Examination of Witnesses (Questions 20-39)
16 MAY 2007
HM REVENUE AND
CUSTOMS
Q20 Mr Touhig: Were they more lax
perhaps in later years do you think?
Mr Gray: Lax is a rather pejorative
word. The net result was that we issued somewhat fewer penalties.
I do not regard the change between those two years as absolutely
dramatic. In any series of this sort, I would expect the numbers
to tend to go a little bit up and down and you are rightly pointing
to a year in which it went down a bit.
Q21 Mr Touhig: Do you monitor that
closely and find the reasons why?
Mr Gray: We seek to do that, but
I do not regard ensuring that we hit a particular percentage of
penalties as something which should be one of the primary things
that drive our business. Other considerations about the effort
we are putting into making sure we are getting the right amount
of tax are probably ahead of that criterion for me.
Q22 Mr Touhig: I am sure that is
music to the ears of those who give you the proverbial two fingers
and who get their tax returns in late and consistently get them
in late.
Mr Gray: People who get them in
consistently late will be penalised and, as I said in my last
answer, it is not that we were changing our practice, this was
the net result of the behaviour of the people filing and the response
of our staff to their behaviour.
Q23 Mr Touhig: How does this compare
in terms of numbers and percentages of penalties against companies
compared with the individual who fails to get his tax return in?
Do you pursue individual tax, people who fail to get their tax
returns in, as much as you do the companies?
Mr Gray: In relation to the automatic
timing penalties, we seek to operate on a comparable basis. The
Report brought out in table 3 the particular penalties and there
are two automatic time penalties which kick in automatically.
The position for self-assessment, which is individuals and self-employed,
is essentially a similar approach on those automatic time-based
penalties as it is for companies. When we get into the kind of
ramping up of penalties where it is not just a time issue but
there is an assessment issue, then again we seek to be even-handed
about this.
Q24 Mr Touhig: The Report also tells
us that in 2005-06 the number of penalties for late payment of
VAT rose, so you did move in the other direction there. Why was
that?
Mr Gray: This was not a particular
kind of target-driven behaviour; it was the net result of the
filing behaviour and our predominantly automatic response to that
according to how many people filed late and how many filed on
time.
Q25 Mr Touhig: Why do you not know
the overall value of the penalties imposed for filing company
tax returns late?
Mr Gray: It is a part of our management
information that, as the Report brought out, is deficient. It
is something that I am seeking over time to put in place. As in
any big organisation, there is always scope for improving management
information and that is something I would, in due course, like
to have. Again, I do not regard it as a completely fatal flaw
in terms of our ability to operate a sensible penalty regime.
Q26 Mr Touhig: You were acting Chairman
for a while and you have been appointed Chairman now. Is it one
of your priorities to look at this?
Mr Gray: It is on my list. I would
not say it was absolutely near the top; I am keen to do a large
number of things in the organisation. This I would have somewhere
down in the middle of my list because, although it is unfortunate
that we cannot provide those figures, it does not fatally affect
our ability to operate the tax system effectively.
Q27 Mr Touhig: Following on from
some points Mr Wyatt made, do you have a range of non-financial
penalties for failure to get the tax return in on time?
Mr Gray: We have the sort of obverse
of what I was trying to say to Mr Wyatt in that if we associate
lateness of filing in our risk profiling with other characteristics
that suggest a relatively low compliance attitude on the part
of the taxpayer, whether it is inaccuracy of returns or any other
factor, then our main non-financial penalty is that we will take
a rather closer interest in the way in which that company conducts
its tax affairs. They are more likely to attract our attention
and to attract compliance visits and that is a very real penalty
for people who are inclined to be less compliant than others.
Q28 Mr Touhig: Does a compliance
visit mean sending somebody out to the company?
Mr Gray: It might be that, or
it might mean—
Q29 Mr Touhig: That is quite labour
intensive and time consuming.
Mr Gray: It is and it is not the
only way in which we pursue things. We can, within the penalty
regime where we are moving beyond the purely time-based penalties,
adopt a more rigorous attitude, particularly if we believe that
there is inaccuracy in relation to the assessments that companies
have provided us with.
Q30 Mr Touhig: Some countries do
have sanctions other than financial penalties. Have you considered
looking at that? Have you looked at it? Is there anything we can
learn from it?
Mr Gray: I am always keen to learn
from other countries. It would be fair to say though that in the
discussions I have with my counterparts in other countries there
is a general trend, of which we are part, towards concentrating
non-financial activity around the degree of attention which we
are giving to relatively non-compliant taxpayers and indeed we
have quite a lot of approaches from other countries to us seeking
to learn from some of the things we have been developing.
Q31 Mr Touhig: I challenged you earlier
about being lax in terms of pursuing the fixed penalties, but
the Report also tells us that fixed penalties imposed on companies
who file late returns are not generally a deterrent. That is quite
the other side of the argument. Why is that do you think?
Mr Gray: There is a range of reasons.
The initial fixed penalties at £100 or so for some people
may be regarded as a relatively modest price to pay. I am sure
in lots of cases, businessmen and businesswomen are busy people,
tax returns and tax obligations do not always sit on top of people's
in-trays, it is even true for me with my own self-assessment form.
Q32 Mr Touhig: Do you get yours in
on time?
Mr Gray: I am pleased to tell
you I have not paid a penalty recently, but I would be liable
if I were late. It is a range of behavioural things. I would describe
the way in which the levels of penalties have been designed at
that initial level as being a slap on the wrist rather than anything
more penal. The more penal things are when we are into more serious
non-compliance.
Q33 Mr Touhig: I follow on from what
Derek Wyatt said earlier and I thought there was some merit in
the arguments that he was putting about having some sort of financial
incentive to get the return in. The Report tells us that financial
penalties actually do not deter those who every year will get
their return in late and pay the fixed penalty and they do not
much care about it. The Report also tells us you are looking at
systems of rewards for companies that have a good compliance record.
Following on the points that Derek has made, would you be looking
at some sort of incentive saying: "If you get your return
in on time, this is what we can do"?
Mr Gray: As I said in response
to his questions, we have been looking essentially at non-financial
ones and although I quite recognise the argument both of you are
making, there would be some significant concerns, in a tax system
which is designed to say that this is the right amount of tax
to pay, particularly in a transaction tax like VAT, about consciously
saying okay, if you do the right thing you do not have to pay
the full right amount; there would be issues and concerns about
going in that direction. What I do fully accept is that there
is scope for sharpening the differentiation behaviour however
we construct the incentive penalty regime around that.
Q34 Mr Touhig: As the Chairman pointed
out at the beginning, at least £1.5 billion tax revenues
were in doubt from late and non-filed VAT and company tax returns
in mid-October 2006. If I were the Chancellor getting up to make
a Pre-Budget Report, I would be rather worried whether I would
have the money at the end of the day.
Mr Gray: The fact that it is in
doubt does not mean that it is not all going to be collected.
The point I made to the Chairman was that on the VAT side we automatically
generate an assessment in order to protect the position. That
is not to say I would not prefer to be in a position in which
nobody makes their filing late. The choices I and the organisation
inevitably have to face, as in any organisation within a fixed
pool of resource, are where I get the most bangs for the bucks
in intervening. The point I was trying to make to the Chairman
was not that we could not get some bangs by going harder on lateness,
but our judgment is that we get more bangs by concentrating those
resources on things like inaccuracy.
Q35 Mr Dunne: The Government set
targets for online filing for individuals which were hopelessly
ambitious and they have cut those targets substantially. The targets
set for online filing for companies and VAT appear to be pretty
ambitious too and your progress in meeting those targets obviously,
as you have acknowledged, is improving but has been very low.
If I hear you correctly, to achieve the target you have got to
get your VAT proportion of returns filed online up from 9% to
35% and up for corporation tax from 7% to 50% in less than 12
months. How are you going to do that?
Mr Gray: The honest answer is
we are going to struggle over the next 12 months, particularly
in relation to the VAT target. If you allow me to say so, I did
not quite accept the premise of your question that we have been
hopelessly ambitious in relation to individuals. In fact, on the
self-assessment target, which was 35% in 2008, we have actually
hit 35.5%[2]
in 2007. On that one we have made better than target progress.
Q36 Mr Dunne: Could you just remind the
Committee what the original target was for 2008?
Mr Gray: That is the target that
I have been operating with, in the current spending review of
35%.
Q37 Mr Dunne: I think it was much
higher than that and it was reduced to 35%. That was perhaps before
your time. This goes back to President Clinton and Mr Blair who
set targets for each country at a fairly early stage in the current
Government's life which were then reduced. The Americans met their
targets; the British did not, as I understand it.
Mr Gray: My recollection may be
hazy as a lot of those targets were around the 100% availability
of online facilities as much as the percentage of people who were
making use of the facility. Nonetheless, in relation to your immediate
question on the corporate taxes and particularly on VAT, our progress
has been, up to this point, slower than I expected. I obviously
hope we are able to put on a real gallop and hit some interim
targets in a year's time but they are ones that it is possible
we may miss.
Q38 Mr Dunne: Are there significant
cost benefits to the department of processing online returns compared
to paper returns and can you indicate some order of magnitude?
Mr Gray: Yes. There are significant
benefits to us. The average cost for us of doing a corporation
tax paper form, and Geoff Lloyd will correct me if I get this
wrong, is of the order of about £20 a time[3];
for online the figure is really quite a small fraction of that.
At the same time, we are also mindful of ensuring that we do not
just transfer cost from us to the company in terms of their position,
but the evidence is that actually there is a helpful saving from
the company point of view of the order of 1% to 2% in that it
is less costly for them. It is less costly for us and the thing
I would probably put slightly more weight on, which has certainly
been our experience with self-assessment, is that the potential
for error in online transactions is, on average, rather less than
it is on written transactions because there are so many fewer
opportunities as things are being taken from paper and keyed into
machines. The quality issues are at least as important as the
cost issues.
Q39 Mr Dunne: Indeed and now with the
almost universal availability of broadband across the country
the availability of online filing is greatly improved and it is
in your interest, the taxpayer's interest and the filing entity's
interest, to use the online facility.
Mr Gray: It is.
2 Note by witness: The percentage quoted in
the Spring 2007 Departmental Report is 35.1%. Back
3
Note by witness: Table 1 of the NAO's Report indicates
that the cost to HMRC in 2005-06 of processing CT returns was
about £4 per return (1.3m returns processed at a cost of
£5.1m). HMRC estimates that a typical business will save
£20 of its costs in filing a company tax return electronically
(see paragraph 2.3 of the NAO's Report). Back
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