Examination of Witnesses (Questions 1-19)
16 MAY 2007
HM REVENUE AND
CUSTOMS
Q1 Chairman: Good afternoon, welcome
to the Committee of Public Accounts where today we are considering
the Comptroller and Auditor General's Report, Filing VAT and
Company Tax returns. We welcome back to our Committee Paul
Gray who is Chairman of HM Revenue and Customs. Would you like
to introduce your colleague?
Mr Gray: On my left is Geoff Lloyd
who is the director in the department responsible for corporation
tax and VAT.
Q2 Chairman: Could we please start by
looking at the problem of businesses that fail to file accurately
and on time? If you look at paragraph 1.8 which you can find on
page 11, you will see there that it says: "The Department
does not have a detailed understanding of the businesses that
fail to comply with both taxes or whether there is any correlation
between businesses that file late and those that file inaccurate
returns". Why do you not know which businesses present the
greatest problems in filing their tax returns? This is fairly
fundamental, is it not?
Mr Gray: We are developing our
risk profiling in relation to both of the taxes. We are pretty
clear that in relation to both VAT and corporation tax looked
at individually, we are not unduly concerned about the degree
of tax at risk as a result of filing after the due date, but we
are doing further work to refine and improve our risk profiling
and, in particular, one thing we are currently looking at—and
it flows from the discussions we have had with the National Audit
Office—is whether, in looking at companies who file late
in relation to both those taxes, there is further focus we should
be bringing to bear on them.
Q3 Chairman: If you look further
down that page, you will see, it follows on quite logically, "The
tax consequences of late filing". It says there in that paragraph
1.9 on page 11 of the Comptroller's Report that: "At least
£1.5 billion of tax revenue was in doubt from late and non-filed
VAT". This, by any stretch of the imagination, is a massive
amount of money so why do you not have a target to reduce this?
Mr Gray: That figure, which is
predominantly in relation to VAT—as the Report brings out,
over £1.3 billion of that is the VAT, the lesser remainder
is corporation tax—is the estimated value of the automatic
assessments that we make and issue to companies who are late in
registering their VAT. It is not a measure of taxes we are in
some sense missing, it is a measure of the amount of tax we estimate
to be due from those who have not filed on time. Setting a target
to reduce the amount of tax we are seeking to recover from them
would not make much sense. The underlying issue that your question
flags up is whether we ought to have a different or more aggressive
target in relation to reducing the number of companies who do
file late so that we reduce that degree of uncertainty. The view
we have taken and the NAO Report brought this out, is that in
relation to VAT in particular earlier efforts that we have made
to push up the extent to which companies do file on time does
not seem to us to have produced any very significant rewards and
our conclusion is that we are better placed in focusing our compliance
effort on other dimensions. Having said that, and as is brought
out in the report, we are keen to deepen our analysis to make
sure that there are not some issues that we are missing.
Q4 Chairman: Could it be a general
problem with your organisation that you are not sufficiently conscious
of your customers' needs and their businesses and that your consumer
relations with your client base are perhaps not as strong as they
should be?
Mr Gray: As a general point I
am committed to doing a lot more to make sure we do understand
the way in which customers wish to do business with us in order
to encourage their natural compliance. In relation to this particular
issue, the question is more about where we put our compliance
intervention effort. Do we worry about lateness as such or do
we put more of our effort into pursuing those returns that we
do get on time where the amounts are incorrect and we need to
follow it up? Our analysis, up to this point, has suggested we
are better off and there are better returns to us by focusing
on incorrectness rather than pursuing lateness as such. As I said
in the previous answer, if a VAT return is late, we make an automatic
assessment to ensure that we are in a position to recover tax.
On corporation tax, we do something broadly similar where, if
we believe there may be tax due, we issue a determination, rather
than an assessment, to make sure that we are pursuing any overdue
tax.
Q5 Chairman: So it seems to me from
what you are saying that your priority is not to pursue lateness,
but to try to improve accuracy. Is this why, if you look at figure
3 on page 12, it seems to suggest that only half the companies
who file late routinely get a penalty? Is that right?
Mr Gray: I assume you are looking
at the figure in the top right hand corner, the 56%.
Q6 Chairman: Yes.
Mr Gray: I agree that that figure
does look surprisingly low and in preparing for this hearing,
it is something I have had a detailed look at. The way in which
we agreed with the NAO to present figures in the report was that
we based that percentage on what you might describe as the upper
bound, the upper limit of the number of returns that might potentially
be due. In fact, in quite a proportion of areas we do not actually
issue a return for various good reasons. If this percentage were
calculated in relation to those cases where we have actually issued
a return and asked for it to be sent in, that 56% figure goes
up to something in the high 80%. I agree that is also an issue
we need to look at. There are some cases where it is not appropriate
to have an automatic penalty, for example if a company is in liquidation,
but we are certainly working to improve the effectiveness of all
this and as part of a review of our powers which you know we are
going through, at various stages we will be reviewing the position
and the provisions on late filing penalties and considering whether
we do need to do anything further.
Q7 Chairman: We have on page 15 a
description of: "The challenges to achieving full mandatory
online filing by 2012". It is going to be a big issue I would
have thought. How are you going to ensure you provide a good quality
service to business?
Mr Gray: We are working on a number
of fronts to improve the quality of our service. As you know from
the Report, the current proportion of companies filing online
for these taxes is relatively low. It is now starting to rise
quite rapidly, but it is still only 9% for VAT and 7% for corporation
tax,[1]
so there is a long way to go. We are operating over the next couple
of years on a number of fronts. One is trying to improve the quality
of the service that people get when they come to us online. I
am very pleased with what we have done in some of our other tax
areas, for example on self assessment we had a huge increase last
winter in the proportion of people filing online for self-assessment,
indeed we have already hit the target we were set for 2008 on
that. We are now applying the same types of investment into our
facilities for the other taxes. As you know, it was also decided
at the Budget time to put back by a year or so the deadline for
mandatory online filing and part of the reason for that was to
make sure that we were getting all our systems and processes in
good shape so that as we get towards mandation, hopefully we will
already be a long way down the track of people being happy to
use our service voluntarily.
Q8 Chairman: How are you going to try
to help small businesses? For instance, one example is dealt with
in paragraph 3.5 which you can find on page 22. It was suggested:
"that the Department could reduce the compliance burden further
by removing the requirement to file returns from those businesses
with no tax liability and more generally simplifying the tax systems
and returns". What do you say to that?
Mr Gray: That is actually an issue
that we have pursued and it came out of the discussions with the
NAO. It was a particular proposition we actually put to our Corporation
Tax Operational Consultative Committee and our customer base on
that group did not want to go down this route for a number of
reasons. They pointed out that under company law provisions they
were already going to have to prepare accounts. Quite a number
of companies would still be keen actually to file a return in
order to establish either a nil liability or indeed a loss position
to carry forward in future years. Having had a rather negative
reaction from our customers to this proposition, we are not currently
pursuing it.
Q9 Chairman: Very quickly then, how
are you simplifying filing for the smallest businesses? Is this
a priority for you? Are you interested in the subject?
Mr Gray: We certainly are and
your Committee had a hearing with me three weeks ago on small
businesses and I tried to point then to a number of the ways in
which we are making it a lot easier for small businesses to do
business with us, for example introducing the short tax returns,
more simplified guidance and so on.
Q10 Derek Wyatt: This is a counter-intuitive
thought. I have always felt that in the National Health Service,
if you are well, you should get paid for it because you have saved
us lots of money. Is there a possibility that if you were to give
your tax returns in early or on time, you could get rewarded for
that? Have you done any research and work on the fact that if
you were to give, say, £150 for people to be early or £200
to be on time, people who are late would start to think there
was some reason to get it in on time? Does any other country in
the world offer the counter-intuitive approach that if you are
early we will give you some benefits?
Mr Gray: We have done work on
this and I have had discussions on this with my counterparts in
other countries. We have not gone for an approach under which
we have introduced a financial bonus, if I may put it that way,
for filing early. We do, of course, have the opposite arrangement
that if you file late, then there are penalties. We have introduced
the financial differentiation of that sort. The area we are putting
more work into now is trying to make sure that companies who behave
in an appropriate way with us—file on time, act in a cooperative
way, get the kind of non-financial benefit, but nonetheless very
valuable benefit that in our risk assessment of whether we need
to pursue enquiries with us—they will acquire a good and
a positive risk rating by comparison with others who do not. Certainly
the idea of differentiating behaviour is something we are both
doing and implementing; we have not gone down the route of actually
introducing a positive financial incentive to do things on time
or early rather than applying the negative financial incentive
the other side.
Q11 Derek Wyatt: But in customer
relationships, if you give an advantage, people like it. They
like getting things. Given that probably we do not like sending
in our returns to you, particularly because it is our money, so
we try to obstruct, if we can, because we want to keep our money,
that is what we think about tax by and large in business. That
is a crude analogy but we do tend not to want to do these things
though of course we want to file on time because we get fined.
I am just saying in a customer relationship why can you not pilot
some schemes to see whether in fact 90% get in early because you
have incentivised it?
Mr Gray: We are incentivising
early behaviour as distinct from late behaviour.
Q12 Derek Wyatt: You are fining as
opposed to rewarding.
Mr Gray: The issue, when we have
a tax system which determines the amount of tax that is due to
be paid, is that I might expect questions from this Committee
and elsewhere if I were positively going out and saying I was
now going to collect less than the due amount of tax simply because
they have done the right thing.
Q13 Derek Wyatt: But actually when
you are pursuing the cases of people who have not sent it in,
it is hundreds of thousands of people. How much are not collecting?
People are late, which means we are not getting it so we have
to borrow.
Mr Gray: For late payments, and
this is slightly different under the two taxes we are looking
at here, we are actually applying either an interest charge or
a penalty. We have the financial differentiation, we are covering,
through those interests and penalties the cost to the Exchequer
of the money coming in later.
Q14 Derek Wyatt: How much are you
missing? How much is late, two years late? Lots of them are not
filing on time.
Mr Gray: The Report brought out
the numbers that are not filing on time. There is a difference
between the proportion of numbers of people who are not filing
on time and the proportion of tax due which is being filed on
time. By and large, the record of the big payers is significantly
better than the small payers and for corporation tax in particular,
although there is a significant proportion of people not filing
on time, the last exercise we did suggested that 87% of the companies
who had not filed within 12 months in fact had ceased trading,
so there was actually no liability.
Q15 Derek Wyatt: This is a question
of ignorance really. Who is giving you the advice or running your
website team? What company is responsible for that?
Mr Gray: It is a combination of
our in-house services; it is predominantly run in-house. We have
a range of support contracts organised through our overarching
IT supply contract with Capgemini but they subcontract to other
people.
Q16 Derek Wyatt: When I fill it in
online—and I do not at the moment—when I think: "Help,
I'm not absolutely certain what you want me to do in this particular
piece" does a voice come out to say: "You may be feeling
nervous here, here are three examples"? How helpful is the
experience?
Mr Gray: We do not have voice
guidance at the moment. We do have online written guidance. It
is one of the areas in which we can do better than we are doing
at the moment. The experience is reasonably okay at the moment
but it is certainly an area where I want to put a lot of effort
into improving that experience.
Q17 Derek Wyatt: So whose responsibility
is that? Is that Capgemini or is that your internal design team?
Mr Gray: I regard all these things
as my responsibility for delivering service to the right standard.
If I choose to contract any of that work to other people, I do
not regard that as contracting out the accountability for making
sure that we do things to the right standard.
Q18 Derek Wyatt: Where would you
say there is better practice in the world on online filling in
of tax returns?
Mr Gray: A number of our fellow
fiscal authorities around the world are slightly ahead of the
game compared with us; Australia would be an example where they
have gone further and faster than we have. In the earlier hearing
I had with the Committee a few weeks ago in relation to small
businesses, we brought out there that we are looking to learn
lessons from them and others. I also regard other private sector
financial businesses as being a very close comparator of the sort
of customer experience we should be aspiring to give to people.
Q19 Mr Touhig: You issued fewer penalties
to companies who were late sending in their returns in 2005-06
compared with previous years. Why was that?
Mr Gray: I am not sure I can give
you a precise explanation of that. The numbers were somewhat down,
as you found from the Report. There was no material change in
the nature of the penalty regime. Each year, where the penalty
is not absolutely automatic, which it is in some cases, our staff
are obviously making a judgment about whether a penalty—
1 Note by witness: Year ended 31 March 2007,
percentage of VAT returns filed electronically was 8.62%; 6.86%
for Corporation Tax. Back
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