UK: The Taxpayers’ Charter - Modernising Tax Administration

Last Updated: 4 September 2008
Article by Paul Garwood

Plans for a new Taxpayers' Charter and to modernise tax administration will hopefully make the whole system easier for everyone.

On 19 June 2008, HMRC announced a consultation on its proposals for a new Taxpayers' Charter and published two consultation documents on modernising tax administration. These are part of the ongoing series of 'Modernising powers, deterrents and safeguards' and it is apparent that HMRC sees an important connection between a charter and the modernisation of its powers.

New Taxpayers' Charter

The consultation document identifies three issues.

  • Rights and responsibilities

  • Broader values of HMRC in its relationship with taxpayers

  • Service standards that customers can expect

The suggestion is that the charter will be a stand-alone document and not enshrined in law. It seems entirely sensible to adopt this approach for the detailed issues concerning rights and responsibilities and also for the broader values of HMRC and service standards. However, we believe the core principles with respect to the rights and responsibilities of taxpayers should be enshrined in primary legislation.

The importance of the work on modernising powers cannot be overstated. Getting the balance right, and being seen to get the balance right, so that taxpayers have appropriate safeguards and rights of appeal is vital. For taxpayers to have trust in the tax authorities they must feel that they have a remedy should HMRC officers behave inappropriately. There is real concern that the Finance Act 2008 has gone too far in increasing the powers available to HMRC. A Taxpayers' Charter, where the fundamental over-arching rights and responsibilities of taxpayers is enshrined in statute would redress this balance. It would also ensure that we have a system that enables HMRC officials to do their job while providing the appropriate safeguards for taxpayers.

Meeting The Obligations

This consultation paper considers taxpayer behaviour and the reasons for late filing and late payment of tax.

It compares the existing sanctions available against a set of model principles which would influence taxpayer behaviour for the better. In light of the work done so far, HMRC has commissioned external research on how taxpayers react to different actions by a tax authority. These findings will be publicly available in due course.

The report includes some fascinating statistics. For the 2006/07 financial year, HMRC collected around £423bn and repaid around £73bn. Of this total, approximately £64bn was paid late by taxpayers, although the majority of that figure was paid shortly after the deadline. HMRC was due to receive almost 23 million returns covering all the taxes, but some 3 million of those were filed late or not at all. Approximately 1.7 million late filing notices were issued to individuals, of which 153,000 were subsequently cancelled. No doubt a number of those were raised incorrectly, but it is clear that late filing and late payment are significant issues for HMRC.

Penalty Deterrents

The paper compares the existing range of sanctions for late filing and late payment against the design principles. It notes that capping the penalty to the amount of unpaid tax was introduced as an additional safeguard for those with low liabilities, but it appears that it has had a significant unintended effect on behaviour – taxpayers make an estimated payment of tax by the filing date and then delay filing the return until later.

In the case of income tax self-assessment, more than half of the 1.7 million fixed penalties issued in 2006/07 were capped, resulting in significant extra work for HMRC.

The document comments that although a fixed penalty on income tax self-assessment provides a clear message, the £100 late filing penalty has remained unchanged from day one and is not a deterrent for serial offenders. The report proposes that a further fixed penalty, possibly at a higher level than the first, would become due a month or so later. This would be followed by a more robust tax-geared penalty later.

The report considers the difference across the various taxes, noting that while there is a surcharge for income tax unpaid 28 days after the due date, there is no sanction for late or non-payment of corporation tax. It suggests aligning the penalty structure and considers a possible system for all taxes that includes escalating fixed penalties, escalating tax-geared penalties or a combination of both.

On the specific issue of taxpayers failing to pay their tax on time, the overriding conclusion was that people generally put other financial priorities first. In the case of businesses, it was noted that payments would probably be made first to those creditors who could stop critical supplies to the business if they were not paid.

Interest – Working Towards A Harmonised Regime

This report starts with the premise that interest is not intended to be a penalty for late payment – it is merely recompense for the time that money is in the wrong pocket. It states that interest should provide recompense for loss of use of money both ways. Accordingly, the interest regime should be responsive to changes in market rates and the interest rate should be set at such a level that paying late is not advantageous. Furthermore, the regime should be understandable and cost effective to administer.

The report makes the point that all interest rates are currently set by reference to formulae; each tax has its own formula and there are currently nine formulae in total. For some reason the current rate of interest on income tax is 7.5%, whereas the rate for corporation tax is only 6%. Not only do companies pay a lower interest rate than individuals, but interest charged on late paid corporation tax is an allowable deduction.

In the case of some taxes, interest is charged as soon as payment is late, for others, only when under-declarations are assessed and, in some cases, there is no interest charge at all. A business which owes several different taxes will need to decide which tax it is best to pay first, either because there is no interest charge if it pays late or because one charge is lower than another.

The report considers possible features of a new interest regime. It suggests that moving to just one interest rate would remove the opportunity for arbitrage between different liabilities. It suggests that interest on indirect taxes should be charged automatically on under and overpayments and the interest regime should be extended to those areas where no interest is currently charged or paid. This category includes in year Pay As You Earn (PAYE) deductions by employers, although the report recognises that a significant restructuring of the PAYE system will be necessary before interest could be charged in these circumstances and this could result in additional administrative burdens for employers.

The report also considers the appropriateness of the current system of 'simple interest' and the differential between interest charged on tax paid late and interest added to overpayments. It seems that this is an issue that needs wider discussion. While moving to compound interest would mean that interest would be charged on interest, there nevertheless could be a significant improvement in the clarity of a statement of account if it were possible to move to a credit card type statement.

All in all the consultation is welcomed and it is hoped that the new charter will achieve its objectives

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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