House of Commons - Treasury - Written Evidence

Select Committee on Treasury Written Evidence

Memorandum submitted by TaxAid

SUMMARY

TaxAid is unique as a charity providing free, specialist advice on tax, tax credits and tax debt for those on low income. Main beneficiaries are unrepresented taxpayers on low incomes. These include all groups—families, single people, lone parents and pensioners. It includes those suffering financial exclusion on low or no incomes. Most are (or have been) employed or self-employed. 40% of problems relate to self assessment: forms, calculation of tax and payment, 30% tax debt, 30% PAYE.

Most tax return problems relate to the self-employed. This ranges from difficulties understanding how the system applies to them, obligations and responsibilities in becoming self-employed, failure to recognise that they are `self-employed', how to keep adequate records, how to complete the self-assessment form, the timing of tax payments, and dealing with enquiries by HMRC (particularly when record keeping and business methods are basic). Failure to comply (eg non-registration of trading and long outstanding non-completion of tax returns) generates about 10% of our work—this can also include those who have not considered themselves self-employed, but who have small or occasional sources of untaxed income ("casual earnings"). The consequences of indebtedness to HMRC are profound: because generalist advisers in front-line debt agencies do not include tax debt in their advice, in the great majority of cases indebtedness to HMRC is not addressed along with other debts. HMRC is in any case more likely to seek to make debtors bankrupt than other creditors—and such bankruptcy may well be based on "estimated" debt.

The greatest barrier to (unrepresented) taxpayers' ability to understand and meet their obligations under the tax system communicate with HMRC is that tax is very complex. Our experience suggests that the principle reason why people on low incomes have problems with HMRC is that they do not understand their obligations. Complexity of the tax regime is compounded for people on low incomes who are also likely to be entitled to Tax Credits. The sheer complexity of tax results in 3 in 10 tax returns incorrectly completed.

A government committed to tax simplification would be the single best driver of change towards better understanding of the tax system—but this is a matter of policy rather than administration. Since on past experience this is unlikely to happen, the Government and its agencies should facilitate access to information and advice in three ways: 1. by inducing coordination in the provision of advice (ie using the generalist voluntary sector to recognise and signpost those with tax problems); and 2. by encouraging the taxpaying public to take responsibility for understanding their tax affairs (through public education programme), and 3. by funding the provision of independent—and high quality—tax and tax debt advice, whether by some form of voucher system for taxpayers or direct to advice providers (using the current network of qualified tax professionals).

TaxAid is not currently able to quantify costs and benefits to low-income clients as sample cases studied are too small to make general statements: broad-brush costs and benefits in London indicate that the average apparent indebtedness of clients in £10,000 (which on average after proper assessment by a qualified tax adviser is typically reduced to a figure of around £500-£700) at a cost to TaxAid of advising each client at an average of £100. These outcomes have great potential to combat poverty and keep people in their self-employment. Rather lesser average indebtedness—and consequently savings from correct assessment—are made for those on PAYE or Tax Credits overpayments, but the outcomes for them are equally dramatic as they are usually on the lowest incomes. We suggest that there are huge costs—and potential savings—to HMRC of case closure and ultimately to the public purse since a single taxpayer's case can sit unresolved in five separate departments in HMRC (collection, compliance, VAT, NI, and Tax Credits).

1. BACKGROUND

1.1 TaxAid is unique as a charity providing free, specialist advice on tax, tax credits and tax debt for those on low income. We also provide specialist advice and training (especially on Tax Credits and tax debt) to front-line advice agencies that work with those experiencing disadvantage. We aim to provide tax awareness training to our partners, and to encourage referrals in suitable (more technical or complex) cases. Services are provided via a national helpline, and face-to-face sessions in London and Birmingham.

1.2 Main beneficiaries are unrepresented taxpayers on low incomes. These include all groups—families, single people, lone parents and pensioners. It includes those suffering financial exclusion on low or no incomes. Most are (or have been) employed or self-employed. Some have tried to sort matters with the Inland Revenue and failed, others want pointers to know where to start, and some need more help as they are unable to represent themselves adequately to HM Revenue and Customs (HMRC), whether because of language or numeracy difficulties, or general problems dealing with officialdom or forms. This includes but is by no means confined to those with limited skills; those with health problems (particularly the long-term sick and those suffering mental ill health); and victims of catastrophic circumstances in terms of health or as a result of crime, bereavement or relationship breakdown. We particularly serve disadvantaged ethnic minority communities suffering multiple disadvantages (cultural barriers; poor education, skills and language problems; low incomes; coerced into self-employment, or in multiple short-term employments interspersed with benefits); all groups are likely to lack of awareness of financial matters. We currently serve approximately 4,000 clients pa (includes 700 casework).

2. SCALE OF THE PROBLEM FACING TAXPAYERS

2.1 Of 27 million tax payers 80% are unrepresented. Approximately 10 million are within Self Assessment, some 4 million self-employed. Our experience of people in self-employment on low incomes is that they are sole traders with no additional internal resources in terms of management skills like budgeting, management accounts or cashflow analysis. 13.5 million people have incomes under £15,000. [HMRC 2005].

2.2 Analysis of our client base and the major problem areas show [from Annual Accounts and Review]:

— 40% of problems relate to self assessment: forms, calculation of tax and payment

— 30% tax debt

— 30% PAYE

2.3 Self Assessment—most tax return problems relate to the self-employed. This ranges from difficulties understanding how the system applies to them, obligations and responsibilities in becoming self-employed, failure to recognise that they are `self-employed', how to keep adequate records, how to complete the self-assessment form, the timing of tax payments, and dealing with enquiries by HMRC (particularly when record keeping and business methods are basic). Typical problems relate to questions re deductible expenses, calculation of tax, amount and timing of collection (eg payments on account), and making arrangements to pay when tax bills cannot be met when due. Failure to comply (eg non-registration of trading & long outstanding non-completion of tax returns) generates about 10% of our work—this can also include those who have not considered themselves self-employed, but who have small or occasional sources of untaxed income (`casual earnings'). Enquiries and investigations are only a small proportion of the Self-Assessment problems we see—possibly because the proportion of self-employed who are represented is higher.

2.4 The self-assessment form also causes problems for those who are surprised to find themselves in self-assessment. (Many people believe that self-assessment applies only to the self-employed). For example, pensioners with no income other than State pension (including SERPS and graduated pension) find themselves outside the PAYE system, and obliged to complete a self-assessment return and pay (often unexpected) lump sum tax demands.

2.5 Tax debt is the next major area where we are the only providers of advice[304]. As this is an area where taxpayers may need to negotiate with HMRC they often feel the need for independent advice before contacting HMRC to take matters forward (see also below in section 3).

2.6 Indebtedness to HMRC arises from various circumstances which can have consequences which are out of all proportion to the initial obligations to the tax due (because of additional penalties and interest if not handled properly and promptly). It can arise from additional small earnings of those on State pensions; 2nd jobs (ie people on low incomes are more likely to have complex work patterns); overpayments on Tax Credits of the order of £2 billion [National Audit Office 2004] susceptible to claw-back; self-employment (voluntary and coerced, often because they are otherwise unable to find employment)—and results in outstanding tax returns which cause HMRC to raise estimated demands. In addition, HMRC itself gets 30% of PAYE codings wrong (NAO 2005). This level of error impacts more heavily on those most disadvantaged in terms of education and access to advice. Understanding entitlement to Tax Credits is important in reducing indebtedness (both to HMRC and generally). The poorest households failing to claim the benefits to which they are entitled (£1.5 billion in unclaimed Tax Credits: NAO 2004 figures). The Revenue has no obligation to inform individuals of their entitlements—which may be substantial— to offset against their liabilities.

2.7 The consequences of indebtedness to HMRC are profound: because generalist advisers in front-line debt agencies do not include tax debt in their advice, in the great majority of cases indebtedness to HMRC is not addressed along with other debts (no criticism is implied here—tax is too specialist to be taken on by unqualified advisers).

2.8 Research undertaken by TaxAid in 2002 in a survey of 30 key generalist money advice agencies illustrated that none of the participating advisers understood that tax bills are "determinations" ie essentially estimates. Nor did they give optimum advice in respect of tax debt (see results of gap survey in Appendix[305]). The survey demonstrated that those with tax debt who approached the generalist VCS were being ill-advisedly referred back to HMRC (with whom they were in dispute) or were advised to go bankrupt—totally unnecessarily, since the debts were estimated and based on determinations. As a result of these findings TaxAid has undertaken to train the VCS in our areas of operation (currently London and Birmingham) and is finding a greater awareness of the significance of determinations (and referrals to TaxAid for help where we are able to provide it).

2.9 If tax is not included as part of the overall debt assessment (for court consideration for example), the likely outcome is that many years later and when other debts have been cleared, the tax-debtor can find himself made bankrupt by HMRC as the debt has increased out of all proportion with the addition of penalties and interest (for example where an Individual Voluntary Arrangement ignores current tax or VAT obligations). HMRC is in any case more likely to seek to make debtors bankrupt than other creditors (and especially for those with debts at £5,000 and higher), which makes it vital that advisers refer those with tax debt when they initially present themselves.

2.10 More than 30% of clients contact TaxAid about PAYE. PAYE no longer serves taxpayers who have much more complicated lives than when it was set up in 1944 with the expectation of jobs for life and a single employer. Problems with PAYE codings arise where:

— There are multiple short-term employments (or employments interspersed with taxable benefits)

306

— We also see problems where people have moved between taxable incapacity benefit and back into work (also with Jobseekers allowance, but co-ordination here seems better). If the taxable benefit is not taken into account in the follow on employment, an unexpected underpayment can arise.

307

— Multiple personal allowances given—too little tax deducted because a personal allowance has been given against more than one job;

A particular type of multiple income is pensioners with eg continuing employment income, occupational pension and State pension. Often, pensioners are surprised to find that State pension is taxable. If it is omitted from their coding, they do not realise it should reduce the personal allowance available against a continuing employment, or other pension income taxed under PAYE. Form P161 is intended to deal with this—but we understand the return rate is not good, and even where it is completed and returned, the information may not be processed accurately. The Inland Revenue should in any case have details of State pension from DWP—but again, this is not always properly processed. Where pensioners continue to be employed, there are complications because different Inland Revenue offices deal with the employment and the occupational pension, and the DWP deals with State pension. Scope for confusion is rife—and not just for the taxpayer.

2.11 The whole question of employed or self-employed status is one fraught with difficulty, where often those most in need of work, or most lacking in tax or financial awareness, can be forced into "self-employment" without realising the consequences. We meet this with groups from migrant domestic workers to skilled workers (including journalists, shop and office workers).

2.12 People throughout the income scale may also be internationally mobile—so they may have problems with tax residence, self assessment on overseas employment (or self-employment) income, or with establishing the UK tax status of employment income in the UK under double taxation agreements, etc. Along with income tax, those on low incomes have to deal with national insurance, and now often with tax credit claims. There may also be the interaction of the tax and benefit systems.

2.13 Those on low incomes may also have complex lives in terms of capital gains tax, and possibly IHT (or establishing these don't apply), again with complications of domicile and residence in some cases. VAT can also apply, even where profits are low. Business as well as individuals is now more mobile and may trade across frontiers.

3. RESPONSE TO Q 3: FINANCIAL EDUCATION AND ACCESS TO FINANCIAL ADVICE

3.1 The above description of TaxAid's work and client base illustrates that those on low incomes have complex lives and correspondingly complex tax to understand. They may need only to know about 5% of the tax system—and ignore the 95% which does not apply to them. However, the challenge for the non-tax expert is to understand which bits of the tax system comprise the 5% for them. See for example at Appendix[308] the range of problems and outcomes presented by the first 50 clients to present themselves for advice at the new pilot TaxAid advice service in Birmingham (during 2005).

3.2 Low incomes taxpayers also often need information on how and which bit of HMRC to contact, what their rights are when things go wrong, and how to complain.

3.3 On occasion they are poorly served by the unregulated tax advice market (including debt consolidators who represent themselves as tax experts) and so need independent advice to represent them to HMRC.

3.4 In TaxAid's experience those working on low incomes have very similar needs in terms of financial, tax, tax planning and financial management advice as those who can afford to pay an accountant or qualified tax professional.

Appraisal of current information and support

3.5 There is a gap in the provision of tax and tax debt advice to those on low incomes. TaxAid is unique in providing accessible, free advice available on tax and tax debt across the UK through its telephone helpline, together with face-to-face services in London and Birmingham. TaxAid's bid under the DTI FIF is to extend face-to-face advice nationally.

3.6 There is some random, small scale, non-networked help given pro-bono by some accountants but this is often as a consequence of historical past relationships eg to the widow of a former client. Accountants and tax practitioners are very unlikely to advise tax debt clients[309].

3.7 Tax Volunteers operate in some (believed to be approximately 20) Age Concern day centres for elderly people—and give advice to their service-users across the range of pension and savings-related tax issues (ie so limited geographically, in content and in terms of clients served).

3.8 The voluntary sector itself also has occasional tax advisers (we believe it to be on a very small scale and generally to be inadequately monitored in that non-tax experts are assessing the outcomes). See Appendix[310] for an appraisal of the access to tax advice from our study of gaps in provision by generalist debt advisers. TaxAid operates an advice service for the voluntary sector which serves their clients when they are required to address tax problems. In addition, most clients are referred by front-line advice agencies that were unable to address the complex needs where tax debt or credits are concerned. For the vast majority no other source of advice was available other than TaxAid, in part because no provision exists for tax debt and in part because referral to HMRC was not appropriate where clients need an independent source of advice (at which point it is practice to refer those people to the correct department in HMRC).

HMRC

3.9 Helplines and call centres: there are still complaints about not being able to get through (though there has been some improvement since area reorganisations earlier in this year). For service concerns, see below.

3.10 Website information—access to Inland Revenue manuals on the website is very helpful for professionals. There is an enormous amount of information available on the Inland Revenue website—but this in itself can make it difficult to find (or be confident) about the answer unless you know what you are looking for. The HMRC website is more successful at dealing with specific situations—eg how do I claim a refund of tax? The reports from unrepresented taxpayers who have filed on line are generally good—though some cross checks we would expect to exist in the system do not apparently exist (eg, a taxpayer received an unexpected bill for National insurance class 4 which was not included in the calculation of tax. She was not over pension age, profits were not below the small earnings exception, and she had not claimed exemption from NI).

3.11 On-line payment—people generally find this easy and satisfactory.

3.12 Face to face—we receive complaints about long waiting times at Inland Revenue Enquiry Centres (IRECS), only for taxpayers then to be told they need to call a helpline/call centre, write, or complete a form on-line. If the reason they have made the effort (and in some cases taken time off work) to attend an IREC is because they need help, this is not satisfactory.

3.13 It has generally been difficult in many areas to get home visits for the elderly/disabled who cannot get to an IREC—and with cutbacks also in IREC staffing the least able to deal with paperwork may find it difficult to get appropriate support and help.

3.14 Written information: there are comprehensive guidance notes, but people find it hard to identify the bits which may be relevant. Even for professionals, some of the more unfamiliar areas are difficult. People new to Self assessment are often very worried about getting it wrong—and often need reassurance about what isn't relevant for them.

3.15 Self-employment: HMRC provide substantial information about starting up, and in some areas Business Support teams are very active in providing seminars etc for start-ups and small businesses at critical points—eg, taking on first employee. But provision is patchy (for instance, can be difficult to find in London).

3.16 People can fail to access the information because:

— they `find themselves' self-employed, rather than deliberately setting out to start up in business

— they are daunted by the amount of information, and cannot find an easy route to the small proportion of it they need

— their skill and interest is in the work they do, not in keeping records, accounting, tax forms etc—it is just a chore, not regarded as providing them with any useful information

3.17 Information and support needs to be timely. For instance, people often need support in completing the first tax return. We are often asked for specific advice about treatment of expenses, personal use items, capital allowances—at the point where people have the form in front of them and don't know what to do. Support at IRECS for taxpayers with tax forms tends to be limited to which boxes figures should go in—not how to arrive at the figures. That is HMRC is not in the business of providing advice in the way that a professional tax adviser does.

3.18 Employees and pensioners—exemplify the major problem that the vast majority of people at the lower end of incomes do not appreciate that understanding tax is their responsibility (and we suspect this to be true of people further up the income scale). This is a basic message which the PAYE system obscures—until things go wrong. HMRC have set up TaxandU (student site) which is helpful—but many young people still find out about the tax system by (not always accurate) word of mouth.

3.19 Information and support—HMRC does issue some leaflets in a variety of languages, and in large print, operate textphone etc to make information widely available. However these and face-to-face help are very resource intensive. There have been well-publicised particular problems with tax credits.

3.20 Accessibility of advice—the structure of HMRC makes it difficult for people to know where they need to go for help. People are surprised that there is no single point where taxpayers can access all details about their tax position (eg pensioners who continue working may have to "juggle" between two tax offices, or clients can both owe money to HMRC under SA and be owed money under PAYE or Tax Credits).

3.21 Where to go in HMRC depends where they are in the process (so for instance separation of compliance from collection—and even collection of income tax and national insurance, let alone VAT, invites traps). HMRC management is of course aware of this and seeking to develop "single entry" for taxpayers—but there are barriers to successful resolution (see below).

3.22 HMRC is itself a victim of tax complexity. So there is a trade-off between full information and overburdening general public with detail. For instance, information on Tax Credits literature is dense and difficult to understand—but even so doesn't include full information to make a correct claim (eg invites errors in terms of what is eligible income). Complexity also impacts on the HMRC—as noted above, the website is comprehensive, but this makes it difficult to access unless you know in advance what you are looking for.

3.23 On the whole the written information leaflets are good and understandable for that proportion of the population prepared and equipped to read them. Specific situation leaflets are particularly helpful eg "What to do about tax when someone dies". General leaflets less so—although CGT1 is comprehensive, and is quite well set out, few people are prepared to wade through 80 pages to work out if they have a Capital Gains Tax problem. It is now not that unusual for unmarried couples on not high incomes to own more than one property.

3.24 Oral information is less reliable. Taxpayers feel understandably aggrieved if they have sought information from HMRC, been misinformed (or misunderstood, or failed to ask precisely the right question) and are then held accountable for unexpected tax. Frequent complaints are:

the officer did not seem to listen to the query—for instance, on asking about payments on account and saying they had never had to pay these before, the response was: "you must have. You're in self-assessment"—but actually they hadn't, as taxable profits had not previously been over £500—so they really did not know how payments on account worked. But they did not get the explanation they needed;

the assumption was they were lying, or trying to get away without paying the correct tax—when all they wanted was information. "Now you've explained how it is that I really owe this, I'll make arrangements to pay it. But why should I pay if no-one has explained how it's due?"

3.25 Clients often tell us they did not feel they got an answer to the question they were really asking; they couldn't understand and act on what they were told (and everything from jargon to speaking accent can cause problems here); concern about the reliability of the information received meant the client wanted an independent "second opinion". It is not clear what steps HMRC take to ensure the accuracy of information provided—certainly a substantial proportion of TaxAid clients (10-20%) who have already approached the Inland Revenue for advice do not seem to have received (or understood?) correct information.

3.26 This can also be the case with written communications. If a previous underpayment of tax is "coded out" in a Notice of Coding, we understand that instructions to officers are that a letter should be sent with a full explanation, if it cannot be given on the Notice itself. Too often the "explanation" is: "You didn't pay enough tax last year so I am collecting extra tax through your notice of coding next year". What this doesn't answer is the obvious question: "How did this happen?" (and sometimes, "How will I know it won't happen again?")

3.27 The proportion of incorrect information for Tax Credits was initially substantially higher. Incorrect information is still being given, eg in relation to losses, foster carers, but appears to have improved.

3.28 Taxpayers are understandably aggrieved if they have sought information from the Inland Revenue, act on it and are then told their understanding is incorrect, and unexpected tax is due. Taxpayers are encouraged to seek information from the Inland Revenue if they are unsure in dealing with their self assessment returns, so they need to be able to rely on the information they are given. The difficulty is that if an area is complex, it is difficult to be sure about the accuracy of an answer unless it is given to a question in writing setting out all the facts. But unrepresented taxpayers may not be in a position to know what is a `routine'question, and what needs written advice to be relied upon.

3.29 Provided efficiently?—If the taxpayer has not `received' the appropriate information, then it has not been communicated. Efficient communication is not necessarily the short term quickest-listening at length and providing the information they need may resolve the situation more efficiently. Clients do report they feel that particularly at call centres the officers are measured on how many calls they deal with—not whether they actually resolve a problem. There are also inefficiencies from the taxpayer's point of view if they can't contact the Revenue promptly when they want to, or get passed on from office to office—this can't be efficient for HMRC either.

3.30 There is also frustration with perceived inefficiency when taxpayers are required to provide information more than once—eg, separate forms for tax and tax credits, or completing a tax return when the only income is State pension, paid out by another Government department.

3.31 Our clients in these cases turn to us because their experience was unsatisfactory in terms of lack of confidence in the response, including that they were given half an answer and/or not understood the HMRC response.

3.32 It is particularly frustrating for taxpayers in circumstances when HMRC should have the information already (eg provided to some other department)—see above, and below at barriers.

3.33 Also difficult when all the necessary information is not provided to enable the taxpayer to understand their situation fully or to respond (eg calculations not provided to enable Tax Credits claimants to judge whether they are being paid the correct amount, and real difficulties in tracking changes in assessments, payments etc on the current Statement of Account, though a revised form is due to be introduced which should improve readability).

4. THE BARRIERS TO (UNREPRESENTED) TAXPAYERS' ABILITY TO UNDERSTAND AND MEET THEIR OBLIGATIONS UNDER THE TAX SYSTEM COMMUNICATE WITH HMRC

4.1 Complexity: tax is very complex. Our experience suggests that the principle reason why people on low incomes have problems with HMRC is that they do not understand their obligations[311]. Complexity of the tax regime is compounded for people on low incomes who are also likely to be entitled to Tax Credits. The sheer complexity of tax results in 3 in 10 tax returns incorrectly completed (NAO figures 2005), indicating a need for professional tax advice. A tax system that is simple, easy to understand—and stable—would mean that taxpayers would be better able to meet their obligations. And their advisers in the generalist voluntary advice sector would be better placed to advise them in relation to Tax Credits[312]—or refer them for specialist advice where tax is involved.

4.2 Fear: of authority, of forms, of financial matters, of not being in control, of feeling stupid

4.3 Culture/language: jargon or terms with specialist meanings (eg determination—not understood by the general public or advisers in the general front-line advice agencies), or explanations of procedures which are obvious to the Revenue officer, but uncharted waters to the taxpayer.

4.4 Particular problems for non English speakers and those with English as a second language; also immigrants/migrant workers unaware of tax laws and the general tax system (including employment rights etc) and those from BME communities who have cultural barriers in terms of accessing advice (particularly women) are less well served by community organisations dedicated to their specific ethnic groups. Coerced "self-employment" status (for example foreign domestic servants are vulnerable to coercion and employers require them to declare involuntary self-employment which conflicts with the terms of their rights to stay in the UK) is one example where HMRC make such pressurized individuals pay the back tax.

4.5 The pressures of making a living cause difficulties in meeting tax obligations. 80% of self-employed people are sole traders who have no additional internal resources in terms of financial management skills like budgeting, management accounts or cash flow analysis.

4.6 Those on low income employment and self-employment (voluntary or involuntary) are more likely to have limited education and skills, but more complex working lives (in and out of work, benefits, part time jobs and occasional employment and self-employment) and more complex interaction with HMRC.

4.7 Access and independence: Those on low pay do not understand what accountants/tax professionals do (this is true of people on somewhat greater incomes too, but their friends and contacts point them in the right direction if they need advice). TaxAid often advises in circumstances where people have inadvertently found themselves indebted to HMRC because they do not have enough understanding of tax to realise that they need professional advice. People are loath too to contact a government department, and especially if they are in dispute with HMRC and need independent advice.

4.8 Differentiating the "can't pay" from "won't pay" is a perennial problem for HMRC. Cost is an important consideration for those on low incomes when making decisions as to whether to come forward (and understand what their tax liability actually amounts to) and comply with their obligations—as is flexibility. For example, if it can be demonstrated that HMRC will understand their personal circumstances and help them meet their tax debt repayments at a level that they can manage and sustain, people are more likely to enter a dialogue with the Revenue—and indeed continue in employment to meet their obligations.

4.9 A trend in "deskilling" at contact points in HMRC in a move away from a "generalist" knowledge of tax matters—this can give problems in accurately identifying information and level of advice needed. (For instance, one client's problem was rapidly resolved once we told her to ask for a CGT specialist in her local Revenue area. She had previously contacted the local office several times, but got nowhere).

4.10 Groups with particular difficulties meeting their obligations include:

— Those with serious mental or physical illness—are tax returns really necessary where psychiatrists "prescribe" therapeutic (self-employment) work for their patients?

— Self-employed whose businesses have stopped abruptly—often because of some catastrophic background event (random events such as they became victim of crime, marital breakdown, bereavement, sudden serious illness, or business failure leading to depression etc) can find it an overwhelming burden to try to deal with "sorting out the paperwork" on the now defunct business. But if not dealt with, HMRC will generally pursue debt on the basis of determinations—which may have the effect of exacerbating the problems.

5. RESPONSE TO Q5: THE ROLE OF GOVERNMENT, FSA, OTHERS

5.1 A government committed to tax simplification would be the single best driver of change towards better understanding of the tax system—but this is a matter of policy rather than administration. Since on past experience this is unlikely to happen the Government and its agencies should facilitate access to information and advice in three ways: 1. by inducing coordination in the provision of advice; and 2. by encouraging the taxpaying public to take responsibility for understanding their tax affairs, and 3. by funding the provision of independent—and high quality—tax and tax debt advice, whether by some form of voucher system for taxpayers or direct to advice providers.

5.2 Serving people in a "holistic" way in respect of financial inclusion to include their tax problems needs coordination of the providers—and some sort of inducement to work together—the obvious route is through conditions set with government funding. This is because the voluntary advice sector is fractured and works uneasily together (and sometimes uneasily even within a federal organisation). The sector is also opposed to working with those who provide paid services (eg financial advisers/debt agencies which take a fee, rather than those that raise money through donations and fees from Local Authorities for example). This is often the result of funding barriers and geographic boundaries ie voluntary sector bodies are funded for specific advice-giving subject matter and often confined within Local Authority boundaries, both of which inhibit wider problem resolution—and/or referral for specialist advice. Care of course has to be taken by government departments to facilitate coordination with a light touch or the flexible manner in which the voluntary sector meets grass roots needs will be damaged.

5.3 People—and especially those on low incomes who are unrepresented—need to understand the tax system for themselves and take responsibility for their tax (ie although tax coding information is provided by HMRC to all taxpayers we find that few of our clients have taken note of it). People thus need:

— a better general grounding in their responsibilities under the tax system; the current "soft" messages (eg in TV advertising) conveyed to taxpayers encourage compliance rather than educate taxpayers about the harsher side of requirements to meet responsibilities

— specific information to meet their individual circumstances—the problem is that it needs filtering so that they only have to understand the 5% of the tax system currently relevant to them;

— access to independent advice both before and when things go wrong.

5.4 Tax and its complexity derives from government legislation and HMRC practice, so logically government should pay for those who are unfortunate enough to be caught up in a system which seems to assume that taxpayers have professional advisers. In any case, since this is seen as a statutory responsibility no other source of potential funding for charitable endeavour has to date been prepared to fund at a level to meet need.

5.5 Our experience is increasingly that people—and even those with complex problems and literacy/ language/numeracy problems—want telephone advice and information in the first instance. This is because those people who are not dependent on welfare benefits often do not wish to give up time to handle their affairs by taking time off work. People are also more familiar with helplines across a range of their needs for advice and information. What does soon become apparent is that they do need help to fill in and file their tax returns, so that they avoid some of the pitfalls which are liable to blow up into crises; this aspect requires face-to-face help from a qualified tax professional. Underlying this is a need for improved financial management (eg simple management accounts, record-keeping, cash-flow analysis, understanding how to cost their output).

5.6 Accountants and qualified tax professionals with FSA accreditation are an ideal source of provision of money advice, given that they already provide it to people who can afford to pay for advice. (The plan for the expansion of tax debt advice that TaxAid is proposing under the DTI FIF is to contract accountants/tax professionals to deliver services alongside their usual client work. This will require TaxAid to train, monitor and support in specialised elements of tax debt and Tax Credits indebtedness, and to act as "broker" in terms of allocating needy clients[313].)

5.7 In TaxAid's experience to fully benefit from tax advice clients need some degree of financial capability to be incorporated into self-help style of tax/tax debt advice (for example in showing people how to fill out a tax return the importance of keeping accounts can be brought out). One-on-one follow-up meetings are also a possibility, as are issue-based seminars (eg we are currently running them on Tax Credits and on Tax Issues for Foster Carers).

5.8 In the case of tax debt people need independent advice about the options open to them, for instance, as long as the Revenue applies a `needs based' case by case approach to time to pay arrangements. Some other tax jurisdictions disclose and apply mechanical rules for the payment of tax by instalments depending on income levels and family circumstance. This may be less responsive to individual circumstances, but has the advantage for the taxpayer of providing known parameters within which instalment arrangements are likely to be acceptable.

5.9 The application and renewal forms for Tax Credits have resulted in some 6 million people completing income information, many of whom are in PAYE and not required to complete a tax return. Is this a step towards a universal tax return which captures information for both tax and Tax Credits purposes? Such a system would need support to enable people to complete it, for instance, by giving everyone a voucher to go to an independent qualified tax adviser. But the benefits to individuals—and no doubt to the public purse and efficient operation of HMRC would be immense (see further discussion below).

6. RESPONSE TO Q6: THE BENEFITS OF FINANCIAL INCLUSION ….

6.1 The outcomes attributable to preventative advice are notoriously difficult to measure (eg avoiding loss of home, livelihood, marriage)—or indeed to trail back to the intended driver of change in that evidence of cause and effect is difficult to prove. Let alone attribute costs to avoidance or occurrence. A single measure of outcome doesn't adequately capture the benefit (eg how much was the actual tax debt), because it doesn't capture the ancillary benefits or the savings to HMRC of case closure (in any case HMRC do not themselves measure cost of cases—either those which lie open or which are resolved). Outcomes and benefits are costly to capture, in part because the effects are sustained later in the process and clients are reluctant to follow-up with analysis of their case for statistical purposes.

6.2 It is in this instance too unspecific to make policy decisions about value of investment to measure broadly comparable outcomes (for example the Association of London Government outcome that people are more "confident" after the service), in part because it is susceptible to differing interpretations and in part because it is within easy reach of any advice organisation, so doesn't benchmark.

6.3 The opposite of comparable outcomes—ie best outcome per client—might seem a sensible measure, but invites value judgements (eg often no absolutely best outcome, rather what fits with individual case since on one view bankruptcy might be the best option, but the client may want to continue "trading out" of his debt).

6.4 In the case of tax debt no case is ever closed; it is merely "remitted" and may be re-opened should clients' circumstances improve. Perhaps the single best outcome for client and HMRC is that a line of communication has been opened and that the client has independent advice in order to represent his interests.

6.5 Over time, despite the reservations expressed above in respect of tracking benefits, a decrease in the rate of errors on self-assessed tax returns (currently at 30% of returns filed) and on Tax Credits returns would provide some evidence that access to advice on tax matters was delivering a desirable outcome. However, this would be undertaken in a shifting environment in that HMRC is withdrawing some of its Enquiry Centres so that less help to the public will be available in future. At the same time an improved result might be due to improved HMRC procedures and form design.

6.6 Outcomes (of TaxAid's intervention) and Social Return on Investment

See Appendix[314] for outcomes of the 50+ cases helped in outreach pilot services in Birmingham to illustrate the success of intervention by TaxAid. This illustrates that we monitor a clients progress through our services, capturing details of the problem(s) they come to us with and the solutions/outcomes we help them achieve. The outcomes illustrate the wide-ranging need for tax debt advice which cannot be met by the front-line debt agencies. This is too small a sample to make general statements in respect of cost benefit but broad-brush costs and benefits in London indicate that the average apparent indebtedness of clients is £10,000 (which on average after proper assessment by a qualified tax adviser is typically reduced to a figure of around £500-£1,500)[315] and that the cost of advising each client is an average of £100. These outcomes have great potential to combat poverty and keep people in their self-employment. Rather lesser average indebtedness—and consequent savings from correct assessment—are made for those on PAYE or Tax Credits overpayments, but the outcomes for them are equally dramatic as they are usually on the lowest incomes. See Appendix, Social Return on Investment for direct financial benefit from TaxAid's advice.

6.7 The matrix in Appendix illustrates:

That there is not an exact correlation between the indices of multiple or social deprivation and financial exclusion—in some cases people with adequate or good education levels, literacy and numeracy skills were not in a financially secure position enabling them access to the financial expertise they lack (and see 6.10 below).

6.8 Nonetheless, those with limited education and skills are more vulnerable to having complicated working lives (eg coerced into self-employment without understanding the implications in terms of their tax obligations).

6.9 That those who have worked at income levels below £15,000 p.a. in some capacity (employed or self-employed) are unable to afford appropriate advice when some background event forces them into indebtedness to HMRC (lack of provision in the case of tax debt and potentially huge cost where HMRC investigations are involved). The estimated average client's costs if they were to go to a firm of accountants would range between £250 for a simple tax return to £2,000—and could be several thousand pounds for those who are faced with an HMRC investigation.

6.10 That they are largely in the unfortunate circumstances in which they find themselves because of some catastrophic background event (which may be business failure or random as they became victim of crime, marital breakdown, serious mental or physical illness). This is in direct contrast to those who have Individual Voluntary Agreements (IVAs) negotiated by general debt agencies where debtors typically put down "living beyond their means" as the main reason for their debt as against 20% who cited loss of employment or marriage breakdown (PricewaterhouseCoopers, Nov 05).

6.11 That people on low incomes often have hugely complicated tax problems, of a range similar to those who do have professional advisers, but compounded by additional factors including such as Tax Credits and complicated work patterns. Advice on the sample included that on: self-assessed tax returns, pre-owned assets and inheritance law, National Insurance, PAYE, allowances losses, non-taxable expenditure for various trades and businesses, employment status, company law obligations, partnerships, construction industry scheme regulations, debt enforcement and Court proceedings, repayment negotiations, disputes with HMRC etc.

6.12 Much of the above could theoretically be handled by existing tax professionals if people had the resources (on average £250 per hour for an accountant—and a complicated case involving an investigation could take tens of hours over many years). The problem is that neither clients, nor the tax professional initially know how long to budget for in particular cases. This is in part because these clients haven't had good initial financial advice that our advisers have to be more concerned with intervention at a later—and more complicated stage—in unpicking the various tangles than is the usual work of the tax profession. For example, a common practice in some communities is to make wives "sleeping partners" of businesses—this is often to the detriment of the women and especially so on the death, desertion or business failure of the spouse because they are held responsible for their husband's tax debts. A consequence of this practice is that it is very time-consuming to advise and provide satisfactory evidence to allow case closure at HMRC.

6.13 The above confirms TaxAid's experience that those who are non-compliant primarily do not understand their obligations, find the tax system too complex, or are frightened of statutory authority/HMRC.

6.14 Additionally, the circumstances of their cases were hugely complicated (which is sometimes a factor of late intervention in a problem which has escalated), for example, those people who have suffered mental breakdowns have been unable to provide sufficient records to construct their tax returns and so are liable to find that HMRC imposes interest and penalties unless professional intervention confirms their case.

6.15 Most clients had been referred by front-line advice agencies that were unable to address the complex needs where tax debt or credits are concerned.

6.17 For the vast majority no other source of advice was available other than TaxAid, in part because no provision exists for tax debt and in part because referral to HMRC was not appropriate where clients need an independent source of advice (once they are aware of their rights, or had their tax assessed for them as appropriate to their case, they are able to be referred to the correct department in HMRC).

6.18 See also Social Return on Investment (SROI) report attached for analysis of longer-term increased benefit to clients from having been advised on tax and tax debt issues. (Appendix[316]). The newly-devised Social Return on Investment study will examine the impact of TaxAid's work, both at the individual level and in the wider social context[317], giving a clearer picture of the true value of advice than purely economic cost/benefit analysis is able to do. Issues such as immediate savings to clients in the difference between the estimated tax debt and the actual tax due, the benefit to society of clients staying in work and remaining healthy and productive, and even more peripheral but important issues such as the affect on housing and family circumstances are considered. The aim is to provide demonstrable cost savings or revenue contributions that result from TaxAid's work.

6.19 SROI examines the impact of TaxAid advice with regards to the probable outcomes of clients receiving no advice, and of advice being given by others (such as HMRC)[318]. After this impact of TaxAid's advice is determined, a cost-benefit analysis is used to show how cost-effective it is as a method of advising those of low incomes on their tax difficulties. We can use this quantifiable information to measure the success of our projects, to determine how best to use our resources, and to prove that we are achieving our aims as a charity and benefiting individuals and society.

6.20 We have begun measuring the Social Return on Investment by having advisers complete casework summaries for every closed case, showing the direct financial impact on the client, the effect on Revenue open cases and court proceedings, and whether Tax Credits were claimed as a result of our advice. This will be followed by client questionnaires that seek to determine any wider effect (such as on employment or housing status, and health and social circumstances) in the year after their case is closed. More quantitative research on the impact of debt advice is on-going but this is an area that is only recently being examined and so comparative data is currently difficult to find.

6.21 We suggest that there are huge costs—and potential savings—to HMRC of case closure and ultimately to the public purse since a single taxpayer's case can sit unresolved in five separate departments in HMRC (collection, compliance, VAT, NI, and Tax Credits). However, the Revenue keeps little data on costs of individual cases worked, or advice given, a direct cost benefit analysis of case closure will be hard to achieve. Nonetheless, by using SROI analysis we will gain a clear picture of the overall economic, socio-economic and social impacts of TaxAid's advice to clients on low incomes in relation to financial investments in our services.

January 2006

304 Tax debt is typically excluded from general debt advice (eg excluded from Individual Voluntary Agreements, so that debt consolidators (like PayPlan) or debt advisers (from organisations like Consumer Credit Counselling Service, National Debtline, Business Debtline, Citizens Advice etc) do not typically include tax debt. Without concurrent tax debt advice clients with general debt are at risk of finding that their HMRC indebtedness has increased massively with interest and penalties. A further risk is that those with burgeoning tax debt will go to extortionate loan consolidators who typically "negotiate" with HMRC for a repayment schedule based on determinations, rather than assess the true debt (ie the consolidators have no interest in reducing the debt as their fee depends on there being a debt to meet). Back

305 Not printed. Back

306 HMRC has undertaken an exercise to redesign the form P46 (for use when a P45 is not available). The redesigned form increases the number of job-changers for whom a cumulative code can be operated automatically. But we understand its design was constrained by computer functionality-both employers and HMRC recognise that more `categories' of joiner need to be identified to avoid either under or overpayment of tax during the year-both of which the PAYE taxpayer may not be aware of. Back

307 HMRC recognises that the PAYE system often does not deal satisfactorily with people with multiple employments. Some 30% of PAYE taxpayers are not on correct codings. The redesign of Notice of Coding P2 does set out more helpfully how the code is arrived at-but we find most taxpayers ignore this. They do not realise that they have any responsibility to check that the coding is correct or based on correct information. Back

308 Not printed. Back

309 This is due largely to two factors: tax debt is likely to involve non-compliance which brings with it obligations for tax professionals to report under the Money Laundering Legislation. Because of their circumstances such clients are unable to pay-and the work involved for tax professionals can be substantial, so they have no experience in taking up such cases and negotiating with HMRC. Back

310 Not printed. Back

311 We understand that this is also the conclusion in an internal report written by HMRC (2003). Back

312 Tax Credits are a particular illustration of the problems created by complexity; in our experience the generalist money adviser does not have sufficient understanding of tax law and practice to accurately advise (for instance TaxAid trainers have found that the vast majority of unqualified advisers do not understand what is eligible income for the purposes of Tax Credits). Back

313 TaxAid's proposal to the DTI under the FIF programme incorporates the national tax helpline manned by highly qualified tax professionals who are able to be the first step in resolving complex tax and tax debt problems and filter people who need more detailed face-to-face advice. The key is to use only qualified tax professionals (typically with 5 years training and subsequent hands-on experience), train them in specialised tax and tax debt issues for those on low incomes, and to have a strict regime of real-time quality control. This is essentially how the best accountancy firms operate. Back

314 Not printed. Back