COMMITTEE OF PUBLIC ACCOUNTS Monday 14 November 2005
FILING OF INCOME TAX SELF ASSESSMENT RETURNS
HM REVENUE & CUSTOMS MR D VARNEY, MR G MAKHLOUF and MR R MASSINGALE
Evidence heard in Public Questions 1-118
USE OF THE TRANSCRIPT
Oral evidence Taken before the Committee of Public Accounts on Monday 14 November 2005 Members present: Mr Edward Leigh, in the Chair Mr Richard Bacon Greg Clark Helen Goodman Mr Sadiq Khan Kitty Ussher Mr Alan Williams ________________ Sir John Bourn, Comptroller and Auditor General, National Audit Office, further examined. Ms Paula Diggle, Second Treasury Officer of Accounts, HM Treasury, further examined. REPORT BY THE COMPTROLLER AND AUDITOR GENERAL FILING OF INCOME TAX SELF ASSESSMENT RETURNS (HC 74) Memorandum submitted by HM Revenue & Customs Examination of Witnesses
Witnesses: Mr David Varney, Chairman, Mr Gabs Makhlouf, Director, Debt Management and Banking and Mr Roy Massingale, Self Assessment Product and Process Group, HM Revenue & Customs, examined. Q1 Chairman: Good afternoon and welcome to the Committee of Public Accounts. We welcome Mr Seeder who is Chairman of the Committee of Public Accounts of the Estonian Parliament, our equivalent, and Mr Saar who is the Director of the State Audit Office; we are having a word with them at the end of this Committee. Thank you very much for coming. Our hearing today is on Filing of Income Tax Self Assessment Returns and we are joined once again by Mr David Varney, who is Chairman of the HM Revenue and Customs. Would you like to introduce your team Mr Varney? Mr Varney: On my left-hand side is Mr Roy Massingale who is Director for Self Assessment in HMRC and on my right-hand side is Gabs Makhlouf who is Director for Debt Management and Banking in HM Revenue and Customs. Q2 Chairman: Could you please have a look at page 26, figure 10, where it says "Over 260,000 taxpayers had more than one tax return outstanding at July 2004" and I understand that it is now about 240,000 taxpayers; still a lot. I wonder whether you are doing enough about these 240,000 taxpayers who persistently fail to get their returns in on time. Mr Varney: One of our central jobs is to allocate resources to the many challenges we face and in this particular case some of those individuals will have low tax obligations to collect; others we are trying to pursue. As it says in the report, we have recently done a spend-to-save initiative with the Treasury, which is using rather more aggressively some of the penalties that we can impose. That has had an impact on increasing the collection. Q3 Chairman: Is it right that what we are talking about here is around 1.1 million tax returns outstanding, £1 billion not realised? Is that right? Mr Varney: In total, if you look at self assessment as a whole, because at any stage you take a snapshot, if you take the last 12 months, 90% of the people who were on self assessment filed on time. Within 12 months, we had increased that to 97.8% and of the tax brought to charge through self assessment, we eventually collect about 99.5%. The position over time is that it is a big source of tax collection, so there will be an outstanding amount at any time, but if you look over the whole of the regime, we actually collect 99.5% of the money which is outstanding. Q4 Chairman: Let us still look at the people who do have difficulties. If you look at figure 14, which you can find on page 34, that figure deals with the most common mistakes that taxpayers make in completing a tax return. I just wonder whether you are doing enough to help these people put in accurate tax returns. Mr Varney: I would not be complacent. We have redesigned the form, we have taken a million people out of self assessment and tried to take people out where their affairs are sufficiently simple that they can be dealt with by Pay As You Earn. We have redesigned the form and we have put out this short return, which has been well received. We do try to look at the causes of error and then see whether we can trace that back either to our form or our guidance and then, if that is the case, we consult about how we might amend the form or amend the guidance. We are not complacent, but we are trying to see what we can do to improve the accuracy of the returns and also trying to minimise the mistakes that we make internally in processing the return, because another source of error is that we get the right data but we do not record it correctly. Q5 Chairman: Let us now look at the sanctions you can use to get people to file on time. If you look at page 28, paragraph 2.21, it says "The Department has not yet developed management information which enables it to monitor the value of sanctions applied against the amount of tax assessed as due". Do you think you have got the penalties right? Mr Varney: There are two issues. Very helpfully, the NAO draw attention to the need to have a better management information system and I think that is a fair comment and that is something we are taking away to work on. The penalties are a judgment call in the end; there is no exact science. It is a decision on what impact you can have and some of the things which we are doing in terms of the daily penalties illuminate that debate. In the end, it is a choice for Government as to what regime they want to put in place and then for us to work it to the best of our abilities. Q6 Chairman: Do you have the right information to assess the impact of penalties? Mr Varney: We are doing more work on it, but it could be better. We are going to move self assessment debt management into a new system, which will give us better intelligence, which will help build a better management information system, for which the NAO have rightly called. Q7 Chairman: Let us look at filing returns electronically now which is dealt with on page 15, paragraph 1.11. It says there "Some taxpayers encountered problems with the online service over the weekend of 29 and 30 January 2005". For 2004-05 17% were filing electronically and you have a 25% target for 2005-06. Do you think you can avoid these problems in the future? Mr Varney: I hope so and I regret the problems. May I explain what they were and maybe look at the reasons why they emerged and some of the challenges we face? Over the period, 29 and 30 January we successfully processed 139,000 filings, but 80,000 filings did not get a message back saying "We have processed your account and everything is satisfactory". We were able to send them that message on 31 January, but if it was not satisfactory, if their input was wrong, they did not get a chance to correct the error. So we gave them a two-week period in which they could then correct the error and file it. We have looked at the reason why we had a problem and we have tried to re-size the web-based technology we are using. This is probably the busiest piece of the e-government infrastructure and one of the issues which we have to face is the density of traffic in a particular period. Because the filing has to be done by 31 January, what tends to happen rather late on 31 January is that we get a large number of filings and therefore have to collate them. Q8 Chairman: Let us look straight at that, which is covered in figure 22 on page 42. This shows graphically those peaks which you are encountering. I just wonder whether you should consider changing your filing deadline so that you can avoid some of those peaks in your work. Mr Varney: That is one of the things being looked at by Lord Carter in his review. He will be making recommendations to ministers later this year for ministers to think about. Clearly, from an administrative viewpoint there is benefit if you can smooth the peaks, but that is just the administrative consideration. Q9 Chairman: It seems that other countries may be organising this better. Mr Varney: I think other countries organise it differently. The reason that the United States and Australia, which are the two often cited, get such early returns from their taxpayers is that they take rather more money from their taxpayers than it turns out the taxpayer needs to pay. So they have high levels of taxpayers claiming back tax which has been paid. That is a rather neat judgment and not one for me to make I suspect. Q10 Chairman: I am cautious in this Committee about suggesting that you should impose greater penalties on people, because if I say that, I get angry letters from taxpayers. So what about more of a carrot-and-stick policy then? Why do you not, for instance, give people incentives to file electronically? Mr Varney: I think that is something Lord Carter is looking at. Q11 Chairman: What is your opinion of that idea? Mr Varney: I think it is an appropriate topic for ministers to consider. Q12 Chairman: That is very illuminating. Mr Varney: I was trying to keep your mailbox down. We have used incentives to go electronic with small- and medium-sized enterprises. It is a finely judged matter. If you make the incentive too high, you get all sorts of unwanted behaviour; people who would have filed as a single company now file as ten because they can get ten rewards for doing so. I think there is a debate to be had about what is right. Q13 Chairman: Surely not. We are not talking about massive incentives. Mr Varney: When we do the market research, the thing that most people want is a reliable service and they want the functionality that we could tell them that their return had been accepted by us; that seems to be the biggest attraction. Whilst that is the biggest attraction and given that the amount of filing online is growing, we should stick with that. Q14 Helen Goodman: My understanding is that 61% of the people who are late with their tax returns have either already paid enough tax or are owed money by the Revenue. That suggests that people are not delaying filing their tax returns in order to avoid tax but simply because they find it difficult to comply with the Revenue's bureaucratic systems. As a general proposition, do you agree with that? Mr Varney: I think we have gone quite some way to make the systems as user-friendly as we can. Mr Massingale: The introduction of our short tax return this year, which is four pages as opposed to a minimum of ten on the main tax return, has been very well received. Our next major move in that course, and we are working on it now and are going to pilot it from next year, is to do similar work on the main tax return to improve the guidance related to that with a view to getting that going by January 2008. Q15 Helen Goodman: You have also taken some people out of self assessment, which is a similar sensible step. Mr Massingale: Indeed, about 1.1 million on a risk base and the NAO have approved that and asked us to look at that further. Q16 Helen Goodman: Strictly speaking we are not supposed to draw on our own experience, but I will draw on my own experience of filling in my tax form, which is that you receive the papers in May, you put them down in some safe place and you subsequently forget where that safe place is. About two months later you get your P60 and you put that in another safe place, probably not the same safe place. You then realise that you are supposed to fill it all in by September and, interestingly, I see in table 27 that you get a reminder letter on 23 December. Do you think 23 December is a good day for sending out a reminder letter to people? Mr Varney: Which one would you suggest? Maybe 23 December is not the best chosen, but then 22 December probably would not be well chosen either. We have a process where we are trying to give people enough notice. To make a tax system work you need to get the taxpayer to provide you with information. We are trying to do that and to make it as easy as possible. Q17 Helen Goodman: Of course I understand that, but when you send out the tax form two months before people have the information that they need to fill in the tax return, that does make it more difficult for people. Bringing those two timetables together would be something that I should like you to comment on. It is all very well to say you have given it over to Lord Carter but you, the Revenue, must surely have some control over what these systems are? Mr Varney: We have obviously put to Lord Carter some of the considerations which we have encountered in operating the system. He will make recommendations but then it will be for ministers to decide. On the issue of timing and frequency, there are some comments in the National Audit Report about the fact that our system appears to give more time than some of the other countries with which we compare the tax system. Q18 Helen Goodman: Quite. The further point in this timetable which makes it tricky for people is that the final deadline is not until the end of January. Possibly bringing the timetable forward to late summer or early autumn might actually make it easier for people to keep in their head that they need to do this. Mr Varney: We do need to look at that with Lord Carter. That is what he is there for. There are some practical issues around when we can get the information from the companies, when we alert them. I suspect some people have much more economically chaotic lives than you lead, so they will have changed employers and have more bits of paper. We try to advertise as well for a high level of awareness. What we are trying to do is get as much voluntary compliance as we can. Q19 Helen Goodman: I appreciate that. I am just trying to suggest that looking at the timetabling would be particularly fertile. Mr Varney: I shall pass that on to Lord Carter. Q20 Helen Goodman: One of the problems that the NAO found was that there was insufficient capacity at the call centres during the peak times and that is in paragraph 3.7 on page 33. Another issue, which I think is related to this and relates also to the complexity of the tax return, is the lack of face-to-face advice now for people when they are making their tax returns. Is the Revenue going completely away from face-to-face advice for people on filling in their tax returns? Mr Varney: No, I do not think so. Mr Massingale: Not at all, in fact we are proposing to improve the quality of our face-to-face advice, in part by introducing an appointment system so that people can plan their time to receive advice. We have worked hard on our website; it does not suit everyone, but there is some very good helpful advice there. We constantly look at our leaflets and guidance notes to try to keep them up to date and write them as clearly as we possibly can. Q21 Kitty Usscher: When the report was written, it suggested that it cost about £22 to process each self assessment tax return. Is that figure still valid? Mr Massingale: That is broadly right. That is mainly a staff cost and I think that cost does not include the overhead costs of our buildings and, in part, our IT system. Q22 Kitty Usscher: Is that a cost which you think you can realistically reduce with efficiency savings and the programmes you have in hand? Mr Massingale: A major way of reducing that cost, and we need to of course, is to increase the level of online filing. Quite clearly our costs are reduced with an effective online system because the costs of data entry are removed and indeed some of the costs of exceptions in the system, because the protocols within the software system can take that difficulty out of it. Q23 Kitty Usscher: How much is it on average if it is an online application? How much would it cost you? Mr Massingale: We believe that overall, the cost of an online form at the present time is about £9 less than the cost of the paper form. Q24 Kitty Usscher: Are you incentivised through PSA targets and that type of thing to achieve those potential savings? Mr Varney: Yes. We get a remit letter from the Chancellor once a year and part of that is efficiency. The other thing we are doing is looking at the efficiency and accuracy of our own processes and in the report you will find reference to the use of a quality management regime to improve the performance. However, there will always be a group of people who will want to use post and paper, so we have to have effective processes for them as well. Q25 Kitty Usscher: Just to get a sense of the order of magnitude, if self assessment forms were filled in correctly 100% of the time, which of course never happens, how much would the cost per form reduce because you did not have to go and chase people? Is that a small proportion of the total? Mr Varney: It would be a guess, but it is probably of the same order. It is the electronic gain if we have done it. The great thing about filing online is that a reconciler is put in the form which tells the taxpayer that the information has been accepted; we get clean electronic data, so we get clean addresses. It is hard to get a precise number because we have not been there. Q26 Kitty Usscher: But if someone completes a manual one perfectly it is roughly the same effect as completing one electronically. Mr Massingale: I think so, broadly, although even with a perfect paper return we are of course still left with the cost of data entry which we have to do manually. Q27 Kitty Usscher: Staff costs; of course. For the paper returns, which make up the bulk of your returns and, as you say, there will always be people who prefer to submit by paper, I am certainly one them unfortunately, what efforts have you taken to minimise the mistakes that are routinely made? There is an interesting table in the report which highlights that people often get their pension contributions wrong and various capital allowances and so on; certainly it is inherently confusing. Do you have an action plan to address each of those particular issues? Mr Varney: We wrote 180,000 letters to people who were most likely to make errors. Inevitably, when you are dealing with large populations like we are, 40 million, you are always trying to find segments at which you can target your interventions so they can be effective and that is what we have tried to do. We also look at what we think are the errors in the system and try to see whether we can work out where the fundamental cause is coming from. Q28 Kitty Usscher: Do you work with the private sector as well? For example, do you work with private pension companies to make sure their yearly tax returns are absolutely clear about which bit you should put in? Mr Varney: We have a thing called Closer Working, which is an engagement basically with advisers. They reflect back to us problems and issues, plus we have what we get from our own internal management information; we work together. If anybody has ideas, they tend to come to us pretty quickly. We tend not to be short of advice about how we can change the system. Q29 Kitty Usscher: Do you have another comment? Mr Massingale: The major piece of engagement that we are involved with is through third party software vendors who support not only individuals who want to return online but also agents and various intermediaries, tax accountants and the like, who want to use their products. We work very closely with that community to ensure that their products meet the requirements of the system and so on and so forth and provide them with test facilities to ensure that what they generate on their machines is a proper replication of our system and the rules and regulations. Q30 Kitty Usscher: I am sure that is useful, but I was thinking more of Helen Goodman's example of piling up bits of paper during the year and wondering what to do with them. You have several different bits of paper, potentially from your bank, from a private pension, potentially all sorts of different bits and pieces and it is not often clear which should go in which box if you do not want to employ an accountant or have a piece of software. Have you thought about perhaps ensuring that the private sector writes clearly on the bank statement when you have the interest coming in, that this is what you should put in box 16.24 or whatever it is? Is that something that you would consider doing? Mr Varney: What we have tried to do is to take out of the system those people whose affairs are simple, that is the million we have already done. The shorter tax return is meant to address those people whose affairs are still sufficiently simple that they can fill in the form and get an accurate return. As people's affairs get more complicated, it then becomes correspondingly more challenging and that is why we have the full tax return and we are going to pilot a redesign of it and see whether that produces a better outcome. Q31 Kitty Usscher: Could you explain how much it costs the public purse for someone who files in September as compared to filing in January for both electronic and manual? Does it make a difference to you? Mr Varney: There is a small cost advantage from early filing. We should prefer that people filed as early as they could and we try to encourage that. It is not easy to persuade people to do that. Q32 Kitty Usscher: Are you able to quantify the effect on the public purse? Mr Varney: It is a quite small timing effect. We have not quantified that, but it is quite small. What we do is encourage people to file and pay as early as possible. We get about 80% of the money in by the end of January. Mr Makhlouf: We do. I think your question was whether the cost of processing was different between the end of September and the end of January and I think the answer is that the differences are too small. It is more the consequences of people filing late or filing too close to the deadline which has been some of the discussion that we have just had. The earlier people file, the easier it is for us to avoid peaks which create costs. I do not think we can actually see a material difference in the costs. If it is the £22 figure that you are interested in, I am not sure we can actually see a big difference between the £22 figure, whether it is September or January; not at this stage. Q33 Kitty Usscher: You are trying to encourage people to file by September by using various incentives such as not having to calculate the tax, so that is simply to get it in? Mr Makhlouf: Yes; to get the return in, that is right. You can actually get the return in online by the end of December and have the facility which is offered for returns on paper by the end of September, which is a fact which is not very well known. Q34 Mr Bacon: Mr Varney, in paragraph 3.4 on page 32 it refers to the random enquiries and the risk based enquiries which are undertaken for both corporate and personal returns. It says at the bottom of that paragraph that 78% of such enquiries detected non-compliance, which sounds quite high I suppose. Nonetheless, out of 200,000 it means that around 22%, 40,000 have nothing wrong at all. Do you think you could do something to improve the targeting? Plainly, not only is it a huge hassle for those 40,000 people, but it also turns out to be a waste of your inspectors' time, does it not? Mr Varney: The random enquiries show roughly a 30% yield and those targeted over 70%. So those are partly the fruits of being more accurate in terms of targeting. Our challenge is that about 5% of cases account for 70% of lost money which we are trying to get to, so we need to find and hit the highest yielding part of that 5%. Q35 Mr Bacon: What criteria do you use to come up with the 200,000 that you have come up with which are risk based? Mr Varney: We go through and look at their experience of filing in the past. Mr Massingale: In our local offices, we have put a lot of effort recently into more systematic risk-based programmes. We have national programmes focusing on particular trades where we think there might be high levels of risk and we also allow our local compliance teams to develop locally based programmes of work based on their experience of the local area and where they think the risks lie. We do quite a lot of work researching the internet, researching local newspapers and so on and so forth. Q36 Mr Bacon: What are the particular trades that stand out as being high risk? Mr Massingale: The construction industry has been a long-term high risk trade; obviously anything with a high volume of cash in the business, cash retail, the entertainment sector around clubs, licensed premises and the like. Q37 Mr Bacon: The previous line talks about just 5% of returns accounting for around three quarters of the total tax at risk. The problem may be deliberate non-compliance by sole traders, but might it not also be complexity on your part making life more difficult for them? Mr Varney: When we get involved, often the case is that something has not been seen as needing to be reported or there is a trial. There is an element of that. We have tried to simplify this. We have a dilemma which is that we try to simplify the forms. The guidance, which becomes the subject of legal action when we are litigated against, has to be comprehensive. So we are continually between trying to keep the forms as simple and as clear as we can but making the guidance as comprehensive and proof against legal attack which says we did not provide the right guidance. It is a dilemma. Q38 Mr Bacon: When you said you look at previous history of filing, I take it you were talking about behaviour rather than whether they filed on time or not. Mr Varney: Yes; whether we had found something before. At my first appearance in front of the Committee of Public Accounts, I was explaining that we also believe that some element of random checking has a deterrent effect and it is unfair perhaps on the individual who is selected if we do not find anything, but it does deter people. Q39 Mr Bacon: May I ask you to turn to paragraph 3.22 which is on page 37? "The Association of Chartered Certified Accountants has carried out annual surveys since 1997 ... In their February 2004 survey they found that 61 % of respondents had experienced cases of penalty or reminder letters issued to their client where the return had been submitted on time". In other words, it was not because they were not doing anything right, yet they were still getting penalty notices or reminders where they should not have done. It goes on to say "80% of respondents reported having to spend extra time on their client's Self Assessment returns due to errors on the part of HM Revenue and Customs". That is not really good enough is it? Mr Varney: No. Mr Massingale: This is something we have been very concerned about and we have regularly surveyed the number of wrong penalties we have sent out. I think we find that there are three reasons for them and I think we have action in place to try to reduce the levels and indeed have reduced the levels to something around the 1% mark now. One of them is duplicates in our databases and we are looking permanently to clean up our database, in fact we have a structural clean-up there. The fact that we simply do not log the returns in is slightly unforgivably on our part and we have introduced a better system of control around that, batching particular numbers and checking then that those batches have been fully logged and that there is a match there and the final main cause - there are three - is people who have ceased to be self-employed or ceased to be within the self assessment system who have not been cleared from our records. We have been working very hard on the work list that illustrates that. It is something where we do not have a very good record, but we have improved greatly. We think we understand what those main reasons are and have programmes of work to cover each of them. Q40 Mr Bacon: What about those people who are no longer required to complete a return, who drop out of the regime as it were? What are you doing to ensure that you are notified if their circumstances change, making sure that they do not necessarily drop out for ever? It is plainly the case that some of them will have dropped out forever, but equally it is obvious that many will or ought to come back in. What are you doing to make sure they do not drop out and drop off the map forever? Mr Massingale: We have removed this 1.1 million systematically from our system, but in fact if we think about it, the system is fluid in any case. People will come up to our criteria and move away from our criteria quite regularly anyway. We have systems which recognise the factors which bring people in and out of self assessment and, each year run those factors against our databases to correct the situation. The criteria are public criteria. They are on the internet and people know or can see what they are. Q41 Mr Bacon: You have a target, according to paragraph 3.7, for increasing by 2007-08 the accuracy and completeness of information and advice given when there is contact with members of your staff to at least 90%. What steps are you taking to make sure that you reach that target? Mr Massingale: We have, as you know, gone very heavily into call centres on the grounds we believe they are giving a better and more consistent service as well as on cost. We have put a lot of energy into training. Some of the things we have found are that people we have recruited newly for this work in fact can provide a better service because they are not encumbered with perhaps the fables of the past. We do put a lot of very systematic training into that territory. We have our frontline, our first-line staff supported by more specialist staff who can take the more detailed enquiries which lie behind the more obvious ones. Q42 Mr Bacon: Paragraph 3.7 of the NAO report about call centres is telling. "All stakeholders commented on the difficulties of getting through at peak filing times". So long as you have a system where you have peaks and troughs caused by deadlines, that is inherent is it not? Is there a limit to how much you could do through training, if you are going to have to get extra staff in for dealing with peak times? Mr Varney: There is a point at which, no matter how much money we have, providing the facilities to answer calls would just be almost impossible because of training. Q43 Mr Bacon: If there is an inherent problem there, which I think there is, is your strategy to move away from having created deadlines? Mr Varney: Our strategy is to take people out if they do not need to do the system, to go for e-filing, to encourage early filing if we can and offer benefits and inducements to file early. So it will calculate your tax liability for you if you give us a paper return in September. That is the service, in return for which we get, hopefully, more people giving us the data. We are also putting our telephone answering capability into tiers, so that the most difficult questions which come in can go to the most knowledgeable and not clog up the system. Given that we operate a range of tax regimes, they are going to have different peaks so we can move the resources from one tax regime to another to help some of these peaks. However, there will always be an issue if you have a filing day. If people wanting to file at the very last minute want to ring up, they will want to ring up on the 31 January and our system is going to be under huge, huge pressure. Q44 Mr Khan: Helen Goodman gave you the hypothetical example of a disorganised Member of Parliament who, for various reasons, does not get the return in on time. What are your opinions on having an eight-month period within which to file tax returns for the previous financial year? Mr Varney: That is something Lord Carter is looking at. Chairman: We are going to have a very boring hearing, if we are constantly referring to Lord Carter. Q45 Mr Khan: I deliberately changed my question to ask you for your opinion as I did realise you would say that. Mr Varney: It is one of the features, if you do ask somebody to look at something, to listen to what he has to say. Q46 Mr Khan: Without prejudice as to what Lord Carter may find, what are your views on having an eight-month period, bearing in mind other countries have a much shorter period? Would that help you? Mr Varney: Yes. We are going to give the NAO report to Lord Carter - in fact he has got it - so that he can see what the comparison is with other countries. Q47 Chairman: You are not prejudicing what Lord Carter is going to say by giving your own opinion now. Mr Varney: No, and he will make that very clear. It is a balance in the end. It is not that if you made it seven months rather than eight, you would immediately get people giving it their attention. It is a judgment call as to when people have the information, how they are organised and we know that people have got used to the current situation. What we are trying to do is persuade them voluntarily to bring forward their return. If the Government desires to make a move, then we shall make that work to the best of our ability. Q48 Mr Khan: May I say, it is a criticism, that I am no clearer as to your views two minutes after you began answering the question? If, for example, the date for returning this were nearer to when people receive their P60, what would your views be on that? Mr Varney: The issue is that you have to pull together. It depends on the complexity of the case, the individual's circumstances. If you have a large number of bits of paper, you have to work out the critical path, the last date and I suspect moving it forward will have some benefits to us in terms of the administration, but it will also lead to a new set of issues which we will have to deal with as people think about their work. A lot of people are dependent on specialist advice and those specialist advisers do not only do income tax, they do other forms of tax. We would look, if you were to move the date, at what it would do to other tax regimes and other peaks. It is not a straightforward question. I am not trying to be obscure; I am just saying that there are various trade-offs. Q49 Mr Khan: May I just ask you about this? We see from the report that last year approximately 5% of mistakes were made in processing returns, the year before it was 6%. Bearing in mind that some of the poorer people who will fill in returns will not have an agent or expert to advise them, do you think you are doing enough to identify and alert taxpayers who may have had their tax return incorrectly processed? Mr Varney: We have done some more work. We have an automatic coding, a piece of IT which is going in, to remove about a third of the coding errors; so we have made an improvement there. What we are doing is trying to bring as much management quality into this process as we can. We are trying to take out of the system people whose circumstances are relatively straightforward or make sure that they do a short return, which we try to make as straightforward as possible. We have not designed the system so it needs an agent. We have designed it so that it can be worked by the taxpayer. Q50 Mr Khan: My point, Mr Varney, is this. If somebody has an agent, it is more likely, is it not that he or she will be aware of the mistake that you have made. It is somebody without an agent who will be unaware of the mistake made and, for example, we see 50 million people have been overcharged due to mistakes made by your team. Mr Varney: We have a rolling process in this and we try to see what the errors are. We try to spot them and we try to encourage people, if they do not think it is right, to come back and challenge it, then we look at it again. That is what we try to do. We are trying to reduce the number of errors which we generate on our side, making it easy for the people to fill in their forms, because that is the best way of making the system work. Q51 Mr Khan: Just before I move onto the next topic, how do you encourage people to challenge you? Mr Varney: We have explained that this is what we think is their assessment, this is how we have arrived at it and then it is up to them to come back. Q52 Mr Khan: Okay. As far as tax codes are concerned, I see from the memorandum that last year your department was 73% accurate and the year before 71%. What sort of figure should we expect in accuracy? Mr Massingale: We are not at all complacent about these figures; we are not at all happy about them. Perhaps I might just elaborate a little more on what our chairman has said and what we are doing about them. First of all, we do manage to track and correct about two thirds of our errors and are constantly working in our management chain to identify common causes of error and feed them into our management systems. Q53 Mr Khan: Is this tax codes or processing? Mr Massingale: This is both. Tax codes are a major source of error. Q54 Mr Khan: The question I asked was: what sort of percentage of accuracy for tax codes should we expect? It was 73% last year and 71% the year before. What figure is acceptable? Mr Massingale: I should say that we should expect it to be much higher than that. Q55 Mr Khan: Right. So what figures can we expect to see for the current year? Mr Massingale: I cannot give you a prediction of what would happen for this year. I can tell you the sorts of things we are doing to try to improve these matters. We have recognised that one of the issues for us has been that our quality management systems have tended to be too lagged. We have examined our quality too far away from the event and we are trying to bring quality management much more into real time in our local offices. Q56 Mr Khan: So the graph will go upward 71, 73, this way would it? Mr Massingale: We would expect the graph to go up quite considerably. Q57 Mr Khan: I have already explained my concern that those who have no agents are not being made aware of errors that you make in processing the claims. I also read that only half of sole traders and partnerships file accurate returns; I suspect because they tend to be smaller partnerships and clearly sole traders by definition are small. What more help do you think you can give to improve their compliance? Mr Varney: We do run education schemes, which are meetings for people starting up businesses, trying to explain to them what the tax system is and what their obligations are coming into the system. In terms of the information we put out, we try to make it customer friendly and we do answer questions but we approach this in a sort of multi-layered way, trying to help people with the information that they have the capacity to absorb and to use. Q58 Mr Khan: I see from page 23 of the NAO report that after spending £25 million on Hector the Inspector, the conclusion was that it should be withdrawn because it was a stereotypical and inaccurate image of HMRC. We then spent £6 million on Mrs Doyle, which was withdrawn because it did not meet the objective of increasing filing by the end of September. We have now spent £15 million on an advertising campaign which seems at this stage to have been unsuccessful because there was a continuing deterioration in the percentage of taxpayers filing by end September. I am assuming you have changed the advertising agencies in those three examples, have you? Mr Varney: I do not know, to be honest. For the last one, the ongoing latest results are 90.6% for the year to January 2005 and 44.8% for September 2004. So it has gone up and we have seen e-filing up by 400%. We think this last campaign is still working and still producing results. Our media tracking says the campaign researches very well. It is in the nature of what we do that we shall be changing our advertising presentation to reflect the impact it has. Q59 Mr Khan: It says in the report that you are unable to trace 85,000 taxpayers with outstanding returns. What are your views on an amnesty? Mr Varney: If we are unable to trace, we have various schemes now across Europe to enable the exchange of information. I am not really in favour of an amnesty. If those people do not want to be found, then they are trying to avoid and evade tax and we shall treat them accordingly. Encouraging them to come forward is not a particularly useful way. I have seen other revenues have tried something like that, but that is primarily to bring money from overseas into the country. I am thinking about the Belgians and the Americans who gave tax breaks to do that. Q60 Greg Clark: Will you be giving evidence to Lord Carter? Mr Varney: Yes. Q61 Greg Clark: What will you be saying on the question of whether an earlier deadline might be appropriate? Mr Varney: I shall be saying the same thing as I have said to the Committee. Q62 Chairman: That will be a very boring conversation. Mr Varney: It will be very boring. I shall explain to him that in any network you are obviously interested in whether you can move the peak down into the valley so that you make it more even. The difficulty and challenge in this is very much the political judgment, how much change, whether it will actually achieve the results and where self-assessment fits against other tax regimes. I shall be giving him that. What I cannot give him and which I should like to give him, but I do not have the information, is the cost benefit analysis of various alternatives. We just do not have the information for that. Q63 Greg Clark: Why not? Is that not important? You are the expert in the subject. You are the man who is in charge of the Revenue. Surely he must depend on that information. I do not understand the great secrecy around it. Mr Varney: There is no great secrecy; it is not there. We are in the process of building a management information system and I have been saying pretty frequently since I arrived that one of the needs is to get in a quality management information system which can answer these sorts of questions. Q64 Greg Clark: You can give him no information which will enable him to come to a judgment as to the costs for you to have an earlier deadline. Mr Varney: I can give him information, but it does not lead quickly to an answer. We can illuminate a lot of these issues with some research, we can give particular pictures, but if you asked me for the cost advantage of this date as against that date, we should give some impressionistic information but we just do not have that quality of research. Q65 Greg Clark: So you are not going to give him your view as to whether it would be desirable or not to have another deadline. Mr Varney: I shall tell him what we think the tradeoffs are, what we think will be the response from consumers to various ideas which he has. Q66 Greg Clark: What do you think the response from consumers will be to an earlier date, say a November deadline? Mr Varney: It will take a bit of time to bed in and there will be some transition issues along the lines mentioned by Helen Goodman. The people who get the letter are likely to put it to one side and think it is the same thing as last year, so there would need to be quite an advertising campaign. I suspect the accountants would have quite strong views about whether this was a good idea, because it will affect them. One of the frequent comments they make is that the reason they file at the last minute generally is the workload they have among their customers of filling in their tax forms for them. Q67 Greg Clark: When do you get to give your evidence to Lord Carter? Mr Varney: Shortly. Q68 Greg Clark: Within the next few weeks, the next few months? Mr Varney: I have had a dialogue on and off with Lord Carter from time to time and also we are interested in what the IT implications will be. Q69 Greg Clark: May I ask you to write to the Chairman of the Committee with a copy of your evidence to Lord Carter? We can joke about this, but this is seriously frustrating. We have an NAO report here entitled Filing of Income Tax Self Assessment Returns, which presumably entailed considerable expense, we have seven members of the Committee, three members of the NAO, a representative of the Treasury, meeting here in order to guide public policy on how best this should be in the future and we seem to have responses which are vague. We are all in it in order to improve value for money and it would be helpful if some of this information which you are about to discuss were shared with this Committee before we make our report, which will entail some expenditure of resources. Do you think that a reasonable request? Mr Varney: I think it is reasonable. I have reached a situation where by and large I have been talking to Lord Carter as his thoughts have been developing and I have been trying to ensure that we provide him with as much information as we can to illuminate the sort of choices that he wants. Q70 Greg Clark: Could you provide the Committee with that sort of information? Mr Varney: I shall be happy to provide that to the Committee. Q71 Chairman: There is no reason why you should not want to provide us with information and illuminate us just as much as you want to provide information and illuminate Lord Carter. Mr Varney: I am trying to. Q72 Greg Clark: Specifically we should all be grateful to see the written information you give Lord Carter. Mr Varney: Whatever written information there is I am happy to share. Q73 Greg Clark: Paragraph 4.2 of the report suggests that the average cost of filing a tax return is £22 and compares it with £60 for a typical income support claim. Do you have an understanding of how much an average tax credit application costs to process? Mr Varney: No, not at my fingertips. Q74 Greg Clark: Do you think it is more than income support or less than income support. Mr Varney: I have a feeling that it is less than income support. I just do not have the numbers at my fingertips. Q75 Greg Clark: Will you write to the Committee? Mr Varney: Yes; certainly. Q76 Greg Clark: That would be helpful. Do you make comparisons between different types of benefits to see what best practice is and if some system is particularly efficient, do you learn from them? Mr Varney: It is a bit more complicated than that. You can look at the costs of various tax heads and we are trying to do more of that. There is a limit to how much value you can get out of a comparison between different taxes, because they often illuminate the regime. They have different environments, they apply to different populations. What we are also trying to do is to see what benchmarking can be done with other revenues to see whether there is any information there which is useful. The problem is that the way it tends to be done is that we receive rather dense documents from OECD, which is where we all exchange this information. Often you then have to go into definitional issues. Q77 Greg Clark: Presumably one of the advantages of having this great new department which has every benefit, every tax conceivably levied there, is that you can compare and contrast and get to some view of best practice. Mr Varney: Where we do want to get to best practice is on quality and the costs, as we get better information, will help, but quite a lot of the work we are doing is focusing on the quality of our processes, learning about common issues. Q78 Greg Clark: Not on costs. Are you not going to take any lessons from the cost of processing one set of benefits, for example tax credits and apply those lessons, good or ill, to other benefits? Mr Varney: We are talking two sides of the coin. I am talking about the management intervention which produces the outcome which is cost. I just do not think that looking at cost of itself is the issue. What we are trying to do is get behind that look at quality. That is what we are trying to do. Q79 Greg Clark: I would hope that costs are part of it as well as quality. On costs, paragraph 4.7 of the report lays out some of the differences in processing capacity which some of your centres have. You make a commitment to more centralised processing and suggest that will save some costs. You give a figure of 200 to 300 staff years, which I assume is a full-time equivalent to 200 to 300 people. Is that a big saving? How many people work in the filing of income tax self assessment returns? Mr Varney: We have about 8,000 full-time equivalent staff members on the processing side and on the debt management side something like 1,800. Q80 Greg Clark: So 8,000 plus 1,800 and the best estimate of the savings from this great efficiency review of centralising processing is 200 to 300 staff, according to paragraph 4.7. That does not seem very much. Mr Varney: That is based on lifting the performance of the processing centres. We are making a whole series of interventions to try to see what we can do to lift the overall standard beyond the three best. Q81 Greg Clark: Is that right? Are you making 200 to 300 staff years of savings or is there a higher figure? Mr Varney: No, we have at the moment 200 to 300 which are in our plans so far. Q82 Greg Clark: So this great review of centralising administration is just going to lose 200 to 300 people out of the thousands you have working for you. Mr Varney: I am trying to talk about two different things. What that paragraph says is correct, if we rise to the standard of the three most efficient offices. Are we comfortable with their efficiency levels? No. We have a programme which is talked about in here which is seeking much greater efficiency savings. That will come from the quality of training, redesign of process, involving the people who do it and a big investment in frontline management capabilities. Q83 Greg Clark: I just find it very mysterious that there is such a great disparity of efficiency and bringing the bottom up to the top is only going to make a nugatory difference to staffing levels, but that now seems to be it. On guidance with filling in forms, one of the problems which means there is more work for you is that you get incomplete or incorrect forms which you then have to reprocess. You have helplines. At what times are they available? Are they open for 24 hours? Mr Massingale: Our main helplines are available from eight o'clock in the morning to eight o'clock in the evening. Q84 Greg Clark: Is there a reason why they need to finish at eight o'clock in the evening? Mr Varney: Just cost; it is a cost efficiency argument of whether you think people are going to ring in the early hours of the morning to do their tax return. Q85 Greg Clark: Have you made an assessment and determined that they do not do them after eight o'clock in the evening? Mr Varney: We have not come under a great deal of pressure to do that. Q86 Greg Clark: When you say "a great deal of pressure", how would you detect this pressure? Mr Varney: You talk to customers, you talk to intermediaries. This is a public process in which we get a lot of feedback. Q87 Greg Clark: I should be surprised if you were to do a survey if you did not find quite a lot of people, particularly the people Mr Khan mentioned who perhaps do not have professional advisers, might fill in their tax returns after work, in other words between eight and ten in the evening. Do you find that a surprising suggestion? Mr Varney: We do not see that pressure. I think it is more a tribute to your imagination than reality. I do not think there is a large demand. Q88 Mr Williams: Following on the figure Mr Bacon used of 80% of chartered accountants saying that they spend extra time rectifying your errors, does that imply that for those who do not employ accountants, but try to do these things themselves, these errors probably go largely undetected? Mr Varney: We hope not. Mr Massingale: We are trying to improve our internal performance. Q89 Mr Williams: That was not the question I asked you. I know you are trying to improve. All I am asking is whether it means, for those who do not employ accountants, that the probability is that they go undetected. Mr Massingale: To the extent that we do not detect errors we have made ourselves, they are in large part detected by our customers. Q90 Mr Williams: Do you know how many people in the vulnerable areas do not use accountants? I suppose the majority do in fact. Mr Varney: We are trying to take those people with simple affairs out of the tax system. Q91 Mr Williams: We understand that. I see that you failed to update tax codes for over 600,000 people and you made two million tax coding errors, which are very large numbers. You and I have been exchanging correspondence in relation to a constituent of mine in such a situation and you imposed the duty entirely on the taxpayer to identify your failures as far as the coding was concerned. You seem to accept no responsibility for getting it wrong. Mr Varney: We have invested in some IT to try to improve the accuracy. We have accepted that we do need to improve it. Q92 Mr Williams: That is not my point. I am asking about imposing the duty on the taxpayer. Though I do not know how many around here bother to check their tax codes, I must admit that I am terribly remiss and do not and I suspect an awful lot of people do not check their tax code and many people may not even be aware of what their tax code entitlements may be. Errors on this scale and the imposition of a duty on the taxpayer seem grossly unjust. Mr Varney: The taxpayer is in command of the information on which the assessment is based. We try to make as transparent as we can why we have reached the decision we have on the coding and then, if we have made an error, they come back and we correct it. Q93 Mr Williams: If they spot it. When they come back later I was fascinated to find that you are so conscious of the money which is coming in and yet we are told that apparently you do not know how much compensation you pay out as a result of the department's errors. That is in paragraph 3.19. Why is that? Mr Varney: I think that was correct information. Q94 Mr Williams: I did not ask whether it was accurate. I asked you why. We assume it is accurate because we know you have cleared these figures with the National Audit Office and we are not here to argue about the figures. I am asking you why you cannot tell us what compensation you have paid out. Do you not keep any track of it? How can you be sure that the money which has flown out is properly accounted for? Mr Varney: It is properly accounted for. Q95 Mr Williams: You say it is probably accounted for but can you say that it is certainly accounted for? Mr Varney: I said that it is properly accounted for. Q96 Mr Williams: Probably accounted for is less than certain it is accounted for. We actually expect you of all people to be in control of your figures and yet you sit there, the Revenue, saying you do not know how much your people are paying out in compensation. I find that staggering. Mr Varney: When the NAO came in that was one of the things they uncovered in the report and we think this report is very helpful and illuminates areas. Q97 Mr Williams: It could be £1 million, £2 million, £3 million, £10 million, £20 million. You do not know. Mr Varney: No, I do not. Q98 Mr Williams: You just do not know. This gets rather worrying when we look at the cost of some of your errors. We are told that errors led to £70 million being undercharged and £50 million overcharged; you have detected errors of £120 million. These are large sums of money where you have gone wrong. First of all, how do you determine compensation? Whoever receives a letter does not just say they will drop the taxpayer a note and give them £10 compensation. There must be a system. There must be some accounting process for it. Why are these figures not aggregated? Mr Varney: They were not aggregated. Q99 Mr Williams: If one of the people whose tax return you are dealing with were to say they had not bothered to add up the figures, you would not be very impressed by that, would you? Mr Varney: No, but --- Q100 Mr Williams: We are entitled not to be very impressed by you. Mr Varney: You are entitled to have your views. Q101 Mr Williams: Yes, I am entitled to my views, but I am also entitled to know what has happened to the money, that is what this Committee is about. Where is it? How much is it? Mr Varney: I am telling you that at this stage, when this report was done, we did not know and that is regrettable and that is something which the NAO has drawn to our attention and we need to improve the management information. That is what we will do now. Q102 Mr Williams: You know that you incorrectly imposed late filing penalties on 30,000 taxpayers. You know what you imposed on them. How many people then got compensation? Do you know in how many cases compensation was paid? Mr Varney: Do we? We do not. If they wrote back and said they thought it was unfair, which they do, they say "You say we late filed, but we did file on time", we realise that we need to improve the logging system of collecting the data, which is what we are doing. Q103 Mr Williams: Who makes the decision? Let us get back to that first of all. Who decides whether someone is entitled to compensation? At which level in your system is it decided that compensation is due? Mr Varney: That would probably be within the distributed processing organisation and there would be guidelines and those guidelines would say --- Q104 Mr Williams: How would you know whether the guidelines were being observed, if you did not know how much was being paid or for what? Mr Varney: In trying to control this, the question is whether it was properly authorised. Q105 Mr Williams: How can you try to control something when you have no idea what it is? Mr Varney: We do not know what the sums of money are in total, but that is not to say the individual items will not have been properly authorised in accordance with the policy for giving compensation. Q106 Mr Williams: We are getting nowhere on that. I hope that by the time you come here next time you will have tried to address this problem, because we should probably like to return to it. I see that three quarters of the tax loss, which is £2.8 million, is accounted for by 5% of returns, which is around 400,000 people. That works out at about £5,000 each. We are told that half the inaccurate returns are from partnerships and sole traders; half of them are coming from the same place every time and it is £5,000 per year on average. Does that mean that the same people are year after year making similar mistakes? Are you sure a lot of them are not getting away with it? Mr Varney: If we find that there is a mistake, we try to provide advice, if we can identify who the people are. There is some degree of fluidity in this. Obviously what we try to do is to provide those who are making errors with the information and the explanation to encourage them not to make those errors. We have been able to mop up returns over a number of years in some of the areas where we have been using the daily penalty regime. Q107 Mr Williams: Let us come back to the people who have been undercharged. Do you sometimes write that off? We know you do in fact. Mr Varney: Yes. Q108 Mr Williams: Do you know what that comes to, because that is different from compensation, or is it counted within the compensation figures? Mr Varney: Undercharging is more difficult. If they are undercharged and they still have an ongoing relationship and we become aware that they have been undercharged, then, as long as it is not outside the statute of limitation, we can collect it. Q109 Mr Bacon: I have a couple of questions about e-filing. I understand that for the corporate sector e-filing is more advanced than for personal taxpayers and indeed companies above a certain size must file online. Is that correct? Mr Varney: Yes. Q110 Mr Bacon: What is the threshold above which you must file online? Mr Massingale: The new mandatory regime for Pay As You Earn employers' filing requires employers with 250 and more employees to have filed online this year. The requirement moves to employers with 50 or more from next year. Q111 Mr Bacon: There were stories in the press, though you cannot always believe something just because it was in the press, about people being unable to file their corporate returns on line because the system was not working properly. Is it correct that processing was stopped? Mr Massingale: I do not believe there was any serious problem about filing online. Q112 Mr Bacon: Is it correct that processing was stopped? Yes or no. Was processing stopped? Mr Massingale: I do not think the question is capable of a binary answer. Q113 Mr Bacon: By "not capable of a binary answer", do you mean you are not capable of saying yes or no to the question? Was processing which should have been taking place not taking place because the system was jammed? Mr Massingale: There was some delay in some of our back-end processing but we had no problem about receiving employers' returns. Q114 Mr Bacon: There was delay. Mr Massingale: No. Q115 Mr Bacon: Was any money involved? Was there money which should have been collected which was not collected? Mr Massingale: No. Mr Varney: The information which was collected was held in a stockpile so that it could then be fed through to the processing. Q116 Mr Bacon: And has the stockpile now been cleared? Mr Varney: Pretty substantially; yes. Q117 Mr Bacon: Is it possible you could send us a note about that? Mr Varney: Yes. Q118 Mr Bacon: And will you? Mr Varney: I shall, of course. Chairman: Thank you very much, Mr Varney; that concludes our hearing. We look forward to receiving a full note on your evidence for Lord Carter. Thank you very much. |