HMRC has backed tax professionals’ claims that the complexity of the tax system accounts for National Audit Office research suggesting that tax returns prepared by agents were more likely to understate liabilities than returns filed by taxpayers who do not have an agent.
The NAO’s report ‘HM Revenue & Customs: Engaging with Tax Agents’ concluded that paying for professional help is ‘not without risk for a taxpayer’, and that tax agents may need more support. But it acknowledged that ‘a key reason’ for its findings ‘may be’ that the tax affairs that agents deal with are more complex.
‘We have no evidence that tax agents are supporting non-compliance,’ the NAO said.
‘The data does indicate that the level of net understatement is greater in cases where a tax agent acts. However, we believe that this reflects the greater complexity or scale of profits of tax agent represented businesses,’ an HMRC spokesman has told Tax Journal.
Data from HMRC’s random enquiry programme was made available to the NAO for its own analysis. ‘In conducting our random enquiry programme we randomly select tax returns filed and check whether the right amount of tax has been declared,’ the spokesman added.
Tax industry experts had warned that the NAO report was likely to be misinterpreted without proper analysis.
Sample
The NAO report recognised that good tax agents help their clients get their tax right. ‘It is possible that without the intervention of tax agents, the level of non-compliance would be higher,’ it said. ‘The complexities of the tax system, however, mean that even the best tax agents and the Department can sometimes get it wrong.’
According to an analysis of a sample of about 5,000 tax returns for 2004/05, self-assessed income tax returns filed by ‘customers’ represented by agents were ‘more likely to have under-declarations of tax (resulting from error, failure to take reasonable care or evasion) than returns filed by non-represented taxpayers’.
An absence of data for more recent tax years meant it was not possible to assess directly more recent trends in under-declarations. HMRC considers, the NAO said, that ‘other indicators, such as tax receipts, suggest there have not been any significant changes’.
The figures
The NAO said that in the sample of 2004/05 returns 37% of self-assessed income tax returns from represented taxpayers had under-declared tax liabilities, compared to 26% of returns filed by unrepresented taxpayers.
The average under-declaration on returns filed by represented taxpayers was £900, around 15% per cent of the total liabilities. For unrepresented taxpayers, the average under-declaration was around £350 or 35-40% of total liabilities.
An analysis of equivalent data for the previous two years found that the results were ‘broadly consistent’ over the three-year period.
The CIOT pointed out that Figure 3 in the report indicates that total under-declared tax as a percentage of total tax liability due from self-assessed income tax returns filed in 2002/3 was 15.2% for represented taxpayers and 39.8% for unrepresented taxpayers.
The tax body added that the percentages for 2003/4 were similar, and Figure 3 also indicated that total under-declared tax as a percentage of total tax liability due from corporation tax returns, filed in 2002 to 2005, was 11.1% for represented taxpayers and 22.2% for unrepresented taxpayers.
The Institute of Chartered Accountants of Scotland said it was ‘paradoxical’ to suggest that returns for represented taxpayers are more likely to have under-declarations of tax than returns filed by non-represented taxpayers.
Revenue loss
Based on the NAO analysis, HMRC estimated that under-declarations associated with represented taxpayers could exceed £3.5 billion (comprising £2.6 billion for self-assessed income tax and £0.9 billion for self-assessed corporation tax) for 2007/08.
‘These figures do not take account of represented taxpayers that had net over-declarations of tax,’ the NAO said. ‘More analysis is needed on the reasons for these under-declarations and how the figure breaks down, for example by type of agent. However, the analysis indicates that there could be an opportunity for the Department to increase tax revenues by providing better support to tax agents and by better targeting of poorly-performing agents.'
A 3% reduction in the average amount of tax under-declared by represented taxpayers could lead to over £100 million additional revenue each year, it added.
HMRC service standards
The NAO report acknowledged HMRC’s recent efforts to work more effectively with tax agents, but said HMRC recognised that it can do more. ‘The Department’s customer satisfaction survey has shown that tax agents report the lowest satisfaction levels of any of the Department’s customers,’ it said.
The ICAS responded to ‘disquiet among professional bodies’ concerning the NAO report by raising its own concerns about the standard of service provided by HMRC.
The ICAS claimed that the NAO report included ‘a number of sweeping and unsubstantiated observations about the effectiveness of tax agents’. The report failed to differentiate between agents who are professionally qualified and those who are unqualified, it added.
The NAO acknowledged that many tax agents had complained of ‘a fall in service standards’ following the merger between the Inland Revenue and HM Customs and Excise in 2005, when HMRC began to centralise activities previously carried out by local offices.
Announcing its own report, titled ‘Systemic errors in tax administration’, the ICAS said ‘poor communications account for 43% of HMRC’s systemic errors and shortcomings reported by the survey respondents (compared with only 13% in a similar survey in March 2009), and 71% of these are considered “more serious than a year ago”.’
Derek Allen, Director of Tax at the ICAS, said: ‘Facilities for contacting HMRC have deteriorated drastically in the past year. Phone calls to HMRC help lines go unanswered. Letters sent to HMRC lie unopened for weeks – sometimes months.
‘Many HMRC staff seem ill-equipped to perform their allotted roles, and technical tax questions are commonly passed from pillar to post. Urgent action is needed to simplify the tax regime and give more help to those trying to comply with their fiscal obligations.’
HMRC has backed tax professionals’ claims that the complexity of the tax system accounts for National Audit Office research suggesting that tax returns prepared by agents were more likely to understate liabilities than returns filed by taxpayers who do not have an agent.
The NAO’s report ‘HM Revenue & Customs: Engaging with Tax Agents’ concluded that paying for professional help is ‘not without risk for a taxpayer’, and that tax agents may need more support. But it acknowledged that ‘a key reason’ for its findings ‘may be’ that the tax affairs that agents deal with are more complex.
‘We have no evidence that tax agents are supporting non-compliance,’ the NAO said.
‘The data does indicate that the level of net understatement is greater in cases where a tax agent acts. However, we believe that this reflects the greater complexity or scale of profits of tax agent represented businesses,’ an HMRC spokesman has told Tax Journal.
Data from HMRC’s random enquiry programme was made available to the NAO for its own analysis. ‘In conducting our random enquiry programme we randomly select tax returns filed and check whether the right amount of tax has been declared,’ the spokesman added.
Tax industry experts had warned that the NAO report was likely to be misinterpreted without proper analysis.
Sample
The NAO report recognised that good tax agents help their clients get their tax right. ‘It is possible that without the intervention of tax agents, the level of non-compliance would be higher,’ it said. ‘The complexities of the tax system, however, mean that even the best tax agents and the Department can sometimes get it wrong.’
According to an analysis of a sample of about 5,000 tax returns for 2004/05, self-assessed income tax returns filed by ‘customers’ represented by agents were ‘more likely to have under-declarations of tax (resulting from error, failure to take reasonable care or evasion) than returns filed by non-represented taxpayers’.
An absence of data for more recent tax years meant it was not possible to assess directly more recent trends in under-declarations. HMRC considers, the NAO said, that ‘other indicators, such as tax receipts, suggest there have not been any significant changes’.
The figures
The NAO said that in the sample of 2004/05 returns 37% of self-assessed income tax returns from represented taxpayers had under-declared tax liabilities, compared to 26% of returns filed by unrepresented taxpayers.
The average under-declaration on returns filed by represented taxpayers was £900, around 15% per cent of the total liabilities. For unrepresented taxpayers, the average under-declaration was around £350 or 35-40% of total liabilities.
An analysis of equivalent data for the previous two years found that the results were ‘broadly consistent’ over the three-year period.
The CIOT pointed out that Figure 3 in the report indicates that total under-declared tax as a percentage of total tax liability due from self-assessed income tax returns filed in 2002/3 was 15.2% for represented taxpayers and 39.8% for unrepresented taxpayers.
The tax body added that the percentages for 2003/4 were similar, and Figure 3 also indicated that total under-declared tax as a percentage of total tax liability due from corporation tax returns, filed in 2002 to 2005, was 11.1% for represented taxpayers and 22.2% for unrepresented taxpayers.
The Institute of Chartered Accountants of Scotland said it was ‘paradoxical’ to suggest that returns for represented taxpayers are more likely to have under-declarations of tax than returns filed by non-represented taxpayers.
Revenue loss
Based on the NAO analysis, HMRC estimated that under-declarations associated with represented taxpayers could exceed £3.5 billion (comprising £2.6 billion for self-assessed income tax and £0.9 billion for self-assessed corporation tax) for 2007/08.
‘These figures do not take account of represented taxpayers that had net over-declarations of tax,’ the NAO said. ‘More analysis is needed on the reasons for these under-declarations and how the figure breaks down, for example by type of agent. However, the analysis indicates that there could be an opportunity for the Department to increase tax revenues by providing better support to tax agents and by better targeting of poorly-performing agents.'
A 3% reduction in the average amount of tax under-declared by represented taxpayers could lead to over £100 million additional revenue each year, it added.
HMRC service standards
The NAO report acknowledged HMRC’s recent efforts to work more effectively with tax agents, but said HMRC recognised that it can do more. ‘The Department’s customer satisfaction survey has shown that tax agents report the lowest satisfaction levels of any of the Department’s customers,’ it said.
The ICAS responded to ‘disquiet among professional bodies’ concerning the NAO report by raising its own concerns about the standard of service provided by HMRC.
The ICAS claimed that the NAO report included ‘a number of sweeping and unsubstantiated observations about the effectiveness of tax agents’. The report failed to differentiate between agents who are professionally qualified and those who are unqualified, it added.
The NAO acknowledged that many tax agents had complained of ‘a fall in service standards’ following the merger between the Inland Revenue and HM Customs and Excise in 2005, when HMRC began to centralise activities previously carried out by local offices.
Announcing its own report, titled ‘Systemic errors in tax administration’, the ICAS said ‘poor communications account for 43% of HMRC’s systemic errors and shortcomings reported by the survey respondents (compared with only 13% in a similar survey in March 2009), and 71% of these are considered “more serious than a year ago”.’
Derek Allen, Director of Tax at the ICAS, said: ‘Facilities for contacting HMRC have deteriorated drastically in the past year. Phone calls to HMRC help lines go unanswered. Letters sent to HMRC lie unopened for weeks – sometimes months.
‘Many HMRC staff seem ill-equipped to perform their allotted roles, and technical tax questions are commonly passed from pillar to post. Urgent action is needed to simplify the tax regime and give more help to those trying to comply with their fiscal obligations.’
