Article by Jane Moore FCA ATII, Technical Director of TaxAid, the charity which gives free tax advice to individuals who cannot afford professional fees. The article was published in the November 2002 issue of Tax Adviser. It is now something of a cliché that the Inland Revenue have become an ‘enabling’ as well as a regulating body. In an article in Tax Journal of 29 July, Inland Revenue chairman Sir Nick Montagu, defined ‘enabling’ as ‘helping people to help themselves’. He explained that enabling is to be achieved through customer focus, which means looking at particular customer groups, both to identify how to meet their needs, and to understand the reasons for non-compliance so it can be tackled effectively.
At TaxAid one of our main client groups, and certainly the one that finds most difficulty with its tax, is the small self-employed business sector. I decided to test how far the Revenue has become an enabling body for these people by seeing what help the Department makes available to them and if it is what they need, when they need it. Two aspects particularly interested me: the Business Support Teams and Self-assessment enquiries.
What’s on offer for the small business?
When I reviewed the information available from the Revenue for small businesses, I was surprised at how much there is. The challenge for the Revenue is to make sure their customers know about it. Help is available in leaflets, on the website, via helplines, and face-to-face. Registering a business is the trigger for information to start flowing. All new traders are sent the pack The Right Way to Start Your Business. This is a weighty tome, but well written and full of relevant information, not just on tax, but on all aspects of running a business with links to further sources of help. Newly registered businesses will be told about the Business Support Teams (see below).
If you are not at the starting up stage, the Revenue’s information about self-employment is not so clearly targeted. On their website, Starting Up In Business is a featured topic, but there is no section designed specifically for the self-employed. The website section for businesses is really just a list of publications and links to further information on a wide range of topics, some of which would mean little or nothing to the sole-trader looking for help with his tax. For example, the first item on the list is the Review of Links with Business, which is relevant to large corporates. Where there are links some are insufficiently precise. For instance, there is a link to the list of leaflets and books, but nothing to signpost the self-employed person to the ones he might need.
There are two areas where the information the Revenue provide is inadequate or inaccessible:
(1) Leaflet IR56 Employed or self-employed? is the main guide to status, but it has not been revised since April 1999 and does not reflect the issues which have arisen in the IR35 debate.
(2) At TaxAid we are constantly asked for guidance on how to prepare simple self-employed accounts for tax purposes, and what expenses are allowable. The Starting up in Business pack does not cover this, and the only written guidance is in the notes to the Self-employed pages of the Self Assessment (SA) return. These are daunting in the amount of detail they give and taxpayers only get them if they order the Self-employed pages. The Revenue have developed a short guide to basic Sch. D accounts as a ‘Small Business Enabling Initiative’; this is in a question and answer format, and is being sent to selected taxpayers who might be at risk of an enquiry due to oddities in their accounts. It could usefully be made into a factsheet for general issue.
Business support teams
Face-to-face advice specifically for businesses is available from the Business Support Teams (BSTs), which have until recently been one of the Revenue’s best-kept secrets. They started operating in 1999 with the aim of helping new employers with their payrolls. Since April 2001 they have widened their remit to advise on business accounts and tax. Help is provided in two ways, in the form of workshops or face-to-face consultations, the latter usually given at the client’s premises.
Business Support Teams are organised on a regional basis. In London, for example, there are ten teams coordinated by a central unit based at Euston Tower. Most of their cases are new businesses referred from the Revenue helplines for new employers and the newly self-employed. There is a BST page on the Revenue website and I was quite impressed to see that consultations and workshops can be booked online.
When BSTs started, their existence was not well publicised, either to the outside world or within the Revenue, and it was difficult to gauge the quality of the service. Now they are up and running they have the potential to perform a genuinely enabling role. Recently I met a manager from a London BST and was encouraged by his enthusiasm and genuine commitment to helping taxpayers. I discussed with him two concerns that I had about whether it would be appropriate to refer TaxAid clients to a BST.
Firstly, the BSTs’ emphasis is very much on new businesses. Would the BSTs help existing traders? His answer was that the service is open to anyone. Indeed in London there is a local initiative, in conjunction with the Revenue Receivables service, for the BSTs to contact taxpayers with tax return arrears and offer help with compliance.
Secondly, I wondered what would happen if in the course of a consultation, a BST adviser uncovered a mistake in an earlier year’s tax return or accounts. My concern was whether the BST would pass the information on to the compliance section, thereby provoking an enquiry. This would make me hesitate about referring a client to a BST in case he got rather more than he bargained for. The current policy is that Chinese walls are operating, and the BSTs will not pass information on in this way. They will explain the correct treatment and recommend voluntary disclosure of the error. The Revenue’s view seems to be that they need to encourage people to come to them for advice, and there is more benefit from teaching people to get things right in future than by recovering a small underpayment now. (One suspects that not everyone on the compliance side of life may have seen it that way.)
I have not as yet come across a client who has used a BST, but Revenue data shows that customer feedback from those who have is very positive. In Issue 9 of Working Together the Revenue say ‘We want agents to feel able to encourage their clients to contact BSTs to use their services … ’ Practitioners may wonder if the BSTs will encroach on their territory. In practice this seems unlikely since BSTs have their limitations. Their remit is to explain the rules but they can’t actually do the forms, and of course they cannot offer tax planning advice. Interestingly, earlier this year a BST referred a case to TaxAid. Practitioners might find that developing a relationship with the local BST might provide a fruitful source of work.
It is clear that many small sole-traders find enquiries very onerous and stressful and are ill equipped to fight their corner. Even from my potentially jaundiced TaxAid viewpoint - because we only see cases which have hit problems - it is clear that enquiries have become more problematic and confrontational under Self-assessment. In fact this point was consistently made by all the professional bodies who gave evidence to the Treasury Sub-committee’s enquiry into Self-assessment, earlier this year.
The Federation of Small Businesses told the Treasury Sub-committee that:
‘the burden of Inland Revenue enquiries under Self-assessment falls disproportionately on small business who are most likely to be the subject of an enquiry’.
An underlying reason for this is that the Revenue have been using a limited range of criteria for measuring their compliance work, and a key measure was the number of enquiries opened. One way to meet such a target is to take up large numbers of straightforward low-yielding cases such as sole-traders. From April 2002 the Revenue introduced new performance measures for compliance work based on results and the quality of work rather than the achievement of numerical targets. Staff will be assessed with reference to the new performance measures. It is too soon to judge the impact of this changed approach, but one hopes that small businesses will no longer be selected for enquiry just to make up the numbers, and that where there is clearly little to be gleaned in terms of lost tax, the case will be closed down quickly and pragmatically.
Returning to Sir Nick Montagu’s words in Tax Journal, he commented that ‘not all errors are deliberate or fraudulent’. So does one infer that most errors, in the Revenue’s eyes, probably are deliberate or fraudulent? Judging by some of the enquiry cases we see at TaxAid, this is indeed the starting point for some Revenue officers. It is not hard to find minor faults in a small trader’s accounts, and seize on them as a reason to adjust the profits (upwards) for several years, maybe leading to a bill which the trader cannot pay anyway. An unrewarding exercise for all concerned. To become truly ‘enabling’ the Revenue should make sure that their staff act in accordance with their own rhetoric in the one-time Taxpayer’s Charter and treat taxpayers as honest unless they have positive reason to believe otherwise. And to be fair, TaxAid does also see examples of enquiries where the officer has taken pains to help the client.
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November 2002 by