2 Improving compliance by newly registered
businesses
The compliance record of newly
registered businesses
10. The Department expects all businesses to file
their returns on time, calculate the right amount of tax due,
and pay it on time. Newly registered businesses are a diverse
group. Some are setting up in business for the first time, others
have previous experience. Some manage their tax affairs themselves;
others rely on an agent or other assistance. Attitudes to compliance
also vary.[13]
11. In dealing with tax obligations for the first
time, new businesses may be unfamiliar with what is expected and
they may need particular help in getting their tax affairs right.
At the same time they face a number of other pressures on their
time and resources. New businesses that get their tax right first
time are more likely to continue to comply as they grow and their
obligations increase.[14]
12. The Department has some data on the extent to
which businesses in general comply, but it cannot easily analyse
compliance by newly registered businesses as a group because of
the way its computer systems were originally set up. Nor is the
Department able to assess the track record of individual businesses.
As a result it is poorly placed to assess priorities, and the
costs and benefits of action to improve compliance.[15]
13. The latest available data show that the proportion
of new businesses filing their returns on time is generally lower
than for the business population as a whole (Figure 2).
Newly registered businesses incur penalties of around £3.1
million a year because they file late on Income Tax Self Assessment
and £5.5 million a year on Corporation Tax. If the Department
could improve the filing performance of new businesses to the
level achieved by the general business population it would receive
an additional 119,000 returns on time.[16]Figure
2: Compliance with different tax obligations for all businesses
and newly registered businesses
|
| Income Tax Self Assessment
(2003-04)
| PAYE/Class 1 National Insurance Contributions
(2003-04 and 2004-05)
| Corporation Tax
(2004-05)
| VAT2
(2004-05)
|
| All businesses
| New businesses
| All businesses
| New businesses
| All businesses
| New businesses
| All businesses
| New businesses
|
| Filing tax return on time
| 89% | 79%
| 80% | 61%
| 77% | 72%
| 85% | 80%
|
| Accurate returns
| 46% | 54%
| 63% | 69%
| 61% | Not Available
| 65% | Not Available
|
| Paying on time
| Not available | Not Available
| 53% | Not Available
| 60% | 64%
| 60% | 53%
|
Source: C&AG's Report, HM Revenue & Customs:
Helping newly registered businesses meet their tax obligations
14. On accuracy of returns and paying on time, comparisons
between newly registered businesses and the business population
as a whole give a mixed picture. A large proportion of businesses
are failing to pay the correct amount of tax. Self employed people
are more likely to file inaccurate returns with only 54% calculating
the correct amount of tax in 2003-04. The Department has found
that around 40% of returns on Corporation Tax under assess tax
by an average of around £2,700. One third of newly registered
businesses pay their Corporation Tax late and almost one half
pay VAT late, owing the Department an average of £6,200 in
VAT after 12 months of trading. The Department does not know the
cost to the Exchequer of late payments.[17]
The effects of the Department's
help on compliance
15. The Department has an objective to achieve by
2007-08 a measurable improvement in new and growing businesses'
ability to deal with their tax affairs. Since 2003-04 it has contacted
businesses within 12 months of VAT registration to instil good
compliance habits before they file their first return. The Department
also telephones those who have failed to file returns to remind
them of their obligations and provide them with guidance and advice
on their responsibilities.[18]
16. In 2004 and 2005 the Department examined whether
the help provided to newly registered businesses improved compliance.
It compared the compliance record of over 100,000 businesses which
had received help with 64,000 businesses which had not. Of those
receiving help, 6% more businesses filed their VAT returns on
time and 9% more paid on time compared to those that received
no help (Figure 3). The average amount of VAT declared
by businesses in the two groups did not differ significantly.[19]
17. Until April 2006, the Department's Business Support
Teams informed businesses registering for PAYE and Income Tax
Self Assessment of the range of support provided. They had a target
to ensure that 90% of newly registered businesses filed on time
if a representative from the business attended a workshop. On
PAYE just over 70% of new employers attending a workshop filed
on time, compared with just over 60% for all newly registered
employers.[20]
18. In 2006 the Department reorganised its support
to businesses. It aims to target education at all newly registered
businesses, in particular those that do not use a tax agent. The
Australian Tax Office has improved compliance by concentrating
help on those who were entirely new to business. It tracks their
compliance for up to 2 years, and takes swift action on non compliance.[21]
Figure 3: The results of the Department's research into
whether education and support improves compliance on VAT for newly
registered businesses
| Aspect of compliance
| Businesses which are compliant
|
| Support received from the Department (%)
| No support from the Department (%)
| Difference
(%)
|
| Businesses submitting their VAT return on time
| 92 |
86
|
+6 |
| Businesses making payments on time
|
85 |
76
|
+9 |
| Businesses owing the Department VAT after 12 months
|
4 |
8.6
|
-4.6 |
| Businesses deregistering in their first year
|
3.3 |
7.4
|
-4.1 |
Source: C&AG's report, HM Revenue & Customs:
Helping newly registered businesses meet their tax obligations
19. The Department considered that those seeking
help tend to be those who are more inclined to comply, and therefore
the challenge it faced was in providing help to businesses that
were less likely to be compliant. Whilst some of its practices
were similar to those in Australia, the Department believed that
tracking those new to business for 2 years would require significant
additional resources. The poor compliance record of the newly
registered self employed suggests that they are a group in need
of continuing support (see Figure 2).[22]
20. The Department expects businesses to pay their
taxes when they are due. If they do not, the Department sends
a demand letter. It also telephones them to ask for payment and
to provide advice on paying on time in the future. Nearly one
half of businesses do not pay PAYE/National Insurance contributions
on time. The Department cannot impose a penalty or interest for
late monthly payments of PAYE/National Insurance contributions
during the year. It can do so only on balances due at the end
of the tax year. If an employer has not paid over the national
insurance contributions collected, the Department nevertheless
credits the employees' records as long as it has received the
employer's return. Where its records show that an individual has
not paid or been credited with sufficient contributions in the
year for that year to qualify for state pension, the Department
sends a deficiency notice inviting the individual to check that
their records are correct. In 2006-07 the Department issued 4.7
million notices relating to the 2004-05 tax year. The Department
is currently reviewing whether to provide additional support to
help new employers meet their PAYE obligations. [23]
13 C&AG's Report, paras 1.1, 1.4 Back
14
ibid, para 1.3; Q 34 Back
15
Qq 8, 77 Back
16
C&AG's Report, paras 1.10-1.12 Back
17
Qq 14, 17, 62, 119 Back
18
C&AG's Report, para 1.5 Back
19
Q 38, C&AG's Report, para 1.22 Back
20
Ibid, para 1.23 Back
21
Ibid, para 1.24, Qq 14-15, 34 Back
22
Qq 35-37, 39-43 Back
23
C&AG's Report, para 1.16, Qq 116-117; Ev 14 Back
|
