2 Performance in managing large business
Corporation Tax
7. In 2006-07, the Department raised additional
Corporation Tax of nearly £2.7 billion from its compliance
enquiries on large businesses. In April 2006, the Department implemented
a new risk assessment approach known as 'resourcing to risk'.
This involves estimating the maximum amount of tax under consideration
for each case and then concentrating resources to tackle the highest
value, most significant risks first. The approach is designed
to enable the Department to differentiate its approach between
high-risk and low-risk businesses.[8]
8. At February 2007, 58% of enquiries under way
were on cases where the tax under consideration was less than
£500,000. Collectively, these were likely to amount to less
than 1% of the total intervention yield from all enquiries. Conversely,
only 1% of enquiries under way involved tax under consideration
of more than £100 million, amounting to 43% of total potential
tax yield. There was also no correlation between the resources
the Department commits to each enquiry and the amount of Corporation
Tax under consideration.[9]
9. The Department acknowledged that it had not
been sufficiently rigorous in resourcing to risk and that the
proportion of low value enquiries was too high. By January 2008
it had reduced the number of enquiries with a value less than
£500,000 by 55%. It had also set a target for 2007-08, to
reduce such enquiries by 75%. It had adapted its approach so that
decisions on enquiries also take account of the probability of
success, as well as the wider significance of the case, for example,
if the issue at stake could affect a number of companies, and
therefore involve larger amounts of tax at risk.[10]
10. The Department's client relationship managers
for each of the large businesses play a key role in assessing
and managing the risks that apply to the business and help businesses
understand the key risks. The Department considers that these
managers have been effective in getting to know the business and
in reprioritising work. Its surveys of large business indicate
improvements in working relationships, but it does not have firm
evidence of their effectiveness in improving compliance.[11]
11. Under the 'resourcing to risk' approach,
the Department estimates the maximum amount of tax under consideration
for each business. In February 2007, the total estimated tax at
risk under consideration was £8.5 billion, based on the tax
issues identified in the previous 12 months from initial scrutiny
by tax specialists of businesses' self-assessments. Issues might
include, for example, use of a tax avoidance scheme, a claim on
capital allowances, or the use of tax reliefs. The Department
could not provide an accurate estimate of the total tax under
consideration, extending back beyond 12 months.
The £8.5 billion
might also overestimate the actual tax at risk since it includes
amounts that the Department may decide have been treated properly
following further enquiries with the company.[12]
12. In 2005, the Department undertook work on
estimating the tax gap for Corporation Tax, but concluded at the
time that the results were not sufficiently robust. The tax gap
is the difference between the amount the Department collects through
routine compliance and the total theoretical tax liability if
all taxpayers were fully compliant. It is currently developing
a measure based on the estimates of tax at risk, and hopes to
generate sufficiently robust figures that it can publish.[13]
13. The Australian Taxation Office has implemented,
and the Canadian Revenue Agency is in the process of implementing,
a methodology for comparing the effective tax rate of individual
businesses to the statutory rate of tax. This methodology is used
as a means of differentiating high and low risk businesses. The
Department considers there are difficulties in extracting effective
tax rate information from accounts that combine United Kingdom
and foreign tax and profits. It believes that the challenge in
working out what tax is paid, against what profits, is that the
United Kingdom does not require a single consolidated tax return
for a group of companies that would allow a simple effective tax
rate to be undertaken. However, it recognises that a consolidated
tax return would be helpful in measuring compliance.[14]
14. As at January 2007, 49% of the Department's
enquiries underway were over two years old, and 13% were over
four years old. Prolonged enquiries prevent businesses from gaining
certainty about their Corporation Tax position, tie up the resources
of the business and the Department in examining past events where
staff may have changed, and restrict their capacity to resolve
current issues.[15]
15. The Department is seeking to achieve speedier
resolution of its enquiries as part of its response to the Review
on Links with Large Businesses, which was published in November
2006. The Department made a commitment to complete enquiries within
18 months. Between January 2007 and January 2008 it had reduced
the total number of open enquiries by nearly 40%, and reduced
the proportions that were over two and four years old to 42% and
10% respectively (Figure 3).[16]Figure
3: The proportion of open enquiries that are over two years old
and over four years old
| Percentage of open enquiries over two years old
| Percentage of open enquiries over four years old
|
| January 2007
| 49
| 13
|
| January 2008
| 42
| 10
|
Source: C&AG's Report, para 2.24 and Q 150
16. While delays had stemmed from insufficient
resources being deployed to progress the enquiries, the Department
considered that many of the older enquiries tended to be complex
cases, involving avoidance schemes and transfer pricing. At times,
it faced difficulties in obtaining information from the business
and experienced delays because of litigation. On occasions, it
met considerable challenge at every stage from the company and
its tax advisers.[17]
8 C&AG's Report, paras 2.4, 2.9 Back
9
C&AG's Report, paras 2.7-2.8 Back
10
Qq 2, 39-40, 66 Back
11
Qq 124-125; C&AG's Report, paras 2.33-2.34 Back
12
Qq 9,138-139; C&AG's Report, paras 2.10-2.11 Back
13
Qq 7, 103; C&AG's Report, paras 3.8, 3.10 Back
14
Qq 10-17, 79; C&AG's Report, paras 2.14-2.18 Back
15
C&AG's Report, paras 2.24-2.25 Back
16
Qq 150, 152; C&AG's Report, paras 2.24-2.25; Appendix 4 Back
17
Qq 109-110 Back
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