Sir John Bourn, head of the National Audit Office, reported to Parliament today on the overall results of the National Audit Office’s 1998-99 examination of the systems which HM Customs and Excise and the Inland Revenue have put in place to secure an effective check on the assessment, collection and allocation of revenues. He reported that his work in 1998-99 included reviews of quality assurance work and other checks carried out by the two Departments; ongoing review of the information technology systems that are fundamental to the efficient and effective operation of the tax system and the collection of revenue; and test examinations of individual transactions and balances. On the basis of the National Audit Office’s work, Sir John remains satisfied as to the adequacy of the regulations and procedure of the two Departments and the way they have been implemented.
During the year, HM Customs and Excise collected some £94 billion net in taxes and duties and the Inland Revenue collected over £128 billion.
HM Customs and Excise
Forecasting and outturn of revenue
- Net receipts of revenue rose by 4.3 per cent over the previous year to £94.0 billion. The increase largely reflected higher household consumption of goods and services liable to VAT, and increased hydrocarbon oil duty rates: VAT increased by £1.4 billion and hydrocarbon oil duty by £2.1 billion. Air Passenger Duty receipts increased by 69.6 per cent following an increase in both duty rates and the number of eligible passengers, while Insurance Premium Tax receipts increased by 19.3 per cent as a result of increased tax rates.
- Tobacco duty receipts declined by 1.8 per cent because the average increase in duty rates was more than offset by a drop in cigarette releases of 7.5 per cent. The other receipts that declined during 1998-99 were Betting and Gaming Duty (1.9 per cent) and Landfill Tax (7.6 per cent); the former due to declines in National Lottery receipts and Pools receipts, and the latter due to a reduction of taxable quantities of waste.
- For VAT, the Department met their forecast accuracy target of ± 3 per cent with outturn being 1.9 per cent lower than forecast. Other Taxes and Duties were 1.37 per cent lower than forecast, which fell outside the accuracy target of ± 1 per cent.
- The average VAT liability arising each month in 1998-99 was about £7,346 million. The average month-end arrears, as a percentage of payment trader liabilities, increased from 1.9 per cent (£1,391 million) in 1997-98 to 2.0 per cent (£1,494 million) in 1998-99. However, liabilities outstanding for more than six months at 31 March 1999 (£473.3 million) have decreased by 14.1 per cent from the figure at 31 March 1998 (£551.0 million).
- During the 1998 calendar year, the value of write-offs and remissions was £631.3 million, an increase of £107.9 million (20.6 per cent) on the previous year. Insolvent traders accounted for 92 per cent of VAT write-offs, and were responsible for £87 million of the increase of write-offs and remissions in 1998. Some £2.5 million was remitted, over the same period, following mistakes by the Department.
Dealing with errors and fraud
- The Department have several initiatives in place to tackle the challenge posed by trader error and deliberate fraud. The number and value of errors detected by the Department continue to rise. During 1998-99, the Department found under-declaration errors totalling £2,569 million in VAT and Insurance Premium Tax returns. In 1998-99, specialist VAT avoidance staff identified £143 million of VAT avoided during the year. The Shadow Economy Teams targeting unregistered businesses provided additional revenue of £34 million. And teams investigating the fraudulent abuse of warehousing and transit arrangements of excise goods detected £244 million of duty evaded.
- Claims for the repayment of duty on hydrocarbon oils, wine and tobacco increased by £41 million in 1998-99. For wine and tobacco, one large trader accounted for most of the increase in each case. The increase in hydrocarbon oil duty reclaimed was due to the increase in the manufacture and use in the UK of ultra low sulphur diesel, with producers responding by exporting greater quantities of conventional diesel. Exporters reclaimed the duty paid, which is at a higher rate than that for ultra low sulphur diesel.
- Cross-Channel smuggling of tobacco and alcohol, where duty has been paid at lower continental rates, has continued to grow. The Department estimate that in 1999, £1,270 million additional revenue would have been collected had smuggling not displaced legitimate trade, of which more than £1 billion relates to the smuggling of tobacco products. The Department have increased the number of staff at the frontier as part of the fight against alcohol and tobacco smuggling.
Outturn of revenue and costs
- In 1998-99 net receipts of revenue were £128.1 billion, 9 per cent higher than in the previous year. Receipts of income tax rose by £9.8 billion and stamp duty receipts rose by £1.2 billion. The increases were due to a variety of factors, including the continuing growth in earnings, and the continued strength of the housing market, coupled with a rise in the rate of stamp duty on property worth £250,000 or more.
- The Inland Revenue’s cost of collecting tax was £1,702 million in 1998-99. The cost was equivalent to 1.33 per cent of net tax receipts, the lowest level for more than 45 years.
- The Department’s quality monitoring work examined the handling by local office staff of those PAYE cases not dealt with wholly by computer. It showed that staff got 87.4 per cent of PAYE cases right first time in 1998-99, compared with 86.3 per cent in the previous year. Difficulties experienced with the National Insurance Recording System meant, however, that the Department had only been able to finalise the tax position of some 83 per cent of PAYE taxpayers by 31 March 1999, against a target of 88 per cent.
Income tax self assessment
- During 1998-99, the Inland Revenue piloted a new system of quality monitoring to check the accuracy of processing work on self assessment tax returns. Checks on 3,400 returns showed that while 94 per cent of returns were processed accurately (within £1), there was scope to improve specific elements of the process, such as changes to PAYE codes and adjustments to payments on account, where the accuracy rates ranged between 65 per cent and 80 per cent.
- The Department opened enquiries into some 369,000 tax returns during 1998-99, including some 6,000 selected at random. Yield from enquiries completed during the year amounted to some £179 million.
Experimental call centre
- As part of its response to the Modernising Government initiative, the Inland Revenue is examining the potential for establishing a series of call centres which would allow taxpayers to deal with their tax affairs by telephone at hours which are convenient to them. To test the approach, it has established an experimental call centre at East Kilbride for 2 million taxpayers which is open from 8am to 8 pm, well beyond the traditional working hours of the Department. Recent benchmarking work ranked the call centre fourth out of seventeen participating call centres.
- The National Audit Office found that the Inland Revenue was managing the risks associated with telephone based systems and that the experiment had been successful in identifying important issues which will need to be examined before deciding to extend the approach. These include the management of peak call volumes, for example when annual PAYE code numbers are issued, and the reliability of information technology systems supporting the service.