Comply Or Else!

The compliance aspects of the Inland Revenue's annual report for the year ended 31 March 2002 are put under the spotlight by DAVID CUNLIFFE.

THE BOARD OF Inland Revenue's Christmas present to us all was its latest annual report, covering the tax year to 31 March 2002, which was published on 19 December. This 128-page, jargon-rich, glossy brochure, full of pictures of smiling board members and staff, will have given chairman Sir Nicholas Montagu KCB more pleasure than most of its readers. There is much to comment on in the report, but this article focusses on the sections relating to the Revenue's compliance functions.

Chairman's introduction

In the last couple of annual reports, the chairman has been so swept up in his enthusiasm for how the Revenue has coped with change, embraced new functions and become focussed on meeting 'customers' needs' that he has neglected to mention what remains the primary function of most Revenue staff i.e., to ensure that taxpayers, to use the old-fashioned but accurate term, pay the correct amount of tax at the right time. This year, somewhat belatedly, Sir Nicholas has recognised the compliance role performed by his legions of tax Inspectors:

'Enabling as well as regulating means ensuring that people understand and pay what they owe and claim what they are due. That is the hallmark of a department which now combines a strong social function with its more traditional enforcement role. The core purpose is why we do it and that is so that everyone contributes to the UK's needs. [Chairman's emphasis.]

'The more we enable people to pay their taxes and claim their entitlements without problems, the more we are free to concentrate on help for those who really need it and on identifying and pursuing ruthlessly that small minority of cheats and frauds who deliberately refuse to make their fair contribution to the United Kingdom's needs.' [Author's emphasis.]

The sting is somewhat pulled in the tail, however: 'it is only by being truly customer-focussed and understanding our customers' differences that we can ensure compliance'. This is possibly as good an illustration yet seen of the confusion caused by the use of 'customer' instead of 'taxpayer' in the context of the Revenue's day-to-day compliance operations

'Compliance assurance' results

Pages 21 to 23 and Appendix 2, Tables 9 to 14 (pages 106 to 109) of the report set out the main results of the Revenue's efforts in tackling non-compliance during 2001-02. Overall, it was a not a good year for the Revenue, with total adjustments to returned liabilities down from £4.5 billion to £3.8 billion.

Large Business Office

More than £600,000 of the decline in yield arose because receipts from Large Business Office corporation tax enquiries plummeted to £1,506.8 billion (this was also £370 million less than in 1999-2000). As explained in a footnote:

'The Large Business Office's work includes some very complex enquiries which may take several years to settle. Yield figures from year to year vary, depending in particular on the number and tax effect value of complex enquiries brought to settlement. In 2000-01, the ten highest yielding adjustments contributed £663.5 million to the total yield and included, exceptionally, three cases yielding £100 million or more. In 2001-02, the ten highest yielding adjustments yielded a total of £232.3 million.'

Since its formation, Large Business Office, which handles the tax affairs of '800 large entities including United Kingdom corporate taxpayers and partnerships, United Kingdom banks, building societies, insurance companies and the Lloyd's of London underwriting syndicates' has accounted for the lion's share, often one third or more, of the total tax adjustments achieved annually. Any large variation in its results has a huge impact on the overall figure, so it is more illustrative of the health of the Revenue's compliance efforts to look at how the local office network has performed on self-assessment enquiries in comparison to previous years.

Self-assessment enquiries

The overall target for full and aspect corporation tax enquiries taken up in the year was 68,941 (2000-01: 68,000). Results achieved were: full 4,706 (4,292), aspect 65,346 (67,222), beating the overall target by 1,111. Additional liabilities from completed enquiries totalled £514.6 million (£511.9 million). Estimated yield for each pound of cost was £1.90 (£2.20) for corporation tax full enquiries and £8.90 (£9.80) for aspect enquiries. This compares with Large Business Office's yield of £49.60 (£74.90) per pound on corporation tax enquiries.

The overall target for income tax self-assessment enquiries into business returns was 103,069. Again, the target was beaten with 41,643 (42,662) full and 62,377 (65,032) aspect enquiries taken up in the year. Cases settled in the year brought in £233.2 million (£210.5 million). In addition, 34,864 people 'who had been working in the informal economy' were forced to join the taxpayers' club. Estimated yield for each pound of cost was £1.30 (£1.10) for full enquiries and £3.10 (£2.60) for aspect enquiries a slight improvement but still woefully short of the yield cost ratios achieved in other areas of compliance work.

Enquiries into non-business returns totalled 232,545 (259,213). Even though this was considerably down on last year, and 17,800 below target, the additional liabilities created by these enquiries was, at £220.2 million, £32.6 million up on the previous year. Estimated yield for each pound of cost on such enquiries was £5.30 (£3.90).

39,255 (29,707) employer compliance full reviews and 2,778 (1,622) aspect reviews were started in 2001-02, and £215.8 million (£194 million) in additional liabilities arose from those settled. Yield per pound of cost on employer compliance aspect reviews (full reviews are not separately shown in the yield/cost ratio Table 14 on page 109) was £3 (£2.70). The additional liability from trust enquiries was £8.3 million.

Special Compliance Office

Special Compliance Office handles the larger cases of fraud and other major tax irregularities, and is responsible for implementing the Board's prosecution policy. Its results are set out on pages 114 to 115. Special Compliance Office no longer publishes details of cases settled in the year but it failed, by 12, to meet its target of reducing to 339 the number of cases over three years old at 31 March. Yield per pound of cost was down to £20.20, from £25.30 for the previous year.

Yield was also down from £378 million to £337 million overall. Of that, the Foreign Entertainers Unit brought in £9 million less, which was attributed to the decline in major film production in the United Kingdom and a significant fall in the number of American sports and entertainment personalities touring in the United Kingdom after 11 September 2001. The rest of the decrease was related to the involvement of Special Compliance Office staff in a mentoring scheme directed at improving the investigation skills of Inspectors in the local office network. As referred to below, this is likely to increase the yield of local corporation tax enquiry work in future years.

Although Special Compliance Office has been under pressure to undertake more prosecutions, and since 1 January 2001 has had a new power to prosecute 'fraudulent evasion of income tax' (section 144, Finance Act 2000), the number of prosecution cases concluded in the year actually went down by two to 68. The number of convictions, however, increased by two to 58. The increase in sentences of two years or more (up by three cases) was more than offset by an increase in community service awards.

Other specialist offices

The rest of the £3.8 billion total is made up of the yield from other specialist offices, including International Section's Business Tax Group (£196.6 million), Capital Taxes Office (£99.1 million), Special Investigations Section (£90.4 million) and the Oil Taxation Office (£73.8 million).

Enforcing the national minimum wage has been part of the Revenue's remit since April 1999. In 2001-02, more than 5,000 investigations were completed by officers and 36 per cent of these uncovered non-compliance.

Joint initiatives

The Revenue's links with Customs and Excise grow closer every year and the report informs us that 20 'joint shadow economy teams' were introduced nationally in 2001-02. The report points out that: 'with the two joint fashion industry teams, they are improving our success in bringing more people from the informal to the formal economy'. This was confirmed at a recent gathering of local accountants when the leader of one such team explained that its main function was to catch traders operating around the VAT limit who failed to register for VAT. Any understatement in the profits returned for income tax would also be of interest to Inland Revenue colleagues. It appeared that the joint team had little or no involvement in the broader liaison between local Revenue and Customs investigators which has taken place for some years, and the officer in charge of the local area management office compliance team declined to answer a question about the current extent of such liaison, other than to confirm that it was still 'patchy' across the United Kingdom.

Conclusion

The Revenue's compliance function may have become a smaller part of the department's overall responsibilities, but it remains one of its most important. Investigating Inspectors must be relieved to see their chairman at last recognising this in his annual introduction to the board's report.

What can we glean from the mass of figures in the report? Overall, not a great deal has changed since last year, apart from the large fluctuation in Large Business Office yield. One 'improvement', though, is the ten per cent rise in corporation tax full enquiries. This is likely to be the first step in a larger rise, resulting from the recent formation of enquiry teams in the area management offices now operating across all regions. These teams, sometimes advised by Special Compliance Office Inspectors, are able to tackle enquiries into much larger companies than before, and the corporation tax full enquiry yield will almost certainly increase as a result of the enquiries now being started.

Although several yield/cost ratios improved in 2001-02, the high cost of some compliance work, particularly income tax self-assessment full enquiries, must remain a cause for concern to the chairman and his board. It would be glib to suggest that staff should be switched from such enquiries and used more efficiently elsewhere. The Revenue has little alternative but to maintain or even increase the number of full enquiries, an important part of policing the tax system and creating a deterrent to 'that small minority of cheats and frauds'.

David Cunliffe of DJC consulting has over 30 years experience of Revenue investigations and now practises independently, offering specialist advice and assistance to practitioners and their clients on tax investigations. David can be contacted on 07968 950797, or via his website www.djc-c.com.

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