Filing VAT and Company Tax returns

Transcription

1 HM Reveue & Customs Filig VAT ad Compay Tax returs REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 102 Sessio December 2006

2 The Natioal Audit Office scrutiises public spedig o behalf of Parliamet. The Comptroller ad Auditor Geeral, Sir Joh Bour, is a Officer of the House of Commos. He is the head of the Natioal Audit Office, which employs some 850 staff. He, ad the Natioal Audit Office, are totally idepedet of Govermet. He certifies the accouts of all Govermet departmets ad a wide rage of other public sector bodies; ad he has statutory authority to report to Parliamet o the ecoomy, efficiecy ad effectiveess with which departmets ad other bodies have used their resources. Our work saves the taxpayer millios of pouds every year. At least 8 for every 1 spet ruig the Office.

3 HM Reveue & Customs Filig VAT ad Compay Tax returs LONDON: The Statioery Office Ordered by the House of Commos to be prited o 11 December 2006 REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 102 Sessio December 2006

4 This report has bee prepared uder Sectio 6 of the Natioal Audit Act 1983 for presetatio to the House of Commos i accordace with Sectio 9 of the Act. Joh Bour Comptroller ad Auditor Geeral Natioal Audit Office 4 December 2006 The Natioal Audit Office study team cosisted of: Nick Lacy, Craig Adams, Lucy Morto, Sascha Kiess, Paul Bishop, Imra Kha, Katherie Robso ad Marti Welsh, uder the directio of Jae Wheeler This report ca be foud o the Natioal Audit Office web site at For further iformatio about the Natioal Audit Office please cotact: Natioal Audit Office Press Office Buckigham Palace Road Victoria Lodo SW1W 9SP Tel: equiries@ao.gsi.gov.uk Natioal Audit Office 2006

5 CONTENTS summary 4 PARt oe Gettig returs i o time 9 The requiremet to file returs 9 The Departmet s performace i gettig 10 returs i o time Busiesses that fail to file accurately ad o time 10 The tax cosequeces of late filig 11 Pealties to ecourage o time filig of returs 11 PARt two Efficiecy i dealig with returs 14 The efficiecy of olie filig 14 The challeges to achievig full madatory 15 olie filig by 2012 The efficiecy of processig paper returs 17 maagig Area Office performace i 19 processig Compay Tax returs PARt three Customer service ad the compliace 21 burde o busiesses makig tax returs measurig customer satisfactio ad the 21 compliace burde Helpig busiesses comply 23 Opportuities for a wider rage of eablers 24 APPeDICes 1 Natioal Audit Office methodology 26 2 VAT ad Compay Tax retur filig maps 29 3 Review of Hm Reveue & Customs Olie 34 Services, Lord Carter of Coles, march Hm Reveue & Customs targets ad 35 performace o filig VAT ad Compay Tax returs edotes 38 Settig targets ad maagig performace o 20 filig of returs Photographs courtesy of Helea Kaoute, Julia Holmes, Digital Visio Ltd. ad PhotoDisc, Ic

6 SummARy 1 Value Added Tax (VAT) ad Corporatio Tax raised aroud 120 billio i reveue i As at March 2006, some 1.8 millio busiesses were registered for VAT ad 1.8 millio compaies registered to file Compay Tax returs, which cover their liability for Corporatio Tax. 600,000 busiesses must file both types of retur. 2 This report examies the performace of HM Reveue & Customs i securig ad processig VAT ad Compay Tax returs from busiesses which should submit them. It covers: Gettig the returs i o time ad the cosequeces of late filig (Part 1); Efficiecy i dealig with the returs, icludig the use of olie filig (Part 2); ad Customer service ad the compliace burde o busiesses makig returs (Part 3). 3 Util March 2005, Corporatio Tax was maaged by Ilad Reveue ad VAT by HM Customs & Excise. The Departmets merged to form HM Reveue & Customs. Compay Tax returs 1 are dealt with at 64 Area Offices across the Uited Kigdom, ad by 11 Large Busiess Service offices for the largest compaies. VAT returs are processed at a sigle locatio i Southed-o-Sea. 4 FILING VAT AND COmPANy TAX RETuRNS

7 4 Our study methodology is at Appedix 1. The mai elemets were: aalysis of the Departmet s fiacial ad performace data ad a overview of its processig systems; review of other coutries processig of olie ad paper busiess tax returs; research ito the barriers ad icetives for olie filig by busiesses; ad cosultatio with orgaisatios with a professioal iterest i VAT ad Corporatio Tax. This report does ot cover those busiesses that seek to evade tax etirely by operatig withi the shadow ecoomy, which we have examied i previous reports (Appedix 1). Coclusios 5 Gettig accurate tax returs i o time is importat for HM Reveue & Customs i esurig it is collectig the right amout of tax at the right time. Over the last three years the umber of Compay Tax returs filed o time has remaied broadly stable at 77 to 79 per cet. Followig the itroductio of a default surcharge pealty for busiesses ot payig o time the full VAT amout due, the VAT retur compliace rate has stabilised at 85 per cet. As at mid October 2006, there remaied 230,000 assessmets of busiess VAT liability (which the Departmet made i ad i the absece of VAT returs from busiesses) which had ot bee replaced by completed VAT returs. Ad 160,000 Compay Tax returs which were due i had bee outstadig for 12 moths or more. The Departmet does ot have readily available iformatio o the total umber of Compay Tax returs outstadig from all previous years. It also does ot kow the potetial tax liability arisig from all missig returs. At least 1.5 billio of tax is i doubt from late ad o-filed VAT ad Compay Tax returs. The level ad the way i which pealties are applied for late filig for the two tax returs has ot proved effective i further improvig compliace. 6 The Departmet s curret review Moderisig Powers, Deterrets ad Safeguards 2, provides a opportuity to improve value for moey. This ca be doe by rewardig those with a good compliace record ad ratchetig up the measures agaist those that persistetly fail to meet their obligatios, through more effective use ad collectio of pealties. Such a approach is beig piloted by the Departmet s Large Payers Uit ad Large Busiess Service o measures to tackle all forms of tax debt collectively. To uderpi this approach, the Departmet eeds to develop a better uderstadig of which busiesses do ad do ot comply ad why, ad the barriers to compliace so that it ca target its effort to best improve compliace. 1 Key facts ad figures data Net Receipts Nature of the tax Registered busiesses Filig deadlies Returs processed Processig of returs VAT 74 billio A tax that VAT registered busiesses charge o goods ad services they sell agaist which they ca offset the VAT they icur o their purchases 1.8 millio The majority file quarterly, oe moth after the ed of the quarter 7.8 millio 1 All returs are processed at oe locatio i Southed-o-Sea CT 42 billio A tax o the profits ad gais of compaies ad uicorporated associatios 1.8 millio 12 moths after the ed of the accoutig period 1.3 millio Returs are processed by 64 Area Offices ad 11 Large Busiess Service Offices Returs filed by filig deadlie Returs filed olie First half Cost of processig filed returs 85% 4.9% 7.8% 4.1 millio 79% 1.9% 7.2% 5.1 millio Source: Natioal Audit Office aalysis NOTE 1 The 7.8 millio VAT returs filed aually is based o busiesses who file mothly, quarterly ad aually ad chages through ew registratios ad deregistratios. Filig VAT ad Compay Tax returs 5

8 summary 7 The Departmet speds 9.2 millio a year o processig VAT ad Compay Tax returs. It also icurs further costs i chasig busiesses for overdue returs ad correctig errors. For example, i , the Departmet spet 1.2 millio correctig errors o VAT returs. Olie filig of returs could improve the Departmet s efficiecy ad reduce costs to busiesses. I , the take up of olie filig for both returs was below five per cet but icreased to 7.8 per cet for VAT ad 7.2 per cet for Compay Tax returs i the first half of Although reveue departmets overseas will have differet priorities ad activities 3, olie filig i some other coutries is higher. 8 Compatibility of software packages to prepare ad submit tax returs, high set up costs ad the greater coveiece of paper returs are some of the barriers which busiesses face i usig the Departmet s olie systems. The Departmet has begu to develop a strategy to implemet Lord Carter s recommedatios for madatory olie filig, which start from April 2008 for large ad ew busiesses filig VAT returs ad March 2010 for all Compay Tax returs. This strategy will eed to address several priorities icludig the commuicatio, wider use of electroic guidace aroud compulsory olie filig, educatig busiesses/agets o how to file olie, measures to ecourage busiesses to switch, esurig data security, ad robustess of the olie service. 9 The Departmet reduced the staff costs of processig VAT returs by 12 per cet i , without affectig the speed of processig ad checkig returs. However, the atioal average uit staff cost of processig Compay Tax returs across the Departmet s 64 Area Offices icreased margially i Some Area offices maaged to reduce their ow uit costs by restructurig the work ad sharig work betwee locatios at peak times. The Departmet has ot tracked Area Office performace agaist targets o their promptess ad accuracy i processig Compay Tax returs. 11 Customer satisfactio i dealig with the Departmet is broadly the same amogst those filig VAT returs ad those filig Compay Tax returs. The Departmet has take various steps to improve customer service. It has measured the admiistrative burdes the tax system places o busiesses ad has set a target to reduce the burde by at least 10 per cet by It plas to require busiesses to provide iformatio oly oce, to eable them to cotact a sigle umber ad receive a comprehesive service across the rage of taxes ad duties a oe-stop-shop. Through the Moderisig Powers, Deterrets ad Safeguards review ad better risk maagemet, it would give a lighter touch to busiesses with a good record of compliace ad also target educatio ad guidace to help busiesses that wat to comply. 12 The creatio of the ew Departmet provides ew opportuities to idetify ad share good practices i tax retur maagemet across both taxes, for example, i reducig processig costs, ad improvig customer satisfactio. There are also opportuities for the Departmet to lear from its approaches to other tax returs. For example, the Departmet has a much greater uderstadig of taxpayers who fail to file Icome Tax Self Assessmet returs o time tha it does for busiesses that file VAT or Compay Tax returs late, ad it uses this kowledge to improve compliace. The Departmet is udertakig work to icrease its uderstadig. It could also lear from other reveue departmets that have a greater uderstadig of the busiesses that fail to comply with their obligatios across a rage of taxes. Recommedatios 13 Our recommedatios aim to yield efficiecy savigs for the Departmet, reduce tax at risk ad improve the Departmet s progress towards its targets. We recommed that the Departmet should udertake the followig which may be implemeted relatively quickly ad at low cost: 10 The Iteral Reveue Service i the Uited States cotiuously moitors workloads, processig efficiecy ad accuracy to idetify ay problems, pla staffig levels ad trasfer peak workloads betwee sites. The Departmet could improve efficiecy i processig Compay Tax paper returs by drawig o the good practices adopted by some Area offices, good practice i VAT retur processig ad by overseas reveue departmets. I respose, the Departmet is reviewig its loggig ad data capturig process for Compay Tax returs to esure best practices are used cosistetly. 6 Filig VAT ad Compay Tax returs

9 summary Gettig tax returs i o time i Aalyse the tax at risk from failures to file correctly (late, o-filed ad iaccurate returs) ad idetify by sector the hardcore of busiesses resposible, focusig o those which are late with both their VAT ad Compay Tax returs. The aalysis should be subject to rigorous quality assurace to esure the results are accurate for risk assessmet purposes. Nie per cet of VAT returs are outstadig oe moth after the due date ad 12 per cet of Compay Tax returs are outstadig 12 moths after the filig date. The Departmet has carried out iitial aalysis to idetify which busiess sectors fail to meet VAT obligatios ad has idetified areas of relatively poorer filig performace, but it has less uderstadig of the problem areas for Compay Tax returs. The Departmet plas i future to quatify the filig risks for Compay Tax returs as well. A better uderstadig of why busiesses fail to comply would help the Departmet target its compliace work for both taxes (paragraphs 1.7 to 1.8). ii Track the effectiveess of ay ew pealty regime i chagig filig patters ad icetives to ecourage compliace ad improve filig performace. This should iclude the amout of pealties imposed ad paid (paragraphs 1.11 to 1.12). Efficiecy i dealig with returs iii Cotiue to develop, test ad implemet mechaisms to achieve the ew targets for madatory olie filig, i cosultatio with stakeholders, agets ad busiesses. This should draw o good practice withi the Departmet ad lessos from other tax authorities that have moved to madatory olie filig or which have a high take-up of olie filig. Movig to olie filig for both types of retur is expected to achieve savigs for both busiesses ad the Departmet. The olie systems eed to be reliable ad easy for busiesses ad agets to use. The Departmet should work o developig electroic commuicatio with customers which meets their eeds ad requiremets. All systems should iclude adequate system testig (paragraphs 2.1 to 2.8). iv Util full olie filig is achieved, promote good practice across Area Offices to achieve greater efficiecies i processig paper Compay Tax returs. The Departmet did ot, i , moitor whether idividual Area Offices met targets for processig returs promptly ad accurately. It should set quality stadards for loggig ad data iput of returs across all its sites. It should also bechmark their costs ad workloads ad idetify the reasos for variatios, to improve performace. The experiece of processig VAT returs should be used to idetify ay opportuities to trasfer good practice to processig Compay Tax returs (paragraphs 2.9 to 2.14). Customer service ad the compliace burde o busiesses makig returs v Improve the HM Reveue ad Customs website ( so that busiesses have ready access to relevat iformatio ad advice. It should provide busiesses with easy access to a full rage of clear, simple, accurate ad up to date iformatio ad advice eeded to file VAT ad Compay Tax returs. Various idepedet reviews of Govermet websites provide useful isights about customers eeds ad how to improve website cotet, presetatio ad avigatio. 4 HM Reveue ad Customs has reviewed its website to uderstad better customers eeds ad best practice. It plas to trasform its website i phases by 2008 i terms of look ad feel, ease of avigatio ad provisio of customer cotet (paragraph 3.4). vi Update its VAT public otices promptly to provide clear, accurate ad readily uderstood iformatio. Public otices should iclude all the relevat poits istead of cross-referrig to other documets that busiesses may fid difficult to track dow (paragraph 3.3). vii Usig its Busiess Customer Uit, work with busiesses to improve the VAT retur, i particular the associated guidace to make it easier to prepare (paragraph 3.3). viii Esure that staff o telephoe helplies ad i local offices have the traiig ad experiece to provide busiesses with the iformatio requested. This eeds to go beyod repeatig what is already available to the busiesses by tailorig support to the eeds of customers such as agets. It should draw o the results of the quality assurace process ad aalysis of commo questios ad errors made to esure cosistecy of the iformatio provided by helplies (paragraph 3.6). Filig VAT ad Compay Tax returs 7

10 summary The followig recommedatios would require further policy aalysis ad research ito the costs ad beefits of implemetatio, cosultatio with busiesses ad possibly legislative chages, some of which the Departmet has started to develop. The Departmet should: ix O Corporatio Tax, cosider whether beefits for the smallest compaies, with the simplest fiacial affairs ad with o tax liability, could be secured through policy chages removig the eed to file returs. The Departmet should research the potetial savigs i its ow costs ad i reducig the compliace burde, together with the risks to tax reveues from such a chage (paragraph 3.5). x Followig the cosultatio i , cotiue to explore aligig the dates for paymet of Corporatio Tax, the filig of accouts to Compaies House ad the filig of the Compay Tax retur to HM Reveue & Customs. This would mea that over 1.3 millio of the smaller compaies could submit their accouts to govermet oce istead of twice ad make ay tax paymet due at the same time, rather tha i advace of filig. Ay equiries could begi earlier makig the compliace process more efficiet. It would brig the filig period i the Uited Kigdom for these compaies more ito lie with the iteratioal average of five moths (paragraph 3.8). xi Provide busiesses with a olie statemet of accout showig tax paymets ad liabilities across all taxes, buildig o the developmet work already begu (paragraph 2.8, area 2). xii Seek powers to offset ay repaymets due o VAT agaist outstadig debts o Corporatio Tax or other taxes, ad vice versa. The Departmet is already cosiderig this alog with a referece to a sigle fiacial accout which will give the Departmet a complete view of a etity s fiacial positio across the rage of taxes ad duties (paragraph 1.14). xiii As part of the review Moderisig Powers, Deterrets ad Safeguards, explore the costs ad beefits of itroducig o-fiacial icetives such as tax clearace certificates for busiesses that comply fully with their tax obligatios across the rage of taxes (such as Corporatio tax ad VAT). Such measures are already used by some reveue departmets i other coutries ad are a powerful icetive to comply with taxatio obligatios as they may be required by busiesses before they ca be awarded public sector liceces, grats ad cotracts (paragraph 3.14). 8 Filig VAT ad Compay Tax returs

11 PART ONE Gettig returs i o time 1.1 Value Added Tax (VAT) ad Corporatio Tax are major sources of govermet reveue, raisig some 120 billio a year ( 74 billio et receipts from VAT ad 42 billio et receipts from Corporatio Tax i ). Some 1.8 millio busiesses are registered for VAT ad 1.8 millio compaies are registered to file Compay Tax returs which cover their liability for Corporatio Tax. 600,000 busiesses must file both types of retur. Betwee April 2003 ad March 2006, the umber of busiesses registered for VAT icreased by 7.7 per cet ad the umber of compaies required to file Compay Tax returs icreased by 25 per cet, ecouraged by the itroductio i April 2002 of a zero rate of Corporatio Tax o profits uder 10,000. The requiremet to file returs 1.2 Busiesses which are required to file VAT ad/or Compay Tax returs may rage from those itedig to start i busiess or with a very low turover (the VAT registratio threshold is 61,000) to large multiatioal compaies. Smaller busiesses ted to use a aget to file their Compay Tax returs ad some also use agets for their VAT returs. Larger compaies ofte have their ow tax departmets for this purpose. 1.3 The Departmet processes some 7.8 millio VAT returs each year. Busiesses are ormally required to file these oe moth after the ed of each quarter, showig the et VAT liability. This represets the differece betwee the VAT icurred o purchases (iput tax) ad the VAT charged o sales (output tax). It takes ito accout ay VAT due o trasactios with other Europea Uio coutries or other third party coutries. For early 30 per cet of returs, the retur results i a repaymet from the Departmet (it repaid 54 billio of VAT i ). 5 The Departmet curretly logs ad processes all VAT returs ad paymets cetrally i Southed-o-Sea (Appedix 2 shows the VAT retur filig process). 1.4 Oce compaies have registered with Compaies House, they are required to otify the Departmet withi three moths of becomig liable to a Corporatio Tax charge. Compaies are required to self assess the amout of Corporatio Tax payable as part of their Compay Tax retur which icludes supportig accouts ad computatios. The stadard retur form is eight pages log. The Departmet has also itroduced a short (four page) form for compaies, clubs ad societies with less complex tax affairs. The Departmet issues a otice for the compay to deliver a Compay Tax retur after the ed of the compay s accoutig period. The Departmet requires the retur by the filig date, usually 12 moths after the ed of the compay s accoutig period. It issues over 600,000 short retur forms aually. 1.5 I , the Departmet logged ad processed aroud 1.3 millio Compay Tax returs at 64 Area Offices ad 11 Large Busiess Service Offices across the Uited Kigdom which carry out compliace work ad customer relatioship maagemet for the large busiesses for which they are resposible (Appedix 2). The Large Busiess Service deals with the Corporatio Tax ad VAT of the largest busiesses comprisig 1,300 groups of compaies. 57 per cet ( 24 billio) of total Corporatio Tax receipts ad 37 per cet ( 28 billio) of VAT receipts were from busiesses dealt with by the Large Busiess Service. FILING VAT AND COmPANy TAX RETuRNS 9

12 part oe The Departmet s performace i gettig returs i o time 1.6 Gettig accurate tax returs i o time is importat for HM Reveue & Customs i esurig it is collectig the right amout of tax at the right time. The percetage of returs filed o time has bee broadly stable over the three years sice April Figure 2 shows busiesses compliace i filig returs from to I , 85 per cet of VAT returs ad 79 per cet of Compay Tax returs were filed o time. Ad over 90 per cet of VAT returs are received withi oe moth of the due date. However, almost 230,000 assessmets (made by the Departmet of a busiess s VAT liability i the absece of a VAT retur from that busiess) made i ad , had ot bee replaced by a late retur by mid October per cet of Compay Tax returs received i , were retured withi 12 moths of the due date. At the ed of March 2006, aroud 160,000 Compay Tax returs, that were due i , were still outstadig. Busiesses that fail to file accurately ad o time 1.7 I 2003, the Departmet itroduced a atioal VAT Compliace Strategy. It aims to address the risks preseted by busiesses across the etire VAT registered populatio based o their differet behaviours ad differet types of risk - registratio, declaratio, filig ad paymet, to determie the most appropriate form of compliace itervetio. The Departmet has a log term pla to use the lessos leared from the VAT strategy ad is developig a atioal risk register ad picture across all taxes ad a Departmet wide compliace strategy. Its iitial work to idetify which busiesses do ot file o time focused o 19 busiess sectors. I the VAT sectio of its risk register, the Departmet has idetified areas of relatively poorer filig performace, coverig the trade sectors of agricultural productio, labour provisio, costructio, textiles ad trasport/warehousig. 2 Busiesses compliace i filig VAT ad Compay Tax returs Fiacial Returs issued Returs received Returs received Assessmets outstadig year by the filig date by the ed of the at mid October 2006 moth followig the ot replaced by a filig date late retur (millios) (%) (%) VAT retur Not kow , ,000 Fiacial Returs due Returs received Returs received Returs outstadig year by the filig date 1 withi 12 moths 12 moths or more at 31 March 2 (millios) (%) (%) Compay Tax retur Not kow , ,000 Source: Natioal Audit Office aalysis of HM Reveue & Customs data NOTES 1 Returs received by the Compay Tax filig date are couted by the Departmet seve days after the statutory filig date (the extra statutory cocessio period allowed before a late filig pealty is charged). 2 Returs outstadig for 12 moths or more at the year ed relate oly to outstadig returs from the previous fiacial year. The Departmet does ot have data o the total umber of outstadig returs from all previous years. 10 Filig VAT ad Compay Tax returs

13 part oe 1.8 The Departmet s uderstadig of the small ad medium sized busiesses that fail to file Compay Tax returs o time is at local level oly as developed by the Area Office ispectors resposible for those compaies. This cotrasts with the computerised procedures developed by the Tax ad Customs Admiistratio i the Netherlads that determie risk scores for each busiess. The Departmet is udertakig a feasibility study ito coductig a cetral risk aalysis to idetify iaccurate (ad ot specifically late) Compay Tax returs durig with a view to triallig the outcome i its compliace activity durig It is ivestig i improved systems to aalyse compaies behaviour i filig Compay Tax returs. The Departmet does ot have a detailed uderstadig of the busiesses that fail to comply with both taxes, or whether there is ay correlatio betwee busiesses that file late ad those that file iaccurate returs. 6 It has ot yet carried out sufficiet work to eable data matchig of busiesses across its busiess taxes to allow it to carry out risk aalysis across these taxes. I cotrast, the Departmet has a more detailed kowledge of large busiesses dealt with by its Large Busiess Service ad, more geerally, of compliace behaviour i filig Icome Tax Self Assessmet returs. There it has idetified the sectors at highest risk of late filig ad o-filig ad researched the reasos. The tax cosequeces of late filig 1.9 Late filig leads to difficulties for the Departmet i cofirmig whether the right amout of tax has bee paid. Late filig may also be liked to late paymet. 74 per cet of busiesses filed ad paid VAT o time i ad 60 per cet of compaies filed their Compay Tax retur ad paid their Corporatio Tax o time. For Corporatio Tax this was a drop from 63 per cet i ad for VAT a slight decrease from 75 per cet i the same period. The Departmet does ot have iformatio readily available o the amout of tax outstadig o missig returs or the umber of busiesses with more tha oe retur outstadig. At least 1.5 billio of tax reveue was i doubt from late ad o-filed VAT ad Compay Tax returs at mid October The estimate icludes: 340 millio of VAT assessed for returs outstadig i ad 1.05 billio of VAT assessed for returs outstadig i I , the Departmet raised 530,000 assessmets. At mid October 2006, i 83,000 of these cases the VAT retur remaied outstadig. The average value of assessmets where the retur was still outstadig was 4,100. It raised 540,000 assessmets i , of which 150,000 remaied outstadig at mid October 2006, with a average value of 7,300. Ay tax lost will deped o whether busiesses evetually pay the Departmet s assessmet or file a retur after the assessmet is made ad the percetage of those which have ceased tradig. Aroud 180 millio of Corporatio Tax for for outstadig Compay Tax returs. The Departmet estimates the average liability of tax per missig retur as up to 1,100. At the ed of March 2006, aroud 160,000 Compay Tax returs from had bee outstadig a year or more The Departmet eeds to develop a better uderstadig of the o-compliat filig populatio. This may iclude, for example, aalysis by sector, locatio or size of busiess ad whether the busiess has more tha oe retur outstadig. The Departmet uses late or o submissio as idicators of risk as part of its VAT Cetral Risk Assessmet to target udeclared VAT. I , the Departmet made 44,000 reveue determiatios for outstadig Compay Tax returs with a value of 2.3 billio. By July 2006, 2 billio (86 per cet) had bee displaced by returs ad self assessmets which represeted 37 per cet of the determiatios made. The Departmet has ot aalysed those busiesses which have ot filed a retur ad have received a assessmet for VAT ad or a determiatio 7 for Corporatio Tax, to uderstad why busiesses fail to pay their tax o time. Such aalysis would eable the Departmet to target its compliace activities across both taxes. Pealties to ecourage o time filig of returs 1.11 The Departmet ca impose pealties for late or o-filed returs. It imposes specific pealties for late filig of Compay Tax returs (Figure 3 overleaf) ad imposes iterest o late paymet of Corporatio Tax. The Departmet applies a default surcharge pealty o VAT upaid at the due date. If a busiess has ot filed its VAT retur o time, as well as ot payig VAT due, the Departmet calculates the default surcharge pealty based o its assessmet of the amout due. There are a variety of circumstaces whe the Departmet may decide ot to raise a VAT pealty (Figure 4 otes). Filig VAT ad Compay Tax returs 11

14 part oe 3 Shows late filig pealties for Compay Tax returs, the umber issued ad pealties issued as a percetage of the umber of returs outstadig i that year. Sequece of pealties Value of pealty Timig Pealties issued (000 s) (%) 2 Pealties issued (000 s) (%) Pealties issued (000 s) (%) First flat rate Day followig statutory filig date Secod flat rate Day followig three moths after statutory filig date First tax-related 10% of upaid tax at the date liability to the first tax-related pealty arises Day followig 18 moths after the ed of the accoutig period Secod taxrelated 10% of the upaid tax at the date liability to first tax related pealty arose Day followig two years after the ed of the accoutig period Source: Natioal Audit Office aalysis of HM Reveue & Customs data NOTES Figures are based o the umber of returs outstadig at the time a pealty is due to be raised. The Departmet may ot always charge a pealty as compaies may have a reasoable excuse, have a agreed extesio or have declared isolvecy. 1 If a compay icurs a flat rate pealty for three cosecutive accoutig periods ad was liable to a pealty for the first two, the first ad secod flat rate pealties icrease to 500 ad 1, The umber of outstadig returs at the various pealty trigger poits is ot available for The umber of VAT pealties issued for o paymet (i thousads) Pealty Default surcharge for a busiess ot payig o time the full VAT liability declared as due 1 Value of pealty First default issue of a surcharge liability otice with a warig of a surcharge of 2% of the tax outstadig Issued Two weeks after the due date (000s) (000s) (000s) 250 Subsequet offeces 5%, 10% ad 15% of outstadig tax at the due date Source: Natioal Audit Office aalysis of HM Reveue & Customs data NOTE 1 The Departmet does ot issue default surcharge pealties to small, ewly registered busiesses filig for the first time, busiesses requestig a repaymet from the Departmet, those itedig to deregister, local authorities, or those with a reasoable excuse for a late retur. 12 Filig VAT ad Compay Tax returs

15 part oe 1.12 The Departmet raised 710,000 pealties i The Departmet does ot kow the cumulative value of the rage of pealties it imposes for late filig of Compay Tax returs. It estimates that 78 per cet of Compay Tax retur pealties were paid i , based o the pealties charged ad paid o a sample of 10,000 compaies. The umber of late filig pealties issued for Compay Tax returs as a percetage of outstadig returs 9 declied i compared with previous years. (Figure 3) The Departmet imposed 270 millio of VAT related pealties. The umber of VAT default surcharges imposed fell from 270,000 i to 240,000 i , followed by a rise i to 250,000 (Figure 4) Paymets received by the due date have bee icreasig for VAT with early 50 per cet of all VAT receipts received by the due date plus seve days i The Departmet s research has show that the fixed pealties for late filig of Compay Tax returs have limited impact o ecouragig compaies to file already overdue returs or i deterrig those compaies itet o filig late. The Departmet cosiders that the itroductio of the default surcharge pealty for busiesses ot payig o time the full VAT amout due, has helped stabilise the VAT retur compliace rate at 85 per cet. The powers to levy pealties are differet for VAT ad Corporatio Tax, reflectig how the powers of the former HM Customs & Excise ad Ilad Reveue had evolved over time. Followig the creatio of HM Reveue & Customs, the Paymaster Geeral commissioed a Moderisig Powers, Deterrets ad Safeguards review to provide a framework of law ad practice for the ew Departmet. The Departmet cosulted with busiesses durig the review ad its respose to the cosultatio exercise is due by the ed of If a ew pealty regime is itroduced the Departmet should assess the effectiveess by aalysig whe pealties are raised, how quickly busiesses pay ad how effective the pealties are i improvig o time filig The Netherlads Tax ad Customs Admiistratio has a uiform pealty regime for VAT ad Corporatio Tax, with the same flat-rate pealties for late filig ad late paymet for both taxes. Its system is similar to the Compay Tax returs pealty regime. The Netherlads Tax ad Customs Admiistratio ca also offset ay outstadig tax due from a busiess agaist ay overpaymets o other taxes rather tha repayig these to the busiess. The Departmet is curretly ot able to do this, uless the taxpayer requests it. Filig VAT ad Compay Tax returs 13

16 PART TWO Efficiecy i dealig with returs The efficiecy of olie filig 2.1 The Departmet itroduced olie filig for VAT returs i 2001 ad for Compay Tax returs i Iitial take up by busiesses has bee slow with a modest icrease each year. It has rise to 7.8 per cet of VAT returs ad 7.2 per cet of Compay Tax returs i the first half of (Figure 5). 2.2 Lord Carter s report i March 2006 (Review of HMRC olie services) recommeded a umber of chages ad targets to icrease the take-up of olie filig, icludig madatory olie filig for VAT ad Compay Tax returs i phases from April 2008 to 2012 (Figure 6 ad Appedix 3). The Govermet has accepted these recommedatios. The Departmet already had a Public Service Agreemet target to icrease the umber of VAT returs filed olie to 50 per cet by , which the Departmet does ot expect to meet, but did ot have a correspodig target for Compay Tax returs filed olie. 2.3 To support the expasio of olie filig, the Departmet plas to ivest 340 millio i its olie services ifrastructure betwee 2006 ad It expects to achieve savigs whe almost all returs are filed electroically ad through greater electroic iteractio with taxpayers. It estimates the savigs to be some 59 millio a year from i processig ad admiistrative costs across a rage of taxes (VAT, Compay Tax, Icome Tax ad Pay As You Ear). The Departmet estimates that olie filig will save the overwhelmig majority of the 9 millio curret costs of processig VAT ad Corporatio Tax returs. Busiesses will have to bear their ow costs of iteral system chages eeded to file olie. But the Departmet estimates that a typical busiess will save aroud 5 per VAT retur by filig olie ad that the savig o a Compay Tax retur filed electroically will be VAT ad Compay Tax returs filed electroically Retur Fiacial Year umber of returs received (millios) umber of returs filed electroically Percetage of returs filed electroically VAT , , , First half of , Compay Tax , , , First half of , Source: Natioal Audit Office aalysis of HM Reveue & Customs data 14 FILING VAT AND COmPANy TAX RETuRNS

17 part two The challeges to achievig full madatory olie filig by Our work, icludig stakeholder cosultatios ad focus groups with busiesses, showed that the Departmet s curret olie services do ot fully meet their eeds ad expectatios. Lord Carter s review idetified, ad the Departmet recogises, that there are aspects which could be improved, to address the difficulties i usig the system ad problems with telephoe helpdesks, i the curret olie filig systems for VAT ad Compay Tax returs. Alogside work o developig a three to five year strategic pla for all its olie services, the Departmet is also establishig a programme to deliver the madatory filig olie targets. A key elemet of this is to cosult ad work with its customers ad their represetative bodies ad software developers to explore their commuicatio ad support eeds. 2.5 The Departmet is improvig its olie services to make them more coveiet for busiesses. It has adopted a iteratioal data taggig laguage (kow as XBRL 10 ) for accouts ad Corporatio Tax computatios, workig i cojuctio with the idustry. This allows the Departmet to accept Compay Tax returs with supportig compay accouts ad computatios as XBRL data from a busiess. Previously, compaies had to covert their accouts ad computatios to a separate format (kow as portable documet format or pdf ) if they wated to file the retur olie. Our stakeholder cosultatio showed that the extra time ad complexity ivolved i producig portable documet formats made paper filig more coveiet tha olie filig. The Departmet itroduced the ability for XBRL tagged computatios i November The Departmet has worked with the British Stadards Istitutio to develop a stadard for VAT accoutig software. 11 This is iteded to itroduce a volutary stadard across the software idustry to help busiesses get their VAT retur right first time. The Departmet cosiders the software will help small busiesses, which use ledgerbased accoutig software, to audit their ow accouts ad avoid some of the more commo errors whe completig their VAT returs. Busiesses do ot geerally chage their software regularly as they icur costs i chagig it. It could take five years or more before the Departmet ad busiesses realise the full beefits of more accurate returs from usig the PAS 76 compliat software. However, the Departmet cosiders the move to madatory olie filig will ecourage busiesses to obtai or upgrade to software packages that meet the stadard earlier. 2.7 A similar system has bee adopted i the Netherlads where olie filig is madatory for both VAT ad Corporatio Tax. The Tax ad Customs Admiistratio have made olie filig coveiet ad simple by eablig busiesses to submit their returs via the tax authority s website or directly through their ow accoutig software. Whe submittig a retur via accoutig software, busiesses oly have to eter figures oce ito the software, which the automatically creates ad submits a retur via a secure iteret gateway. This reduces the risk of keyig errors whe eterig the figures ito the retur. 6 The icrease i olie filig required to meet the ew targets Returs filed olie (per cet) mar-04 mar-05 mar-06 mar-07 mar-08 mar-09 mar-10 mar-11 mar-12 Source: Natioal Audit Office Olie rate April to September VAT 7.8%, Compay Tax returs 7.2% Compay Tax milestoes Ed of fiacial year VAT milestoes NOTES 1 Data poits have bee forecast based o the Departmet s ow assessmet of the additioal busiesses affected at each stage of Lord Carter s recommedatios. 2 The Departmet expects a exemptio will be provided for groups that have a religious cosciece objectio to the use of computers ad the iteret so the umber of busiesses that file olie may ot quite reach 100 per cet. Filig VAT ad Compay Tax returs 15

18 part two 2.8 The Departmet recogises the cocers of customers ad is workig to improve the olie service. Lord Carter s Review has highlighted the beefits to both customers ad the Departmet of olie filig ad recommeded that compulsory olie filig is the most cost effective way of deliverig those beefits. We commissioed research ito the barriers ad eablers for busiesses filig returs olie; drawig o practices used i reveue departmets overseas with olie filig rates of more tha 20 per cet. 12 We also visited the Tax ad Customs Admiistratio i the Netherlads ad the Iteral Reveue Service i the Uited States of America. Although the reveue departmets i other coutries have differeces i structure ad there are differeces i the tax regimes ad rates i each coutry, we have focused o those features which have the potetial for trasferability ad geeral applicatio. We cosulted stakeholders ad carried out focus groups with busiesses to gai their views o olie filig. From these, we have idetified four mai areas which are importat to developig a strategy to meet olie filig targets. Area Oe: Tacklig busiesses barriers to olie filig Olie services should be simpler, more coveiet ad cheaper for busiesses tha filig paper returs. This was a key success factor i securig high olie filig rates i Austria ad i the Scadiavia coutries (Figure 7 o page 18). May busiesses use software to prepare the supportig computatios for their returs. The software may ot be compatible with the format required by the Departmet. Busiesses may ot be iclied to chage software packages, to comply with a system they perceive as more complex. Other tha the existig icetives for payig electroically which for VAT gives busiesses up to a extra seve days to pay ad file, the Departmet is offerig o fiacial icetives to busiesses to switch to olie filig. Busiesses may cosider that the costs of switchig outweigh the beefits of more accurate returs ad of the small processig savigs obtaied from submittig a retur olie. Lord Carter s report rejected the optio of ew fiacial icetives ad recommeded that resources would be better spet o improvig services. If agets are ot VAT registered, they are uable to file VAT returs olie for their cliets. Some agets are small busiesses below the VAT threshold which restricts the scope for olie filig. The Departmet has recogised this ad has icluded expasio ito the o-registered agets market a priority for developmet uder its implemetatio programme. Area Two: Improvig the coveiece ad fuctioality of olie services Our cosultatio with stakeholders ad focus groups with busiesses idicated it would ecourage olie filig if a additioal olie fuctio showed their tax liability statemet, icludig past paymets, calculatios ad outstadig tax amouts. Curretly this service is oly available for Corporatio Tax. A busiess i the Netherlads ca view a olie statemet of accout across all the taxes ad duties it pays. Usig the Departmet s Compay Tax electroic filig service meas registerig to use the olie service. Busiesses eed to complete parts of the process maually before filig their returs olie. Uless they use third party software, busiesses are ot curretly able to file a olie retur simply by clickig a Sed butto directly from their computer software. The Departmet cosiders this does ot disadvatage busiesses ad to provide this service the Departmet s systems would have to provide full tax computatios as Corporatio Tax is a accouts based tax. Area Three: Esurig data security Our stakeholder cosultatio ad focus groups with busiesses idicated data security is a key factor i decidig whether to file olie. I particular, they wat to be cofidet that if they file a retur or pay olie, their tax record is accurately credited ad that they will ot icur pealties icorrectly should returs ad paymets be wrogly attributed to aother busiess. This demostrates that to ecourage the switch to olie filig, the Departmet must build busiess cofidece i the security of filig ad payig olie ad demostrate the stregth of its security cotrols, for example, that the data they set was received ucorrupted by the Departmet. Busiesses ad stakeholders suggested the use of a password liked to the tax umber to gai access to olie filig ad paymet as a security cotrol. This facility already exists. VAT registered busiesses usig the olie service must access their olie accout usig a series of kow facts idetifiable to the busiess or its aget, icludig the VAT referece umber. All compaies registered to use the Corporatio Tax olie services are provided with a uique user idetificatio ad password that are liked to their tax referece. 16 Filig VAT ad Compay Tax returs

19 part two For Corporatio Tax, each busiess has a password which is their ow ad for VAT, registered agets ca deal with all of their cliets olie issues. But agets that file returs o behalf of their cliets raised cocers over the ease of filig o behalf of a umber of their cliets at ay oe time. The Departmet has recogised the eed to improve its services to agets ad is takig forward work as part of implemetig the recommedatios i Lord Carter s report. Area Four: Eablers to ecourage busiesses to switch to olie filig The research ito the barriers ad eablers for busiesses filig returs olie, showed that most of these coutries had itroduced icetives ad obligatios to ecourage busiesses to make the switch to olie filig (Figure 7). Usig other electroic commuicatios with busiesses ca support the Departmet s olie filig targets, for example, by allowig commuicatio by with busiesses ad ecouragig busiesses to use its website as the most coveiet, comprehesive ad accurate source of relevat iformatio advice ad support. Wider use of electroic commuicatios will ecourage busiesses to see olie filig as the atural mechaism for filig returs (Figure 7). Our stakeholder cosultatio cofirmed the importace of eablers to help ad support busiesses switchig to olie filig. They supported Lord Carter s recommedatio for the Departmet to offer access to the iteret to file olie through, for example, iteret termials i its tax offices for the public to file returs olie, particularly for small ad medium eterprises, idividuals ad those i remote areas. These are curretly available i the Departmet s 40 largest equiry cetres. Stakeholders would also welcome a specialist advice service for agets filig their cliets returs olie. Stakeholders welcomed the helplie for olie services which is ope 8am to 8pm, seve days a week. Lord Carter also edorsed the icetive i VAT of a exteded paymet date for those who file olie. The efficiecy of processig paper returs 2.9 The Departmet estimates that it speds aroud 9.2 millio a year o processig VAT ad Compay Tax returs, icludig staffig, IT, accommodatio, pritig ad statioery ad postage. I , the staff costs of loggig returs ad trasferrig or iputtig data to the Departmet s tax systems were 1.5 millio for VAT ad 3.8 millio for Compay Tax returs. It icurs further costs i chasig busiesses for overdue returs ad correctig errors o returs. For example, i , the Departmet spet 1.2 millio correctig errors o VAT returs. These costs exclude the costs of equiries which the Departmet may coduct to assess whether a busiess has declared the right amout of tax. Makig paper based filig more efficiet durig the trasitio to madatory olie filig will help cotribute to the Departmet s total savigs target The Departmet reduced its aual staffig costs of loggig ad iputtig the data o paper VAT returs by 12 per cet i , without affectig the speed of processig ad checkig returs. This followed a 15 per cet reductio i costs i The Departmet uses flexible part-time workig patters to suit the peaks ad troughs of the workload. The reductios are maily attributable to this ad staff efficiecy savigs, attaied from ivestmet i traiig ad developmet to build a multi-skilled workforce The Departmet ad Area Offices do ot routiely moitor the uit staff processig cost per retur ad total staff costs of loggig ad iputtig the data from Compay Tax returs i Area Offices, as this is a relatively small activity. The average staffig cost per retur of loggig ad capture i rose by 17 per cet i Area Offices maily from more highly graded staff to supervise processig work, maage the higher volume of work ad carry out additioal staff traiig. There is variatio betwee Area Offices i uit staff costs (Figure 8 o page 19), ragig from 0.64 to 4.60 per retur. The Natioal Audit Office report o Corporatio Tax 14 examied Area Office costs of all processig related work for Compay Tax returs i It foud that some Area Offices had six times the ratio of processig staff to returs processed i other Areas ad that ecoomies of scale did ot accout for variatios betwee Area Offices i the ratio of processig staff to returs processed. Filig VAT ad Compay Tax returs 17

20 part two 7 Eablers for improvig olie filig ad reveue departmets overseas which use them Eabler Madatory olie filig Quicker refuds Loger filig period Moetary rewards Pre-populatio of returs Electroic commuicatios with busiesses/iteractio with the website Specialist services for tax agets Public access to olie filig facilities Meetig the differet eeds of busiess Adopted by Australia, Austria, Frace, Germay, Greece, Hugary, Irelad, Italy, Mexico, Netherlads, Norway, Spai Irelad, Mexico, Norway, Spai Australia, Austria, Greece, Norway Mexico Korea, Chile, Demark, Swede, Norway, Filad Italy, Australia ad Caada collect website usage stats to drive improvemets. Norway s Tax Agecy website received a award for the most useful site i Norway. OECD research showed that: Liks with exteral search egies so that the tax agecy website is a result for geeral searches for iformatio; Rotatig messages o the homepage; ad Electroic subscriptios to tax ad iformatio alerts are ways that its member coutries have cosidered to optimise website usage. Australia Chile, Netherlads Italy Commets Olie filig rates of more tha 20 per cet Pre-populated olie returs with basic iformatio provide estimates of the busiess s tax liability Tax Agets Portal Agets ca access their cliets accout details olie, icludig the curret balace, iterest charges, pealties, due dates ad registratio details. The portal also gives the facility to update basic iformatio such as the address ad bak accout details for refuds. 1 Chile set up a etwork of cetres offerig iteret café services for busiesses ad idividuals. Netherlads provided iteret termials i its tax offices for the public to file returs olie. It has developed two olie services for taxatio. 1 Provides services to idividuals ad small ad medium eterprises 2 Provides services to medium to large busiesses ad itermediaries or agets Source: Research ito barriers ad icetives for busiesses filig returs olie Oxford Iteret Istitute 2006 NOTE 1 The examples above reflect differet tax structures ad cultures ad their applicatio will eed to take accout of that. 18 Filig VAT ad Compay Tax returs