The management of Corporation Tax by HM Revenue and Customs’ Area offices has improved in recent years, according to the National Audit Office. However, the variations in performance across offices offer scope for further savings in the costs of managing the tax and generating additional tax revenue.
The Department’s Area offices administer Corporation Tax for all but the largest UK companies and generate almost half of the overall revenue from Corporation Tax, approximately £15 billion. The Department spends around £220 million a year on Corporation Tax work in the Areas, including processing of tax returns and compliance and enquiry work. Areas have coped with a surge in new incorporations in recent years. Planned enhancements in electronic filing should help to reduce costs.
Since 1999 when Corporation Tax Self Assessment was first introduced, there has been a 42 per cent increase in the extra revenue secured by area offices from their detailed enquiries on tax returns, giving a total of £602million in extra revenue for 2004-05. Focusing on higher risk cases has meant that this increase in revenue has come from fewer enquiry cases, down from over 80,000 in 1999-00 to 44,000 in 2004-05. To achieve this, the Department has made greater use of databases and risk profiles to select enquiry cases and it has plans to develop these techniques further.
Areas undertake two types of enquiry. One type scrutinises every part of a company return and yielded on average £27,000, five times their average cost. Most of these enquiries tend to be carried out on less complex companies. The other type concentrates on particular aspects of a company’s affairs and these enquiries yielded an average of £12,000, nearly 23 times their cost.
Around 40 per cent of all enquiries resulted in no change to the tax or profit assessment. While enquiries are now carried out more quickly they still take many months to complete. A trial of new methods of communication with companies on enquiries suggests that enquiries might be completed 20 per cent more quickly.
Yields varied widely from office to office, even after economic geography had been taken into account. Variations in coverage mean that companies of a similar size have different chances of being selected for enquiry depending on where they are located. Similarly, there were wide variations in Areas’ efficiency in processing returns and undertaking enquiries, with, for example, average enquiry costs in some areas being twice as high as in others.
These variations in performance and costs across the 68 Areas suggest scope for efficiency savings in processing and enquiry work, together with still higher yields. Much of the variation stems from imbalances across areas in the number and experience of tax inspectors and other staff compared to the size and complexity of company caseload dealt with by each Area.
The Department is consulting staff on plans to restructure local compliance work into fewer but larger offices. This would provide opportunities to match staffing levels and experience more closely to local workloads and compliance risks, and more easily to share best practice and experience of new techniques.
The scope for further improvement hinges also on being able to tackle some of the underlying reasons for non-compliance. The Department has a programme of random enquiries underway which should improve its understanding of the nature and extent of non-compliance. This work has detected errors by companies in around 40 per cent of returns. The Department has introduced various measures to help businesses submit compliant returns, such as a shorter tax form for companies with simpler financial affairs, an electronic return with inbuilt checks, and working with some companies to resolve issues before they submits their returns.
There is relatively little research into the administrative burdens and costs for businesses in meeting their Corporation Tax obligations, although some studies suggest that these might be less in the UK than in some other countries. A review of available research suggests that such burdens and costs principally arise from the complexity of the tax structure and frequent legislative change. The Department has been consulting on small businesses’ priorities for simplifying administration of the tax system. It also has work underway to set a baseline for tracking and reducing the costs of compliance. As part of its restructuring, the Department has set up a business unit to focus on the needs of small and medium size enterprises and employers.