Evidence submitted by the Chartered Institute of Taxation on 22 February 2002 to the Treasury Sub-Committee review.
1. INTRODUCTION The Chartered Institute of Taxation
1.1 The Chartered Institute of Taxation (CIOT) is pleased to be able to contribute to the Treasury Sub-Committee’s consideration of the Self Assessment systems. We have made submissions to the Sub-Committee for their earlier studies of aspects of the system and also had the opportunity to give oral evidence, which we would be pleased to do again to amplify this brief memorandum.
2. INCOME TAX SELF-ASSESSMENT (ITSA)
2.1 The CIOT has always regarded self-assessment (SA) as a necessary modernisation of the tax system. From its inception, and then from its introduction over five years ago, we have been involved in consultations, working groups, and research on its operation. In particular, one of our recent research projects looked, in collaboration with the Inland Revenue, at how the Enquiry system was progressing.
The burdens of Self Assessment
2.2 It is inevitable that SA puts greater burdens on taxpayers and their advisers than was the case with the old system. Contrary to popular belief, the introduction of SA did not produce a boom for advisers with a flood of taxpayers seeking tax advice. Our members’ experience is that in fact they have had to invest a good deal of time and effort into client education and, as we note later, in dealing with issues for which it is difficult to charge a client.
2.3 As we noted in our submission to the Public Accounts Committee in October last year following the NAO report, we think the time has come for making the system more efficient. Fundamentally, the Inland Revenue (and indeed Government) have a duty to make sure that the administrative burdens of the tax system bear as lightly as possible on taxpayers, employers and advisers.
Late filing penalties
2.4 We particularly endorse the recommendation of the NAO that the Revenue develop:“their management information to monitor the use of fixed and daily penalties, and tax determinations, and their effectiveness in ensuring that tax returns are filed. Without this information, the Inland Revenue cannot assess whether these incentives are effective or that local offices are using the arrangements properly.”
2.5 We welcome the announcement in that report that the Revenue are now carrying out research into patterns of taxpayer behaviour and the reasons why returns are not filed on time. It is a telling commentary on SA that the proportion of taxpayers who missed the filing deadline rose in each of the first four years of SA (see the NAO report, recording the Inland Revenue’s own figures). We look forward to the results of that research with interest.
2.6 We have long argued that there is a need for a serious review of the reasons for missed filing deadlines. Until it is understood why taxpayers fail to file on time, any action to improve filing behaviour could be mis-targeted. Advertising campaigns to alert taxpayers to the filing deadline may help if ignorance of the date is the main reason for late filing. If instead it is, as we suspect, a combination of reasons including the complexity of the forms and difficulty of collecting information in certain areas, then other actions are indicated.
2.7 We continue to press for simplification of the tax system. To highlight some relatively easy changes that, inter alia, would have a beneficial effect on SA, we submitted a paper on “Personal Tax Quick Wins” to the Inland Revenue last summer.
Problems for the elderly
2.8 We also believe it is necessary to reduce the impact of self-assessment on certain sectors of society such as the elderly. Our Low Incomes Tax Reform Group (who are making their own submission to this review) has long advocated removal from self-assessment for those on the lowest incomes. It seems a farce to send a long self-assessment form to an 85-year old widow with two sources of income totalling £7,000 per annum but we understand that this is what happens if you have “the wrong sort of income”.
A simpler SA return?
2.9 We believe that there is scope for developing a simpler return form for some taxpayers, including the elderly. Its development could be linked with the returns that will be necessary for the forthcoming group of New Tax Credit applicants in 2003 (Government estimate of potential applicants, 6 million), of which pensioners will be just one type.
2.10 We had hoped that such a simplified return might also be linked with the forthcoming means tested pension credit (Government estimate of potential applicants 5.6 to 6 million). Recent debate in the House of Lords has also indicated that:“According to the Government’s own long-term projections, by the middle of this century as many as 65% of pensioners could be eligible for the pension credit, with all that that implies.” (Baroness Turner, State Pension Credit Bill, Committee stage debate 24.1.2002, Col 1592)
2.11 However, we understand from recent discussions with the Department of Work and Pensions that, despite comments in the consultation document on pension credit (published in November 2000) that steps would be taken “to reduce the overlap between the two systems”, there is not much alignment between tax and tax credits and the pension credit system, the latter having to be based entirely on Social Security law because of the link with MIG and Housing and Council Tax Benefit. It appears unlikely, therefore, that a joint income tax and means testing form could be used. This seems a pity considering the potential number of applicants and again is despite suggestions in the consultation document that “to improve customer service and increase efficiency in government, the administration of tax and benefits should be brought closer together”.
2.12 Even without the alignment of tax and benefits we still strongly advocate a simpler self-assessment system, if only for those whose income is low.
Errors
2.13 Also in our response to the Public Accounts Committee we noted that at Appendix 2 of the NAO report there is a reference to “processing errors” leading to gross errors of the order of £100 million. We still wonder how effective the Revenue are at correcting such errors. Whilst we understand their “process now, check later” principle we have found, in practice, that this can lead to processing errors.
2.14 We can understand and accept why these occur – the complexity of the tax system being one reason – but such errors take taxpayers and their advisers time and effort to sort out. We wonder, also, how many unrepresented taxpayers remain subject to uncorrected, unnoticed errors.
2.15 Another source of frustration for taxpayers and advisers is the “repair” to a SA form that turns out to be unnecessary. Similarly, there are the late filing penalty notices that should not have been issued. The cost – usually in the time of agents – to sort out such matters is out of all proportion to the amounts involved and we would encourage an examination of procedures to reduce the numbers of such instances.
Electronic filing
2.16 We continue to support the e-enabling of the self-assessment process and hope that all future development of electronic communication and services will recognise the incentives that are necessary to make this a success. We believe that these need to take several forms:
- incentives for filing by internet;
- incentives for earlier filing, to spread the load;
- making it simple so that people will use it.
2.17 These are not necessarily monetary incentives but ways of sharing the benefits of electronic filing beyond the Inland Revenue. For example, enabling agents to access clients’ tax accounts as held by the Inland Revenue would help considerably in confirming payment positions. Anything that encourages earlier filing would help agents and Inland Revenue alike in smoothing the 31 January rushes.
2.18 We think it is unfortunate that the current Filing By Internet system was started before the system was properly ready and in particular before it was available to agents. Its poor start will mean that extra effort will be necessary to convince taxpayers to use it. The position of the Electronic Lodgment System needs to be clarified – many agents devoted time and money to setting up as ELS filers and are disappointed that their investment may be a very short-term one.
The position of agents
2.19 Members of the Sub-committee will appreciate that our submission reflects the experience of our members as well as our views of the SA system and its impact on taxpayers generally. As a general observation, we feel that it is important for the smooth running of the whole Self Assessment system that the role of agents is recognised and that changes made consider the impact on agents as well as taxpayers. In simple terms, SA cannot work without the active cooperation of agents.
2.20 One of the most pleasing developments in the last two years has been the establishment of the Working Together Initiative – now firmly embraced by the Inland Revenue as part of working practice. This is proving an invaluable way of identifying and trying to solve the many practical issues that arise as the Inland Revenue and taxpayers’ agents deal with SA. We warmly applaud the Inland Revenue’s high-level support for the Working Together programme and we believe that it has a major part to play in ensuring that SA runs more smoothly – that the “grit in the self assessment oyster” is eliminated.
2.21 We have compiled a supplementary paper on the agents’ position with SA that amplifies many of the issues identified in the forgoing paragraphs.
3. CORPORATION TAX SELF-ASSESSMENT (CTSA)
3.1 CTSA applies in relation to accounting periods ending on or after 1 July 1999. For many companies, therefore, the first relevant accounting period was the year ended 31 December 1999. Accordingly our members’ experience of CTSA is much less than for ITSA but some of the comments we have made about additional burdens through familiarisation with the new system are valid for CTSA as well.
3.2 The vast majority of companies are small or medium-sized companies. For them, the transition from the Pay and File system to CTSA involved very little change. No significant problems were experienced.
Large companies
3.3 For large companies, however, the change to CTSA was accompanied by the introduction of the system of Quarterly Instalment Payments (QIPs), under which large companies have to pay the tax for any accounting period in four instalments, two of which fall within the period itself. Practical problems have arisen in estimating taxable profits in advance.
3.4 The problems are alleviated for groups by the ability to enter into a Group Payment Arrangement with the Revenue. Under such an arrangement, the group’s liability can be estimated, and payments can be made, on a group basis. These payments are then allocated to specific companies in the group when the returns are submitted. However, the problems of estimating profits in advance remain.
3.5 The Revenue have held regular discussions of these problems with the representative bodies under the auspices of the Self Assessment Consultative Committee (Corporation Tax) – or SACC(CT). A Large Business Forum has also been established to deal generally with the problems associated with the taxation of large businesses.
3.6 The Revenue have published guidance on QIPs and Group Payment Arrangements in Tax Bulletin Issues 40, 42, 45 and 52 and have promised further guidance on QIPs, following further discussions with large companies and the representative bodies.
3.7 In summary, the Revenue have made strenuous efforts to make the system work. The problems are inherent in the current year basis for QIPs.
Transfer pricing
3.8 Under CTSA, transfer pricing adjustments have to be self-assessed. The law makes provision for companies and the Revenue to come to Advance Pricing Agreements (ss 85-87 FA1999). The Revenue have published a detailed Statement of Practice on the operation of this procedure (SP 3/99). Due to limited resources, the Revenue are able to deal with large cases only.
3.9 Under CTSA, companies are required to keep records to show that their returns are correct and complete. In relation to transfer pricing, the operation of this requirement has caused concern. The Revenue have published guidance in Tax Bulletin Issues 38 and 46. However, the record-keeping requirements are still seen as onerous.
Controlled foreign companies (CFCs)
3.10 Under CTSA, any apportionable profits of CFCs have to be self-assessed. The legislative changes that were required for CTSA were the subject of detailed consultation and no particular problems have been reported to us.
Chartered Institute of Taxation
22 February 2002
Technical Department
020 7235 9381
