“The self assessment system is providing an effective framework for managing the risks associated with the assessment and collection of tax. The system has improved the administration of income tax by making assessments more straightforward and by allowing a more focused approach to compliance work.
“However, the Inland Revenue need better management information to assess the effectiveness of the system and to identify areas for improvement as they continue to develop their approach.”
The main findings in the report are as follows.
Identifying potential taxpayers
Individuals have an obligation to notify the Inland Revenue of taxable income and gains. Some will fail to do so, for example ‘ghosts’ and ‘moonlighters’ operating in the hidden economy. The Department’s intelligence work identified some £22 million additional tax in 1999-00 by identifying people not registered for tax.
The Inland Revenue have recently reorganised the way they approach intelligence work. They have set up specialist teams to improve the focus of the work, are increasing the scope and scale of data-matching to identify non-compliance, and are planning to improve the way they collate the results. These changes should also provide the Department with better management information to assess the effectiveness of work at national and local level.
Getting in tax returns
Around 90 per cent of the 9 million tax returns issued each year are filed by the 31 January deadline. The Department estimate that there is potentially between £150 million and £300 million at risk from returns which remain outstanding after automatic £100 penalties have been applied.
The report recommends that the Department should develop their management information to monitor the use of automatic £100 penalties, daily penalties and estimated tax assessments to assess whether these incentives are effective and that they are being used appropriately. The Department are carrying out research into patterns of taxpayer behaviour which should help identify ways in which the current arrangements might be improved.
Carrying out enquiries
The Inland Revenue enquire into tax returns to deter and detect non-compliance. Using new powers, they have carried out enquiries into a random sample of tax returns. The results of this work are providing valuable information about the level and pattern of non-compliance in the taxpayer population as a whole. Results from the first two years, while not providing a definitive view, have, nevertheless, confirmed that substantial sums are at risk.
The self assessment system has enabled the Inland Revenue to introduce a greater uniformity in approach to addressing higher-risk aspects of individuals’ tax affairs and there is now a structured approach to risk assessment and the selection of cases for enquiry. The Department are continuing to develop their approach and in April 2001 introduced specialist teams to carry out risk assessment work. They have also analysed yield from completed enquiries to identify features which will be used to make a central selection of cases for enquiry in 2001-02.