TB Special Edition 3

Tax Bulletin - Working Together Special Edition

CONTENTS

This special Tax Bulletin is the first of what I hope will become a regular series of Working Together editions.

We gave you details of Working Together in our February edition. It is our brand name for a new initiative launched with CIOT and ICAEW to strengthen local liaison between practitioners and the Revenue, build on established links and consultative arrangements, and improve the operation of the tax system. My fellow Board members and I attach great importance to it and I will be giving it my strong personal support wherever and whenever I can.

The Revenue's participation reflects our absolute commitment to improve our understanding of all our customers' needs and wishes, and to be much more responsive to them. Our shared goal with you is to identify problems and risks more quickly, to address them more rapidly and to explain more fully and openly what we are doing about them. The Register of Issues will play a key part in this by showing all the issues and concerns that have been identified and recording progress on each. Later this year we hope to publish a live version of the Register on our website.

This special edition outlines a range of subjects that have already been identified as key areas of concern and interest, and addresses some of these in depth. In it we also tell you about new issues which Working Together has identified and which our specialists are now reviewing. But there hasn't been space for everything; in future editions we will look at other issues and provide a comprehensive update on progress generally.

One last point. Working Together is about what we can all do to make the existing tax system work better. These special bulletins will therefore focus on the day to day work of our offices and on the needs and interests of ordinary practitioners. This will be a two way process: we will be looking at what we can do to make the tax system work better, as well as what you can do to help us and your clients.

I sincerely hope you find this edition helpful. Through your professional bodies, or if you prefer direct by e- mail or post to the addresses on page 8, do please let our Working Together team here have your comments.

Miss Ann Chant CB

Director General (Strategic Service Delivery)

REVIEW OF INCOME TAX SELF ASSESSMENT ENQUIRY WORK

As practitioners and Revenue staff have gained experience of SA enquiries a number of aspects of the regime have been thrown into focus. These have generated a considerable amount of interest and feature strongly in our Working Together Register.

Regular readers of Tax Bulletin will be aware that we are presently carrying out a thorough review of SA enquiries. This will cover options which would require legislation as well as those that could be implemented by changing guidance or procedures.

We issued a Press Release about this on 9 December 1999 and also included details in February Tax Bulletin (Issue 45).

The terms of reference are to:

  • carry out, in consultation with interested parties from both within and outside the Revenue, a review of all the processes and procedures involved in an ITSA enquiry which impact on taxpayers or agents;
  • highlight those areas that are working well and those where improvements are required, and
  • make recommendations on improvements that could be put in place.

Many of the items included in our Working Together Register are being covered by this review, including Section 9A opening letters, "private side" questions, informal enquiries and requests for meetings.

The Revenue and the CIOT are working together on the first phase of the review - collecting and analysing the views of practitioners, taxpayers and Revenue staff. The reason for this is that CIOT had already commissioned further research by Ann Hansford (of the Bristol Business School) who undertook the original CIOT study into Self Assessment. We agreed that it would make sense to combine aspects of both reviews.

Questionnaires were sent to 1000 CIOT members and were opened up to all Revenue staff on the Department's Intranet. They were also made available to all other professional agents and to taxpayers via the Revenue and CIOT Internet websites. The data is now being collated and analysed and it will then be considered in conjunction with the many detailed suggestions that had previously been received.

The provisional timetable for the rest of the first phase is:

May/ June Follow- up interviews. Draw conclusions from research data.
June List emerging findings and make preliminary internal Revenue and CIOT reports.
July/ September Consider implications of results.
November Publication of a report on research findings to the Revenue, CIOT members and more widely.

The second phase of the review - working up options for change - will involve all the main representative bodies on an equal footing. A rough provisional timetable is:

July/ September Revenue begins analysis of options for change in consultation with interested parties.
October Final preparation of the report to Ministers on the list of options for change.
November Pre- Budget Report may include a description of changes proposed (and possibly draft legislation) and invite comments.
October/ February Preparation of package of changes, legislative and procedural, in time for inclusion, where appropriate, in Finance Bill 2001.

The later stages of the timetable may be revised as we see how the research progresses and how many ideas emerge which need to be evaluated. It will also be subject to the views of Ministers and Treasury advisers and officials.

Follow- up reports on the progress of the review will be included in future editions.

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WORDING OF OPENING ENQUIRY LETTER

We have redrafted our formal notice opening an enquiry in response to concerns expressed by taxpayers and members of the professional bodies that the tone of the notice might be a little threatening.

The redrafted letters were circulated on 1 March 2000 to members of the Operations Consultative Committee (a joint body of the Revenue, external organisations and professional bodies representing taxpayers) and we are currently considering their comments. We will incorporate any suggestions for amendments if we can reasonably do so.

The letters have been rewritten in a way that seeks to maintain the current balance between information that is given to, and requested from, the taxpayer and agent respectively. Whether this balance is correct is currently under consideration as part of our review of ITSA Enquiry Work. But we hope that over the short term these changes will be seen as generally helpful.

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WORKING TOGETHER 'REGISTER OF ISSUES'

Working Together has already identified over 60 separate 'hot spots' and the list is being added to and updated daily: all are aspects of the existing tax system that are causing problems in practice. The range of issues which are bothering people has turned out to be very wide. To give a flavour: it includes for example the availability of forms and leaflets, the design of pages in the SA return, our valuation procedures for Capital Gains Tax, and the consistency of our treatment of small benefits provided by employers.

We have reported on some of these here. On a number of others we have already taken action to put things right. And for problems which have been newly identified by Working Together our specialists have agreed that there are issues for them to address and have these under review.

We will be publishing our Register in full in our next edition. This will set out, comprehensively in relation to each entry, what has already been achieved and describe what work is underway. Later in the year we hope to publish a live version of the list on our IR website.

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SELF ASSESSMENT: ACCOUNTING AND STATEMENTS

Charges and accounting have undoubtedly been the most difficult and problematical area of SA. These have featured prominently on our Register of Issues. This is largely because of the variety of charges that may be raised, the ways in which they can be adjusted, and the consequential issues around allocation of payments. There has been a good

deal of criticism on a number of subjects. The Revenue has been working hard both internally and in consultation with representative bodies to resolve the various issues. These have involved both amendments to the way the computer system operates, and the way in which details are presented on the various forms, particularly the statements.

Accounting Issues

On the operation of the system generally, two complaints have recurred frequently. These concern the charging of interest where there is an earlier payment; and the allocation of payments. While the charging of interest where there is an earlier payment is relatively infrequent, it is very irritating when it does arise. It has also been very cumbersome for our staff to resolve.

This tends to happen, for example, in situations where a fully paid charge is reduced and the resultant overpayment is reallocated to a new charge after the due date for that charge. The original problem arose because we wanted to ensure that taxpayers received the benefit of repayment supplement wherever appropriate. That is normally given to the date on which the payment is reallocated or repaid. However in these circumstances, there is also interest on the outstanding charge from its due date to the date of reallocation. In these circumstances, with the differential rates for charging and crediting interest, it makes sense to allow one to cancel out the other from the due date.

It has proved difficult to define the circumstances when this should happen, while ensuring that taxpayers still get the proper repayment supplement. We believe we have now done so for all but the most exceptional cases.

Those exceptional cases can be dealt with by a new facility we have given to our staff. This facility also deals with the second complaint above, concerning the correct allocation of payments. In most cases the computer system will automatically allocate charges in a way which is advantageous to the taxpayer, or neutral. But where a specific allocation is requested, or a reallocation needs to be made, this can now be done quickly by our Accounts Offices, or by a local office.

Statements and Agents' Statements

The forms requesting payment and showing account details have also been much criticised. Since the introduction of SA a lot of time and effort has been put into improving the Statement of Account. We have taken account of feedback and also consulted closely. We have certainly not reached a final conclusion. But the recent statements issued for the January payment deadline have shown some significant improvements.

1. The total amount to pay is now clearly shown in a box at the top of the statement, below the address. Where there is nothing to pay this is also shown.

2. While a detailed breakdown of the charges is still shown, there is a final total line, so that it is possible to work through the detail and reconcile it with the total amount to pay.

3. In most circumstances, the total amount to pay is printed on the payslip.

One other change, introduced at the same time, is to provide only the final net figure where there have been a number of adjustments of the same kind to a particular item. For example, a single net adjustment figure will appear on the statement where there have been a number of adjustments to a payment on account.

Later this year we plan to use new software to improve the clarity and presentation of Taxpayer Statements. When that has been achieved we intend to use the same software to improve other Self Assessment forms such as the Tax Calculation (SA302).

Agents' Statements

We have also made changes to the agent statements (SA327). In response to many requests from agents we included personalised payslips so agents can help their clients to pay on time. We issue agent statements before the 31 January and 31 July payment dates. We are hoping to bring the issue dates forward, particularly before 31 January. We are also looking again at the design of the covering note and agent statement. All of these developments will be subject to consultation.

Filing and Payment Reminder

We know that the existing dual- purpose filing and payment reminder (SA309A) confuses many taxpayers who have filed their return but are still waiting for it to be processed.

In the light of feedback following the latest issue we think it is time to take a good hard look at the basis of issue, emphasis, design and content of the filing and payment reminder form.

Once we have done this we will share our thoughts with the representative bodies and give them an opportunity to contribute to the process of re- designing the form to make it more understandable.

The Future

We will continue to look at the key forms and at SA accounting more generally, together with the representative

bodies and in the light of feedback. The main objective will be to see if we can make the whole process clearer and simpler for taxpayers and agents to handle. We will update you in future editions.

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ELECTRONIC LODGEMENTS SERVICE: PROGRESS, CURRENT ISSUES, THE FUTURE

Although ELS was certainly not problem- free in 1999- 2000, the Inland Revenue has been working hard to improve the service. It has reorganised and increased its support for agents in the new Electronic Business Unit. It has sought to deal quickly with problems that have arisen, and ensure that they do not recur. That has resulted in over 300,000 1998- 99 ELS returns being received by this year's deadline, almost 60% more than the previous year. At the peak of filing nearly 16,000 returns were processed in one day.

Although the current publicity surrounds Internet filing by individuals, the Revenue remains firmly committed to electronic filing for agents. We will continue to support ELS fully throughout 2000- 2001. We are actively looking at an Internet- based service for agents that may eventually replace ELS. Once we do so we will be ensuring any changes are properly managed with minimum inconvenience to existing ELS users.

The remainder of this article looks at some issues and concerns around the current service that have found their way to our Register. Where there are difficulties it explains what we have done or are doing to address them.

Agents have expressed concerns about the limitations of ELS, in that not all returns or all the information can be supplied through ELS. Following recent work, the one significant limitation on ELS will be the need to provide Construction Industry subcontractor vouchers in appropriate cases. Otherwise ELS should be able to cope with all sorts of cases and with any additional information.

It has always been possible to send additional information through ELS, using the 'white space. ' The only constraint is around formatting: lines cannot be more than 80 characters wide. Agents have also been concerned that the white space is not available to offices, or not used by them. As with paper returns, the additional information is not captured on the computer system. But with ELS returns, offices are informed that there is additional information, and can then request a printout. There is a similar issue around the carry back of loss relief and pension premiums. Again offices are alerted through the computer system to the need to take action. However we are also reinforcing our guidance and increasing our quality control in this area.

Until now ELS has not been able to deal with returns with certain combinations of income. This was a by- product of the fact that we initially designed the SA system itself with four different types of calculations to deal with different types of cases. Broadly, cases with a combination of elements of the different types could not be processed through ELS. We believe we have solved that problem from April 2000 since we have now developed an integrated calculation.

Turning to the service itself, there have been some difficulties in processing returns through ELS and issuing acknowledgements to agents. We can only repeat our apologies on this, and emphasise that we are trying to avoid such problems for the future. Ironically the most significant difficulties were experienced in early January because we were seeking to improve the service and ensure that we could deal with the January peak. There were a number of teething problems. These caused delays in acknowledgements and, in a few cases, the need to re- submit returns. These were addressed urgently, and the service was able to handle a substantial flow of returns in the final weeks before the filing deadline. There were still some very minor niggles but we had and have a much more robust service. Clearly we have learnt lessons for the handling of any future changes.

ELS will therefore be available to agents in 2000- 2001. The service continues to offer agents significant advantages over the submission of paper returns. These include the streamlined processes for sending in the return, the assurance that what you have sent is what is entered on the computer system, and the quick acknowledgement of processing. We are continuing to send to ELS agents electronic copies of the statements sent to clients. While it would be foolhardy to predict there will be no further problems we believe we have a worthwhile and wellestablished service for agents to use.

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SA INCORRECT PENALTY NOTICES

You may have read articles in the press recently regarding the issue of some incorrect penalty notices for 1998- 99 tax returns. Some of you will have been affected directly. We did make some mistakes in this massive exercise and we are very sorry indeed.

The press quoted a figure of 20,000 incorrect penalties: this was an overstatement because we believe the actual number was closer to 5,000. But that is still a sizeable number and we want to apologise now, unreservedly, to you and to your clients for the worry and work we know these errors must have caused. By the time you read this Special Edition they

should all have been corrected but any that have not been will be put right the moment we become aware of them.

A thorough investigation has identified individual processing errors as the root cause of the problem. The three main errors were incorrectly "unlogging" incomplete returns when returning them to taxpayers and not waiting until after the 14 day period of grace before doing so; not logging returns on the date of receipt and subsequently failing to change the date of receipt on the system; and not identifying returns that were attached to correspondence, or to other returns.

We hope you can view these errors in context: they amount to a figure considerably less that 1% of the total of about 750,000 SA fixed penalties issued in February which themselves are only a fraction of the 9 million SA returns we issued. The sheer volume of returns and other communications hitting our offices at and around the SA filing date, and the pressure that puts our people and systems under, inevitably increases the chances of individual mistakes happening. As a result of this year's problem we have taken a series of actions to improve processing accuracy which should reduce the scope for mistakes in the future. However there are also things which you as agents can do to make the system run more smoothly, the principal one being, where you can avoid it, not to leave filing your clients' returns until just before the deadline.

The more the present filing peak around 31 January can be evened out over the preceding weeks and months then the better will be the service which we can give to you and your clients.

Well before next year's filing date we will provide some detailed practical guidance on how to deal with provisional figures and how to help our offices identify returns as soon as they are received.

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CONSTRUCTION INDUSTRY SCHEME REVIEW

The new Construction Industry Scheme was introduced on 1 August 1999. The Scheme tackles tax loss and evasion within the industry. It has already been successful in ensuring that many thousands of subcontractors, of whom the Inland Revenue was previously unaware, register for tax. It has also been successful in highlighting where the rules of the old Scheme, many of which were carried forward into the new one, were not rigorously applied.

However, despite our best efforts, the Scheme ran into some serious practical difficulties and the industry has complained that the costs of complying with some parts of it (even some parts which were unchanged from the old Scheme) are too great.

Two new consultative forums have been set up to review the Scheme:

  • A Joint Working Group comprising officials from the Inland Revenue, the Department of the Environment, Transport and the Regions (DETR), and representatives from the Construction Industry.
  • A User Panel consisting of a cross- section of people from the industry who have hands- on experience of operating the Scheme.

We will also be drawing on experience and feedback from Working Together and from other groups with whom the Revenue already consults, including representatives from the Accountancy Bodies.

The review will look specifically at the following areas:

  • The results of independent market research commissioned by the Inland Revenue.
  • Similarities between the regulatory requirements of the Inland Revenue and Customs and Excise and how these could be brought together to help businesses.
  • The difficulties which CIS6 holders face in complying with their obligations to show their cards in person which can involve significant travelling time.
  • Ways in which the different criteria for granting a certificate to companies and to individuals and partnerships can be made more acceptable to the industry.
  • The compliance issues associated with any wider distribution of CIS5s.
  • Introducing in- year repayments for companies. Advances in information technology and electronic business and ways in which these could be used to support a streamlining of the Scheme.

In addition the rate of deduction which will apply to all relevant payments under the Construction Industry Scheme fell from 23% to18% from 6 April 2000. This means that subcontractors within the industry without gross payment certificates will have substantially less tax deducted from payments made to them during the 2000- 2001 tax year, which they would otherwise have to reclaim from the Inland Revenue.

The reduced rate of 18% will be closer to the final liability that subcontractors are due to pay and will therefore allow them to keep more of the payments made to them throughout the year. This will help cash flow in many small businesses whilst still ensuring that enough tax is deducted from the majority of subcontractors to settle their final liability by the end of the year.

Any comments or concerns about the scheme that you wish to be considered by the Joint Working Group should be addressed to:

Philip Hogan
Inland Revenue
Compliance Division
Construction Industry Scheme Review
Room 432
22 Kingsway
London
WC2B 6NR

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NATIONAL MINIMUM WAGE

The National Minimum Wage came into force on 1 April 1999 and, through Working Together, has generated a lot of questions from practitioners. Two questions have been asked repeatedly. First, what is the Revenue's role. And second, what are NMW's implications for the directors of family companies.

The Revenue's Role

On behalf of the Department for Trade and Industry the Revenue provides a dedicated telephone helpline. This offers advice to workers and employers, and it provides assistance and support to workers who wish to pursue a complaint. The Revenue also carries out a number of NMW audit and enforcement functions, again on DTI's behalf.

If an employer fails to pay at least the national minimum wage to a worker the Revenue may:

  • serve an enforcement notice requiring an employer to pay NMW within a specified period;
  • issue a penalty notice in the event of failure to pay following the issue of an enforcement notice;
  • bring a case on behalf of a worker before an employment tribunal.

In the most serious cases, and exceptionally, the Revenue will invoke the criminal powers contained in the National Minimum Wage Act and prosecute.

It goes without saying that DTI and the Revenue want to help workers understand their rights and at the same time ensure that employers understand their rights and help them comply with their obligations.

At the moment NMW audit and enforcement activity is carried out by separate specialist teams.

Directors

We have received a lot of questions about the position of company directors.

In response to these DTI recently met with ICAEW and Revenue to discuss the position of directors. ICAEW and DTI have agreed to jointly produce further guidance. We will let you have more information about this development, as well as a full update, in our next edition.

Further Guidance

DTI and Revenue intend to produce further guidance:

  • a second edition of the 'Detailed Guide to the National Minimum Wage'; will be published in the summer reflecting feedback from users and including more up to date 'frequently asked questions'. This, and other more specific literature, will provide clarification in the areas which have been flagged up by the recent Low Pay Commission report as being in particular need of more detailed guidance.
  • DTI and Revenue are working with particular organisations to develop tailored guidance dealing with issues of concern to them (for example on the status of certain directors and voluntary workers, and on the treatment of therapeutic work). This guidance will also be issued in the summer.
  • DTI are developing an interactive section on their website which will provide a simple to use NMW decision tree and a number of 'ready- reckoners'. This will allow workers and employers to see how the NMW applies to them personally and to calculate their entitlements including the accommodation offset, salaried hours etc.

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OPEN GOVERNMENT: MANUALS ON THE WEBSITE

Under the Code of Practice on Access to Government Information, we publish certain of our internal guidance manuals used in local offices. These are published under a 12- month contract awarded to CRONER@ CCH in mid- July last year.

When this contract expires, we plan to publish these manuals on the Department's web- site. We shall announce precise details nearer the time.

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AGENT AUTHORISATIONS - THE NEW 64- 8

Authorising your Agent, the new Inland Revenue form 64- 8, was introduced at the end of January. The changes we have made reflect our new wider role in administering NICs, National Minimum Wage and Tax Credits. The new form authorises an agent to act on a client's behalf on any matters for which the Revenue is responsible.

We are not asking agents and their clients to update existing authorities but a new 64- 8 will be invited where:

  • the existing authority is limited to disclosure of tax information only and you require National Insurance or Tax Credit information, or
  • as previously, there is a change of agent. Only one new authorisation will be needed. We will ensure that within the Revenue the new 64- 8 is shared with both the National Insurance Contributions Office and the Tax Credits Office as appropriate. The new form 64- 8 can be obtained from local Revenue offices. The old version has been discontinued and should not be used.

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FUTURE SPECIAL EDITIONS

There has not been space in this first edition to cover all the issues we would have liked. So as well as the various updates we have already promised you we shall be including in our next edition:

  • full details of our Register of Issues,
  • more information about directors and NMW,
  • further guidance on provisional figures in SA returns, and
  • an article on Paying Tax - which, following the November Open Day for agents at our Accounts Office in Shipley, will contain practical advice on payment methods and provide a summary of the rules governing the effective date of payment for interest purposes.

We would like to know whether you have found this edition useful and whether there is more we can do to make future editions relevant and helpful. Comments should be sent via your own professional bodies please or directly to the Working Together Team at:

Working Together
Business Operations Division
5N, South West Wing
Bush House
Strand
London
WC2RD 4RD

or by e- mail: BOD. RMT. ir. bh@ gtnet. gov. uk

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OTHER NEWS

This section contains brief details from three articles which are published in full on our Revenue website, www. inlandrevenue. gov.uk as an annex to this Special Tax Bulletin. Full copies of these articles can also be obtained from any tax office.

Enquiry Notices issued at the end of January

As many of you will be aware we have always understood that the time limit for opening an enquiry into a Self Assessment return relates to the date on which the notice is issued by the Revenue rather than the date of its delivery to the taxpayer. However the point has been considered by the Special Commissioners who decided that the time limit in Section 9A TMA 1970 operated by reference to when the taxpayer received the notice of intention to open an enquiry.

We have reconsidered our position and in the light of the Special Commissioners' decision now accept that, for returns filed on time, an enquiry is valid only if the notice is delivered no later than 30 January.

This has implications for a number of 1996- 97 enquiry notices issued shortly before the 30 January 1999 enquiry deadline. We recognise that agents, taxpayers and officials will have done a lot of work on many of these cases and that it would not be helpful to abandon that work only to take up the same issues in a different year or by a different statutory route.

In summary, for taxpayers represented by agents, we will normally assume that 1996- 97 notices issued before 30 January were in time unless you or your client claim otherwise. Where we are satisfied that the notice was received late we will accept that an enquiry was never opened. However in many open and settled cases where omissions or errors have been established we would expect to be able to use the discovery provisions in Section 29A TMA 1970 to recover any lost tax and any contract settlement will be valid. We will discharge any penalty

imposed for failure to comply with an information notice although we will still make use of any information supplied.

A full account of this decision, its implications and our reasoning, has been published on our website. If in doubt about the position in relation to enquiries into any of your clients' returns - whether these are still open or have already been settled - the office which handled the enquiry will be happy to provide further advice.

31 January Filing Deadline

The article in December Tax Bulletin (Issue 44) explained, following the Commissioners' decision in the case of Steeden v Carver (Sp C 212), that a tax return filed on 1 February, although late, would not attract a penalty. We also said that a return found in a tax office post box before 7: 30 am on 2 February would be treated as put in the box before midnight on 1 February. We will follow the same approach for the 31 January 2001 deadline.

Where a return required to be filed by the 31 January is delivered after that date the enquiry window is extended to the 30th April in the following year. That will be the position in future years. However, for returns filed or treated as filed on the 1 February 2000, following the 31 January 2000 deadline, we will not open enquiries in the three months to 30 April 2001. This is because we did not warn taxpayers about the implications of late filing for the enquiry window.

Section 19A Notices - Period allowed for producing information

The Special Commissioners decided in the case of Self Assessed v Inspector (Sp C 207), that a Section 19A TMA 1970 notice which required compliance by the taxpayer within 30 days of the date of its issue did not give the taxpayer the minimum notice required by statute. However, our legal advice is that we can still use information supplied under an invalid notice.

Section 19A notices we issue in future will give the taxpayer a minimum of 30 days from receipt of the notice to produce the documents or particulars.

As there was an exceptional delay in making this change in practice following the Commissioners' decision on 14 December 1998, we have decided to discharge any Section 97AA TMA 1970 penalties raised by the Revenue after that date. Where the penalty has been paid we will credit the SA account with the repayment, plus interest. Where that puts the account into credit, we will repay the excess. Although we will take all reasonable steps to identify affected cases, we cannot guarantee that we will find all of them. We would therefore be grateful if practitioners could draw to our attention any cases where they do not hear from us by 31 July 2000.

© Crown Copyright 2000

 

 

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