House of Commons - Public Accounts

Select Committee on Public Accounts Sixty-Fifth Report

1 Getting VAT and Company Tax returns in on time

The Department's performance in getting returns on time

1. Getting businesses to file accurate tax returns on time is an important step in HM Revenue & Customs collecting £129 billion a year in VAT and Corporation Tax. Late filing of returns leads to difficulties for the Department in confirming whether businesses have paid the right amount of tax, and additional costs in chasing late returns.[3]

2. Around 1.8 million businesses are registered for VAT and 1.8 million companies registered to file Company Tax returns,[4] which include their self assessment of the amount of Corporation Tax payable. 600,000 businesses file both types of return. Businesses are normally required to file a VAT return one month after the end of each quarter. Companies are required to file their Company Tax returns annually, usually within a year of their accounting year-end.[5]

3. In 2005-06, 85% of VAT returns and 79% of Company Tax returns were filed on time (Figure 1). Similar rates were achieved in the previous two years. The Department does not have any international comparators to assess how it performs in getting returns in on time.[6] On Income Tax self assessment around 90% of returns are filed on time and the Department has a target to increase the percentage to 93% by 2007-08.[7]

Figure 1: HM Revenue & Customs' targets and performance on filing returns for Income Tax self assessment, VAT and Company Tax returns

	TARGET	ACHIEVED
	%	2005-06 %
Income Tax Self Assessment	90.6	90.6
VAT	No target	85
Company Tax returns	77.5	79

Source: C&AG's Report, HM Revenue and Customs Filing of VAT and Company Tax returns Appendix 4, and NAO and Committee of Public Accounts Reports on filing of Income tax self assessment returns

4. In the absence of a return the Department may levy a penalty (see paragraph 8) and it can also raise an assessment of the tax to pursue the estimated tax due.[8] While some businesses may subsequently file a return, the Department does not know how many returns in total remain outstanding. Almost 230,000 VAT returns expected from businesses in 2004-05 and 2005-06, had not been received by mid October 2006. At the end of March 2006, around 160,000 Company Tax returns, due in 2004-05, were still outstanding. The estimated value of these returns was at least £1.3 billion in VAT and £180 million in Corporation Tax.[9]

5. HM Revenue & Customs considered that late or missing returns did not lead to significant losses of tax for several reasons. Firstly, there are separate deadlines for paying the tax due and some businesses pay their tax without submitting a return. For example payments of Corporation Tax are due for most companies three months before the tax return and 80% of Corporation Tax payments are made in instalments before the return is due. The Department can also raise assessments for the estimated tax due, which businesses may pay without submitting a return. In some cases where returns are missing there might be no actual tax liability. The Department concluded from some further analysis that 87% of businesses which had not submitted a Company Tax return within 12 months had in fact ceased trading and there was no tax liability.[10]

6. The Department tended to concentrate its effort more on the payment of tax and on the accuracy of returns where it believed it could achieve greater returns for the resources involved. Nevertheless only around 60% of companies pay on time and 50% of VAT receipts are received by the due date. The Department wrote off £2.8 billion in VAT (3% of net receipts) and £214 million in Corporation Tax (0.5%) in 2006-07.[11]

7. The Department accepted that there were deficiencies in its management information. It did not know which businesses persistently failed to submit a return or how many businesses fail to submit both their VAT and Company Tax returns.[12] It also had no detailed understanding of whether there was a link between late filing and inaccurate returns.[13] It had carried out initial analysis to identify the business sectors which had a poorer record in meeting their VAT obligations, but it had less understanding of the problem areas for Company Tax returns.[14] It recognised that it needed more in depth analysis and was developing its assessment of risk against a number of criteria.[15] For example it considered that the size of the business may be a better indicator of whether a company is likely to file on time. It was developing a compliance strategy and centralised risk profiling to provide a better overview and focus on those businesses which fail to comply with their filing obligations on both taxes.[16]

Sanctions and incentives to encourage businesses to file returns

8. The Department has a range of penalties to encourage businesses to file on time. Its powers to levy penalties differ for VAT and Corporation Tax reflecting how the powers of the two former departments evolved over time. On VAT it can apply a default surcharge penalty on VAT unpaid at the due date. On Company Tax returns, it can impose fixed penalties for late returns; tax-related penalties if the return is further delayed; and it can impose interest on late payment of Corporation Tax.[17] It recognised that the fixed penalty of £100 was modest. The penalty regime was similar to the regime for Income Tax self assessment where the Department issues an automatic penalty of up to £100 to individuals who have not filed their tax returns by the deadline.[18]

9. The Department raised over 250,000 VAT default surcharge penalties and 450,000 penalties for late filing of Company Tax returns in 2005-06.[19] It considered that fluctuations in the numbers of penalties issued each year largely reflected the changing behaviour of the filing business population rather than changes in the way the Department applied penalties, although it acknowledged that penalties were not routinely applied.[20]

10. It imposed £270 million of penalties for late payment of VAT in 2005-06 but it did not know the total value of the tax related penalties it levied for late filing of Company Tax returns. It estimated that, based on a sample, 78% of Company Tax return penalties were paid in 2005-06. On VAT, penalty payments are not separately identified from payment of the VAT due. Half of all VAT receipts are received by the due date.[21]

11. The Department considered that the penalty regime had limited impact on encouraging businesses to file already overdue returns or in deterring those businesses intent on filing late. In the 2007 Budget the Government announced a new approach to penalties for incorrect tax returns with a single penalty structure for Corporation Tax, VAT, Income Tax, Pay As You Earn and National Insurance Contributions.As part of the 'Powers, Deterrents and Safeguards' review the Department was considering the range and level of penalties used, particularly against those who persistently filed returns late or not at all.[22]

12. The Department considered that financial incentives to reward those businesses who do file on time would not be a good use of taxpayers' money. It was however seeking to make clearer the incentives for achieving a good compliance record. Businesses with a good record would attract a lower risk rating and less scrutiny, whereas those who persistently fail to comply would increase their compliance risk rating which could lead to an enquiry.[23] In the 2007 Budget the Government announced a change from 2008 in the timetable for enquiries to remove one of the disincentives to early filing. The window for an enquiry would begin when the return is filed rather than from the filing deadline.

13. The Department agreed to consider the experience of the Irish Revenue in using tax clearance certificates as an incentive for businesses to achieve a good compliance record. The Irish Revenue issues tax clearance certificates to confirm that a business has complied with its tax obligations, for example that all taxes, interest and penalties have been paid and all returns have been filed. The certificates are issued electronically and must be applied for each year. As certificates can be required for the award of public sector grants, licences and contracts, the Irish Revenue has found that the certificates help to achieve greater taxpayer compliance, particularly in the payment of taxes in full on time.[24]

3 C&AG's Report, HM Revenue & Customs 2006-07 Accounts, HC (Session 2006-07) 626, paras 1, 5 and 7 Back

4 A Company Tax Return covers self assessment of the amount of Corporation Tax in the accounting period, and other taxes which are assessable as if they were Corporation Tax. The Company Tax return is the return form, together with accounts and computations. Back

5 C&AG's Report, paras 1,5, 1.3, 1.4 Back

6 Qq 51-53; C&AG's Report, para 1.9; Figure 2 Back

7 Committee of Public Accounts, Twenty-third Report of Session 2005-06, Filing of income tax self assessment returns, HC 681 Back

8 Q 4 Back

9 C&AG's Report, paras 5, 1.9 Back

10 Qq 14, 54, 58, 86-87 Back

11 Qq 56, 58; C&AG's Report, para 1.12; Committee of Public Accounts, Fifty-third Report of Session 2006-07, Helping newly registered businesses meet their tax obligations, HC 489, Ev 14 Back

12 Qq 25, 59, 61, 65, 91 Back

13 C&AG's Report, paras 1.8, 1.10 Back

14 Q 3 Back