Statistically Speaking

THE INLAND REVENUE published its annual report last month and presented over 1,000 statistics quantifying the results of United Kingdom tax policy and administration. What do these mean? Do they portray a compliance policy effective in today's economy or one buried in the past? Has the deterrence effect of compliance work, which it trumpeted in tandem with the introduction of self assessment, been persuasive, or does this department need to focus more on its corollary, education?

I think the biggest clue to understanding the strategy from which these results derive is the absence of risk policy statements or risk assessment statistics. Risk assessment is commonly used by the private sector, but how can tax compliance be focussed without knowledge of how large the black economy is, or what are the most important threats to the tax base in the present/projected business population; or does all investigation work begin with an 'I' for imagination?

Looking at the detail contained in the report, I think there are a number of questions raised in the statistics.

Prosecutions

The Board of Inland Revenue reported 68 prosecutions of which 58 defendants were found guilty, but these figures include 28 working families tax credit cases - work taken over from the Department of Social Security, as was. There were a mere 13 mainstream false accounts/returns prosecutions from an unknown business population and, interestingly, nine prosecutions made against its own staff for internal fraud. That the prosecution of false returns has continued to dwindle, despite the enhanced armoury of the Inland Revenue, is a worrying statistic. The number and amount of recent confiscation orders emphasise the usefulness of the Proceeds of Crime Act 2002 and other legislative changes, so why cannot these legislative changes be harnessed and compliance become more effective? Is the traditional border between tax avoidance and tax evasion too fine a line, or are the possibilities of prosecutions thwarted by inexperienced investigators compromising later proceedings? With revised Hansard procedures published in December, perhaps the assurance of civil settlement will continue to depress the prosecution statistics. That is perhaps a good thing, but what became of the automatic prosecution policy mooted in 1999 and surely 13 is a meagre proportion of the business population being caught in the compliance net, being only four more than its own staff.

Perhaps exhausted and publicity shy after the Al Fayed deal, there was a notable absence of celebrities from the 'A list' of civil settlements and prosecutions. There were no proceedings for false claims to allowances or misapplication of residence and domicile status to achieve tax advantages; are these political animals in and out of favour every so often, or was it a year the Revenue was deliberately shy of the camera?

Civil settlements

These are the enquiries into company, business, pay-as-you-earn and individual returns that are the Inland Revenue's 'bread and butter'; again, I think the results are very interesting. Enquiries into beleaguered self assessment taxpayers' returns (of which a fair percentage are already taxed income), i.e. the ones that must be filed by 31 January which accompany reams of guidance notes, calculation guides, calculation worksheets and schedules, yielded £164 million. In comparison, reviews into company accounts and returns (untaxed income) yielded £70 million.

Surely this is a huge message that either much more education is needed for the beleaguered individual filer or that a well-designed and simpler return should be introduced as soon as possible. Remember that the ordinary small businessman is invited to prepare (and balance!) his own balance sheet in the tax return, and the consequences of getting it wrong are the award of a number of 'risk' points when the return is screened for investigative potential by the tax office. Or is coverage of corporate compliance risks woefully inadequate and ineffective?

The gem in the statistics is the yield from pay-as-you-earn audit reviews, resourced by more junior personnel than company investigators, which yielded £160 million - a figure comparable to the £164 million from individuals above. To me, this suggests a burdened, puzzled employer struggling through reams of Schedule E legislation and statutory instruments, work packs and employer's guides, Budget updates, IR35 and - in case he had got bored with being a part time tax guru - additional recent burdens of administering working families' tax credits, student loans, national minimum wage, to name but a few, and finally not forgetting legislative updates regarding share option schemes, benefits and National Insurance changes!

As well as this, there have been demographic factors such as a more internationally mobile workforce and the increasing popularity of benefit/participative remuneration schemes for employees. In reality, how many employers facing penalties of up to £3,000 or £60 per day for incorrect returns would knowingly misapply tax rules? Rather than file late, does the system encourage returns to be filed now (incorrectly) for which the employer may pay (dearly) later?

Is the yield from pay-as-you-earn review work a message that will encourage foreign companies with labour intensive operations to locate here, or a signal to those already resident to stay here? Will there be many more 'BT Bombays' to come; call centres being a typical example of the type of large employers targeted for review by Inland Revenue auditors?

The 2002 year saw the introduction of a number of tax breaks for small to medium-sized businesses including, for example, enhanced capital allowances for research and development: commendable and encouraging to business, yet there is no quantification publishing 'tax savings for businesses' attained by such reforms. Why not look on the up side too?

Special attention

As usual, the accoladed work of specialist investigation units, large business offices and Special Compliance Office is as erratic and unfathomable in its yield as last year. The Special Compliance Office yielded £337 million from its work as compared to £378 million the year before. These are large enquiries into the business sector or complex returns worked without remit and to punishing timescales. These may be as a result of research into a particular aspect of the black economy or reviews taken over from local tax districts. There is no published strategy for these units, a lot of their work is simply assumed from local offices when the tax yield looks as though it will exceed a certain figure. These offices are certainly not in the business of education! Looking at the effectiveness of each, Special Compliance Office is actually the lowest contributor of these specialist offices, symptomatic of the fact that the increased complexity (and blissful ignorance) of international and corporate tax legislation yields results as shown in the Table.

Quality

The Adjudicator's Office and the Ombudsman continue to police the quality of the Inland Revenue's work, but can only address individual cases. It is most unfortunate that they end up there at all (probably as a result of sheer frustration, worry or despair). They do nothing to alleviate the downtime or stress of a review, or to prevent it. The Commissioners' machinery is still infrequently used (by taxpayers) to request closure notices during an enquiry and this is despite its presence in the Codes of Practice issued at the start of all enquiries. Would an automatic right to £1,000 redress in the case of simpler reviews, based upon assumptions by investigators later found to be incorrect or a time limit exceeding one year, focus effort on more worthwhile enquiries and be some automatic safeguard for taxpayers who have erred in good faith? There is a legal (and complicated) mechanism of establishing a reasonable error, but unsurprisingly its application is at the discretion of the Board. In the writer's experience, this obscure piece of legislation is almost never explained as a legislative right to the bewildered taxpayer under enquiry.

Is the Revenue in the business of putting things right and making the law simpler or is it capitalising on mistakes and differing tax interpretations? The yield from technical adjustments on companies, i.e. differences in interpretation of tax law and practice was the biggest earner for the Revenue netting £444 million from the corporate sector last year (£430 million in 2001). That far outstrips the combined yield from self assessment and corporate tax enquiries and is a dramatic statistic. This type of work is capable of having penalties added, but there is a noblesse taken by the Revenue almost in apology for its complex tax laws. If charged, these would bump the yield up still further.

Encouragingly, a consultation paper on corporation tax reform published in August 2002 reiterates the need for tax computations and tax liabilities to be more in line with accountancy results. But the United Kingdom has an arcane legal foundation which is frequently challenged in the courts, so tax computations become ever more difficult and costly and the consequences of error more expensive.

Beyond the grave?

There were over 10,000 enquiries into the returns of deceased estates last year, yielding £99 million (£105.8 million last year) from the work of capital taxes offices. This compares with £164 million from the 'live' population - not bad work if you can get it!

Finally

The final statistics dissect the Inland Revenue's recruitment for the year, 100 per cent of its new senior personnel being male and zero per cent female. This leaves the percentages for 2002 of male/female recruits compared to 2001 and 2000 unchanged. Shall I stop here or have I reached very dangerous ground?

Has the tax compliance system and machinery the ability to spot or cope with an Enron phenomenon or the 'Del Trotter' population effectively, or is it simply an opportunist preying on and increasing the likelihood of incorrect returns and understanding of tax law?

Issue: 3899 / Categories: Comment & Analysis , IR35