Returns and Self-Assessments

Orders of the Day — Finance Bill – in the House of Commons at 8:15 pm on 25th January 1995.

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Photo of Hilary Armstrong Hilary Armstrong Shadow Spokesperson (Business, Innovation and Skills), Shadow Spokesperson 8:15 pm, 25th January 1995

I beg to move amendment No. 31, in page 107, line 2, at end add— `(9) Her Majesty's Government shall, before 31st January 1996, present a report to Parliament on:

  1. (a) the guidance and explanatory material made and to be made available to the public for the purpose of ensuring that returns and partnership statements under self-assessment reflect the taxable position after claims to relief and allowances and after taking into account tax suffered on, and tax credits with, the items in the return,
  2. (b) the training provided and to be provided to Inland Revenue and other relevant staff on the provision of advice and support to taxpayers in the completion of their returns for the purpose of ensuring that returns and partnership statements under self-assessment reflect the taxable position after claims to relief and allowances and after taking into account tax suffered on, and tax credits with, the items in the return, and
  3. (c) amendments made and to be made to the Taxpayer's Charter relating to ensuring that for the purpose of ensuring that returns and partnership statements under self-assessment reflect the taxable position after claims to relief and allowances and after taking into account tax suffered on, and tax credits with, the items in the return.'.
I know that the Chair examined the amendment carefully before selecting it and was not able to select the other amendments tabled in my name and those of my hon. Friends, because the clause was drawn up exceptionally tightly and carefully by parliamentary draftspeople who were anxious to ensure that we could not amend the text to any great extent.

The clause seeks to tighten up provisions that were made last year. I might say that anyone who is riot an accountant would have great difficulty understanding what on earth it is about, but, as I am learning, most Finance Bills are written in that way. I certainly do not aspire to be an accountant, despite the fact that my local university seems to produce more accountants than anything else.

The clause tightens up the provisions and regulations around self-assessment. It is somewhat ironic that the proposed legislation is so impenetrable, as the clause is supposed to open up the system and simplify it so that the ordinary taxpayer will be able to fill in his or her return and assess liability. The official Opposition are happy to agree with the Government that the procedure should be simplified. The rules need to be written in such a way that proposed legislation does not become a tax avoidance charter.

I took the opportunity to read the deliberations of last year's Committee, because the clause builds on what was in last year's Finance Bill and, indeed, the Finance Bill before that. I was quite amused by them and know that the Committee will miss the presence of my hon. Friend the Member for Newcastle upon Tyne, East (Mr. Brown), who was always able to bring a light touch to those matters. I apologise to the Committee, but I know that I shall not have quite that lightness of touch. I was never as good at jokes as my hon. Friend, but nevertheless will plod my way through.

This is a radical provision. It is a radical approach to the taxation system and the assessment of liability. The House has already had the painful experience of legislation insufficiently scrutinised, over-bureaucratic and insensitively implemented. Such recent legislation has not always emanated from the Treasury. Examples were given in the previous debate when the business expansion scheme was mentioned.

Talk of legislation which is over-bureaucratic and insensitive and which has led the Government into all sorts of difficulties brings to mind the Child Support Agency. This measure is not in the same league because it does not set up a new department. However, we fear that its implementation will be bureaucratic and, instead of it simplifying matters and easing the way for the taxpayer, it will present the taxpayer with a difficult passage. The complexity and denseness of the clause must give rise to concern. Those who seek to move to self-assessment in the first instance will have many problems.

Most of the amendments tabled by the Opposition were not in order because, as I said, the clause has been crafted so carefully. They sought to push the Government into considering whether they had taken appropriate and cautious steps in arriving at this radical change in the manner of clarifying tax liability.

Since last year's Finance Bill, the taxpayers charter has been published. It says: You"— the taxpayer— are entitled to expect the Inland Revenue …To help youTo get your tax affairs rightTo understand your rights and obligationsBy providing clear leaflets and formsBy giving you information and assistance at our enquiry officesBy being courteous at all times". The Inland Revenue's attitude towards the taxpayer must undergo a radical shift. Instead of its current probing, challenging approach, it will have to be helpful, supportive and encouraging. It will have to develop a relationship of trust and that will be critical in ensuring the success of the venture.

The taxpayer's attitude, too, must undergo a radical shift. The legislation applies to the 8 million people who currently fill in a tax form, not all taxpayers. It requires from them co-operation and keenness. They should want and be able to find their way through the complex provisions.

Most people I know fill in their tax forms with some apprehension. They wonder where it will land them and whether they have got it right. Not everyone shares my father's approach to taxation. He tells me that he would tell his accountant that he did not want to avoid paying tax and that he wanted to pay all that he was liable to. It was clear from our previous debate that that is not the attitude of all taxpayers when it comes to filling in their tax forms. I suspect that my father's attitude has something to do with his Methodist upbringing. We are entering a regime where the relationship between the taxpayer and the tax inspector will have to change.

The Government made it clear last year that there would have to be a change in the number of tax inspectors. That goes without saying. There was some debate in Committee last year about what would happen to the approximately 3,000 tax inspectors who are expected to have to move. At that stage the Minister could not clarify whether they would be redeployed or whether the Government would take the opportunity to reduce costs by reducing the number of people employed.

We are anxious that the Government should consider the matter carefully. Given the changing relationship between taxpayers and tax inspectors, the Opposition contend that those tax inspectors should be redeployed within the Inland Revenue in order, specifically, to help, advise and support the taxpayer, particularly in the early stages of moving to self-assessment, with the change in the base year on which the tax form is to be completed.

We are not content that there has been sufficient retraining or opportunity for the relevant staff to be able to provide comprehensive advice and support to assist taxpayers in the completion of their tax returns. The Inland Revenue staff association is not content that sufficient effort has been put into the retraining of staff. It shares our anxieties that the scheme could falter because insufficient attention has been paid to matters of detail and the specific area of retraining for the tax officials to fulfil their new role. One of the major criticisms of the Child Support Agency was that the staff were not prepared for or effectively trained to face the new challenges presented by the legislation. It would be a travesty if, because of that, the Government faltered into a new way of assessing tax liability.

8.30 pm

Self-assessment will not be introduced for a couple of years. The year of its implementation is likely to be a general election year, and the offical Opposition are therefore particularly anxious to ensure that all the necessary steps are taken to prevent taxpayers from feeling that they have been led up the garden path, and from becoming, as it were, the equivalent of the CSA protesters. We do not want good self-employed small business people to be driven to such lengths. I hope that that is an exaggeration, but I also hope that the Government are learning some of the lessons of inappropriate and insufficient preparation for major changes. I hope that they are beginning to realise that we Members of Parliament must ensure that all the necessary preparations are made—and, as I have said, the role of Inland Revenue staff will be crucial in that regard.

So far, taxpayers have not been given any preparatory information and advice. Consultation papers have been issued this year, and Treasury press releases have suggested that changes in the Finance Bill would deal with the matter, but I am not satisfied—and nor are several outside bodies—that that is the case.

We tabled a number of probing amendments—which, because of the tight drafting of clause 91, were not in order—in an attempt to give taxpayers more leeway in the first year of self-assessment. We wanted not to encourage tax avoidance, but to minimise the problems: problems in the early stages of the implementation of the clause would undermine the principle of self-assessment and the Government's objectives, which we fully support.

When the consultation papers were issued, the Institute of Taxation wrote to the Treasury expressing a fear that the cost to employers would rise significantly. The institute felt that the Government had not taken sufficient account of that. I spoke to the institute this week, and it remains exceedingly sceptical, feeling that the Bill does not tackle the points that it raised during consultation.

Following the issue of the documents, the institute wrote—and it stands by that view: The Revenue must devote sufficient resources to educating employers and employees about the impending changes. They must also simplify the taxation of benefits and expenses and bring national insurance contributions into line with other taxes … If assessment may benefit a very small minority of employed taxpayers but the most obvious result of the proposals will be a significant increase in compliance costs for employers.This arises not only in providing the annual information that employees generally will need … but also because employers will find themselves supporting the Inland Revenue's efforts to make employees more tax aware. Increasing taxpayer awareness on this scale involves a change in culture and attitude that may well take a generation to achieve. In the meantime the employer is inevitably likely to bear the brunt of employee difficulties and indeed we believe that self assessment for employees cannot be made to work by the Inland Revenue without the active co-operation of very many employers. If that is the case, we have a long way to go before the Government's aims are achieved. Over the past two years they have consistently reiterated their anxiety to remove burdens from employers, but the Institute of Taxation foresees an additional burden.

As I have said, we welcome the principles of self-assessment and simplification of the tax system, but no one who reads this year's Finance Bill will be convinced that the system is indeed being simplified. Indeed—as we shall point out later in Committee—in some ways it is being made more complex. We must be confident that legislation passed by the House will be implemented in a way that achieves the House's aims, but the Opposition remain unconvinced that the Government are serious enough about that.

We want to be sure that the taxpayers charter takes account of these important changes in the assessment of tax liability. I am cynical enough never to expect the Government to accept an amendment in full, but I am always open to persuasion, and I hope that they will accept at least the spirit of this one. We want to ensure that the House can implement the self-assessment proposals with confidence: that is the only way in which we can be certain that the changes work in the interests of taxpayers and, indeed, the taxation system as a whole.

Photo of Alan Milburn Alan Milburn , Darlington

As my hon. Friend the Member for Durham, North-West (Ms Armstrong) said, the introduction of self-assessment is a radical shake up in the tax system. The Opposition do not argue against the principle of self-assessment but we are concerned about its implementation. On the plus side it is fairly clear that it will mean less bureaucracy, less paperwork and fewer Revenue overheads. But it will be a culture shock for taxpayers. For the first time the onus will be on them to supply the correct information and submit a return within the required time. Obviously, automatic penalties will be imposed on those who fail to get their tax return in on time.

I hope that a new impetus will be given to tackling some of the problems that have become evident in recent years. I mention in particular the alarming statistic that at the moment about 2.5 million taxpayers file their tax returns late. That has a cost to the Exchequer and to the taxpayer. Has the Treasury assessed the impact of those appalling late filing figures? How many people does the Minister expect to file on time and how many does he expect to file late? What assessment has the Treasury made of the financial implications of those figures? Has the Minister assessed the cash-flow implications for the Exchequer? At the end of the day that means the taxpayer because, as Conservative Members continually remind us, it is the taxpayer who foots the bill.

I hope that the Treasury has paid close attention to the Public Accounts Committee report. Our fourth report entitled, "Inland Revenue: Getting Tax Right First Time and Dealing with More Complex Postal Queries" raised a number of concerns about current practice and raised some doubts about the implementation of the self-assessment system. If the onus is placed on the taxpayer and Parliament is broadly in agreement with that principle, the onus is on Parliament and especially on Ministers to make taxpayers fully aware of their self-assessment responsibilities.

What thought has been given to the sort of public education programme that will be necessary not just for taxpayers but for employers and Inland Revenue staff? My hon. Friend the Member for Durham, North-West spoke about the need to ensure that adequate training mechanisms are in place not when the system is introduced but before its introduction, so that teething problems are minimised.

The next issue that I wish to raise was highlighted in paragraph 18 of the PAC report: The success of self-assessment will depend in part on the use of forms that taxpayers can readily understand. The Department accepted that such forms are a critical piece of documentation for the new system. I understand that some preliminary forms have been trialed, but I also understand that the Plain English Society has not yet been consulted about the wording of the forms. That might seem trivial but according to rumour the Treasury has in mind forms that run not to one or two pages but to 17 pages. I hope that the Minister will take the opportunity to dispel that rumour because if I were a small self-employed business man dealing with the plethora of problems that such business men have to deal with the last thing that I would want to face would be more red tape, bureaucracy and paperwork by way of 17-page forms from the Inland Revenue.

The most important point about implementation is contained in the PAC report. It noted the complexity of tax legislation and the problems that that causes for taxpayers and Inland Revenue staff. The Committee recommended that the Treasury should continue to take every opportunity to simplify the tax system.

8.45 pm

As my hon. Friend the Member for Durham, North-West said, the Finance Bill contains 348 pages. Whatever else it has going for it, it certainly does not simplify the tax system. Some complicated rules will need to be made clear to all taxpayers. What does the Minister have in mind for simplifying the tax system? Unless the system is made straightforward and clear, self-assessment will not be a boon for individual taxpayers and certainly not for Inland Revenue staff.

However, it will be a boon for the private accountancy industry. There will be privatisation of the tax system because taxpayers and small businesses which rely upon the Inland Revenue properly to assess their affairs will have to turn to private accountancy firms and pay for the privilege.

That brings me to the important matter of what is to happen to the 3,000 Inland Revenue staff who could be displaced as a result of self-assessment. Self-assessment is a threat to those staff but it is also an opportunity because it will provide a chance to redeploy staff so that back room officers will be transferred to the front line and district officers will be turned into more public-friendly people. Advice shops could be opened in district offices. Has the Treasury any plans on that?

As I understand it, self-assessment will give Inland Revenue staff an opportunity to monitor taxpayers' returns. How many of those self-assessment forms will simply be nodded through and how many will not be properly assessed or queried? We need an assurance that a thorough-going monitoring process will apply to as many return forms as possible. If implementation goes wrong, self-assessment will turn into a tax avoidance industry. The last thing that Ministers want to do is to give the green light to tax avoidance, especially when we hear from the Inland Revenue that the current system means that annually £100 million worth of tax is not properly collected from taxpayers.

Some concerns exist therefore. I hope that the Minister will be able to deal with them in his reply to the debate. We had a debate on self-assessment in the Committee that considered the Finance Bill last year, and this Finance Bill takes the issue a stage further. Hon. Members on both sides of the House agree that it is a positive step forward. We all agree about the need to reduce unnecessary bureaucracy, but dangers exist in the process of implementation. My hon. Friend the Member for Durham, North-West has pointed out some of those dangers. I hope that I have as well. I would be grateful if the Minister would deal with the concerns that have been expressed.

Photo of George Young George Young The Financial Secretary to the Treasury

I very much welcome this opportunity to reassure the House that the Government take self-assessment reform seriously. We have taken and are taking on board the words of caution that have been voiced in the debate. I hope that, in the few minutes that I propose to take to deal with these issues, I shall be able to reassure hon. Members on the specific points that they have raised.

Like the hon. Member for Durham, North-West (Ms Armstrong) I am not an accountant. Like her, I experienced a culture shock when confronted with the legislative text in the Finance Bill. Like her, I am climbing a fairly steep learning curve. She asked if the Government were taking appropriate cautious steps to introduce the measure. She is right so to do. Self-assessment is a major change to the personal tax system. We are introducing it after an extensive period of consultation, both public and with representatives of business and the professions, and it has already been debated at some length in the House.

The hon. Lady outlined qualities that Inland Revenue staff will need if this is to be a success. I am confident that they have those qualities already and that they will apply them to the challenge that lies ahead.

The Government are committed to the new system, which has been widely welcomed. I was pleased that, in the debate, the principle of self-assessment has been broadly accepted. When we debated the matter in 1994, the hon. Member for Newcastle upon Tyne, East (Mr. Brown) graciously acknowledged that broad agreement existed on the issues, and that they were not controversial.

A few days ago, I happened to meet Inland Revenue staff from Darlington when they were in London. They were finalists in a competition organised by the Revenue to promote details of schemes worked up by staff which especially emphasised customer service. The hon. Member for Darlington (Mr. Milburn) can be proud, therefore, of the Revenue staff in his constituency in that they reached the final of the competition.

Both he and the hon. Member for Durham, North-West complained about the length of the legislation. If one wants to simplify the tax system, one may have to legislate. Some of the reforms in the Bill simplify the system. Personal incidental expenses are an example. The length of the Bill, therefore, does not necessarily mean that the legislation is becoming more complicated. I hope that it contains proposals that simplify the system.

The main legislation for self-assessment was passed in the Finance Act 1994 with all-party support. Some of the changes have already come into effect, or will do so soon. As my right hon. Friend the Secretary of State for National Heritage made clear last year, some of the more detailed clauses would need longer to complete and would be introduced this year. He also committed the Government to making changes where, on further examination and consultation, it was felt sensible to do so. That remains the case.

The Bill contains a considerable number of clauses that have as their origin the desirability of making changes to make self-assessment easier—something that was advocated by both Labour Members who have spoken. The Government have, wherever possible, taken the opportunity to simplify the underlying rules at the same time. For example, the Bill contains measures that will introduce substantial simplifications for the taxation of income from property, and the beneficiaries of the estates of deceased persons. In developing measures for self-assessment, I am determined that they should be as straightforward as possible.

It is perhaps worth reminding the Committee about the main features of self-assessment. It is a clearer, more streamlined system for taxpayers. Self-assessment will also simplify matters for the Revenue. It will free up resources. In response to the hon. Member for Darlington, some of those will be devoted to improving customer service, as well as the Revenue's compliance work.

The introduction last year of the current-year basis for businesses has paved the way for taxing all income and gains in one sum and with common dates. It will no longer be necessary for the Revenue to make estimates of an individual's tax liability as a matter of course, leading to the familiar but costly rigmarole of sorting out, often over a long period, how much tax should be paid. Instead, taxpayers will be able to put all their income, gains, deductions and allowances for one year on the one tax return, and send it to the Revenue within a clear and realistic timetable.

The hon. Member for Darlington asked about the timetable. The returns will have to be in 10 months after the end of the tax year, as against the current position—in theory, the limit is 30 days. Ten months is a generous time, particularly if one compares it with the time that is allowed in other European countries.

Taxpayers will have the opportunity to work out their own tax if they wish, but, as I made clear on Second Reading, they do not need to do so. The Revenue will do it for them if that is what they choose.

Hon. Members will know that self-assessment will apply directly only to people who receive tax returns. They number 9 million people and are the self-employed and others with relatively complicated tax affairs, such as directors and higher-paid employees. Pay-as-you-earn will continue to operate as now for all employees, of whom four out of five, some 20 million people, do not receive returns and will notice little change. I say to the hon. Member for Durham, North-West that of course the Government will learn from experience as they introduce the new reform.

It is important that such a fundamental change should be made only after careful thought and extensive consultation. We have recognised that throughout and, to allow more time, my right hon. Friend the Member for Kingston upon Thames (Mr. Lamont) decided, when announcing the go-ahead in 1993, to put back the start date by one year. The emphasis now must be on doing all that we can to make the new system work well from the start.

To help achieve that, the Revenue has already begun an extensive programme of research and education. It is preparing a publicity campaign to start later this year. It is consulting widely on the design of the tax return, which the hon. Member for Darlington mentioned, as well as on many other aspects of self-assessment. It will test its plans for the new system in a live trial—a pilot, if you like, Madam Deputy Speaker—starting this April. That will involve some 5,000 volunteers and their advisers and employers. It will be based at the Revenue's "model office" in Leicester.

That is not a theoretical exercise. It is real Revenue staff dealing with real taxpayers. The trial and the lessons that are learned from it will help the Revenue to ensure that the introduction of self-assessment goes as smoothly as possible. In response to both Labour Members who have spoken, the Revenue has also started an extensive training programme for its own staff to ensure that they are properly prepared for the new system.

The key aim of self-assessment is to reduce the overall costs of running the tax system. A more straightforward system will deliver that, and will provide significant savings for the self-employed by sweeping away all the complexity of the old rules. That will allow businesses to concentrate their energies where they really belong—on creating wealth.

As with any new system, people in business and others who receive returns and their advisers will need to learn new rules. I recognise that there will be some initial costs for those affected. Some employees will need more information than they do now about benefits in kind and expenses payments, so that they can complete a tax return if they receive one. That will also mean more work for some employers—those who do not provide that information to their employees, but who will need to do so.

We have tried to keep business costs to the absolute minimum by consulting as widely as possible on the best way forward, listening carefully to what people had to say. We are continuing with those consultations. Indeed, members of the self-assessment consultative committee were good enough to come to a meeting at the Treasury just before Christmas, so that I could hear their views at first hand. A substantial programme of publicity and education for taxpayers is planned and is under way. Particular emphasis will be given to raising awareness and to tax advisers understanding the changes through mailings and presentations.

Some deregulatory savings will arise from self-assessment. Both the cost and savings are documented in detail in the comprehensive compliance cost assessment that we published on Budget day. Notwithstanding such costs, the overall impact on business is expected to be positive and to produce continuing savings of between £125 million and £250 million per year in business costs. The main beneficiaries of that will be the self-employed. I can tell the hon. Member for Darlington that the aim of self-assessment is to help people to get their tax right first time. This will involve making them aware of their responsibilities through the programme of education and publicity that I mentioned.

9 pm

The design of the tax return and the guidance notes will also have an important role. We are consulting taxpayers, professional advisers and Revenue staff and we are also undertaking research to help design a return that is as easy to understand and as simple to complete as possible. The response to the consultation has been excellent, with strong interest from not only agents but the public. Indeed, more than 1,000 people volunteered to try out the new return for themselves—it says something for the popularity of the new scheme when people are volunteering to fill in a new return that they are not obliged to fill in. Consultation on the new tax return will continue throughout 1995.

The consultations centre on the traditional paper tax return but self-assessment is a system for the future and clause 136 includes the measures necessary to enable taxpayers to file their returns electronically. However, our plans do not stop at electronic lodgement. Many taxpayers already have personal computers at home and, in the future, even more will have computer skills. Filling in a tax return, especially under self-assessment, is an activity which, I believe, lends itself naturally to the use of a personal computer—it can do the calculations and it can access the right help screen. I have, therefore, encouraged the Inland Revenue to consider urgently the possibility of producing a version of the return on computer disk, but it need not be something that the Revenue itself produces—it is a natural candidate for private sector involvement or partnership. Either way, I regard it as an exciting development and the right way forward.

Finally, whether people decide to use a paper return, a computer disk or electronic lodgement, self-assessment will be a big change and people are likely to need help of one kind or another from the Revenue. That brings me to a point made by the hon. Members for Darlington and for Durham, North-West. The Revenue will be embarking on an ambitious and comprehensive customer service programme to inform and assist taxpayers so that they can understand the new system and comply with their obligations.

The Revenue is currently conducting research into taxpayers' needs and consulting extensively on all aspects of its programme. The results of that work will help it develop the most effective and efficient service using, for example, carefully targeted written guidance on the telephone and face to face through the network of tax inquiry centres. The Revenue now has nearly 400 such inquiry centres and I have been impressed by the high standards of service that they provide. Hon. Members may have raised other issues but I shall write to them, if I may.

We shall, of course, continue to keep the House informed of developments as we move towards full implementation of self-assessment. We expect to introduce further self-assessment legislation, the third and—I hope—final tranche being in next year's Finance Bill. That will provide ample opportunity for further parliamentary discussion on the progress of self-assessment and other clauses which will be dealt with in Standing Committee.

Against that background, I hope that I have given the hon. Member for Durham, North-West sufficient assurance to persuade her not to press the amendment to a Division.

Photo of Hilary Armstrong Hilary Armstrong Shadow Spokesperson (Business, Innovation and Skills), Shadow Spokesperson

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 91 ordered to stand part of the Bill.

To report progress and ask leave to sit again.—[Mr. Bates.]

Committee report progress: to sit again tomorrow.