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National Audit Office report: Inland Revenue: Inheritance Tax

Inland Revenue: Inheritance Tax

"The Inland Revenue’s management of Inheritance Tax has improved over the last five years. The burden of having to deal with the tax affairs of a relative after his or her death has been lightened, an important matter for those who are not professionals in these matters. And Inheritance Tax returns are dealt with more efficiently.

"My report highlights a number of areas where the Revenue can build on those improvements, to help ensure compliance and improve service to Inheritance Tax payers."

"The Inland Revenue’s management of Inheritance Tax has improved over the last five years. The burden of having to deal with the tax affairs of a relative after his or her death has been lightened, an important matter for those who are not professionals in these matters. And Inheritance Tax returns are dealt with more efficiently.

"My report highlights a number of areas where the Revenue can build on those improvements, to help ensure compliance and improve service to Inheritance Tax payers."

Sir John

 

The Inland Revenue has in recent years improved the way it checks compliance with Inheritance Tax. It has also done a great deal to reduce the burden on those who have to sort out the tax affairs of an estate when someone dies. Today’s report from head of the NAO Sir John Bourn highlights ways in which the Revenue can make further improvements.

The efficiency with which the Revenue deals with tax returns for the estates of those who have died has improved: it processes 66 per cent more cases than in 1999, and has taken on additional work, with a broadly similar level of staff. It conducts compliance enquiries on around 5 per cent of those tax returns, securing an additional tax yield of £126 million in 2003-04.

The Revenue has also improved the way it singles out cases for checking, making greater use of data held in other parts of the organisation and checking for particular risks such as undeclared gifts or under-valued houses. Today’s report highlights some further ways in which underpaid tax might be identified. These include making greater use of the Revenue’s existing statistical data on the make-up of estates and measuring the ‘tax gap’ to establish the level of overall compliance with the tax – an area in which the Revenue could learn from its counterpart in the US.

The Revenue has publicised the penalties available against those fraudulently or negligently submitting inaccurate tax returns through a series of roadshows for solicitors and other Inheritance Tax professionals. These penalties were strengthened in 1999 and further in 2004. In many cases the Revenue does not apply these penalties because of the difficulty in demonstrating negligence against people who are dealing with the financial affairs of a deceased person. Where penalties are used they are abated to reward taxpayers’ co-operation and to provide an incentive for them to disclose all errors when they come to light. Today’s report recommends that the Revenue ensures such abatements not only give incentives for disclosing errors, but also work to discourage incomplete or inaccurate returns in the first place.

The Revenue has also taken significant steps to improve the service it provides to Inheritance Tax payers. It has made its tax forms easier to complete, and new procedures introduced with the 2004 Finance Act mean that fewer people will need to fill these in. The Revenue has set up a joint helpline with the Probate Service. It is processing cases more quickly. And it has introduced schemes to simplify the way the tax is paid.

Most tax returns are completed by professionals, such as solicitors, but around 30 per cent are completed by ‘personal representatives’ – often a relative of the deceased who may be dealing with Inheritance Tax matters for the first time – and the burden on those people could be eased further. For example, the Revenue could improve its website; provide more help on certain aspects of the tax such as the valuation of land and buildings; and make the tax forms still easier to complete. The Revenue is planning to improve the way it surveys taxpayers. It should also extend its performance indicators and set targets for further reductions in long outstanding cases.

Today’s report also points out that, using provisions in the 1998 Finance Act, the Revenue has tightened up the controls on the ‘Heritage exemption’. Items now need to be of pre-eminent heritage importance (rather than of a previously lower ‘museum standard’). It has required open-access for the public as a condition of new exemptions, and negotiated open-access for some existing collections. The Revenue is also working more closely with heritage agencies in checking that exemption conditions are being met, with much less slippage in the programme of inspection visits.

 

Publication details:

ISBN: 0102931550 [Buy a hard copy of this report from TSO]

HC: 17 2004-2005

Published date: December 3, 2004