Treasury Committee

Session 2003-04 Treasury Committee press notice no. 30 - 4 June 2004

COMMITTEE CALLS FOR CUT IN TAX COMPLIANCE COSTS ON BUSINESS

The Treasury Committee today published its Seventh Report, The Administrative Costs of Tax Compliance (HC 269, Session 2003-04).

Michael Fallon MP, Chairman of the Treasury Sub-committee which undertook the inquiry, said that:

"The Government has conflicting objectives for the tax system. It wants to reduce the administrative costs of tax compliance, but it also has other aims such as delivering social or environmental objectives which can add compliance costs. The relative priority of each of these objectives is not clear and should be spelt out.

The Revenue Departments have failed so far to establish the actual overall administrative costs of tax compliance incurred by business. Without this progress in reducing costs cannot be properly measured and how tax compliance costs have changed over time cannot be determined. But business witnesses believed that they have increased, particularly in the area of payroll-related costs, and pointed to the fact that in addition to PAYE employers are now potentially responsible for: three types of NI contributions; payment of tax credits; collection of Student Loans; four statutory payments (SSP, SPP, SAP, SMP); the Construction Industry Scheme tax; and monitoring National Minimum Wage compliance.

We expect the Revenue Departments to act on our nine recommendations and to consider all the detailed suggestions that have been made to us for reducing compliance costs. A deliberate and determined effort should be made to harmonise PAYE and National Insurance Contributions and to reduce the complexities of Statutory Sick Pay. We also want the Revenue Departments to follow the DTI's lead and ensure that changes in regulations and taxes are implemented on only two set days each year.

The new combined Revenue and Customs department gives the opportunity to measure tax compliance costs more accurately and to set a proper target for reducing them."

Note for Editors

Mr Michael Fallon is available for comments on the report on 0797 367 6506. The Report can be purchased from Stationery Office Bookshops (tel: 0870 600 5522). The full text will also be available on the Internet (www.parliament.uk) at or before 3.30 pm today.

List of the Report's conclusions and recommendations

The terms of reference of this inquiry were widely drawn, encompassing all taxes administered by Customs and Excise and the Inland Revenue. We have concentrated on the general issues and main areas of concern identified during the course of our work. A number of witnesses supplied detailed information on particular areas of concern suggesting specific measures for reducing the administrative cost of tax compliance in respect of individual taxes. We have not sought to investigate the merits of these, but we expect the Revenue Departments to give due consideration to all the detailed suggestions for reducing compliance costs that have been made to us. (Paragraph 5)

We recognise the conflict between producing a tax system that is simple to understand and operate, and the need for checks and safeguards to bear down on tax avoidance. We also note that the Government has a number of other objectives for the tax system, such as promoting fairness and delivering social or environmental objectives, which can add to the administrative costs of tax compliance. As a result, the Government's objective of reducing compliance costs is only one of a number of objectives for the tax system. We recommend that the Government sets out more clearly the relative priority it attaches to each of these objectives. (Paragraph 10)

The Revenue Departments' current PSA targets for reducing tax compliance costs can be met by any reduction in compliance costs, however small, and are not rigorous enough. We note and endorse the recommendation in the O'Donnell review of the Revenue Departments that the new merged revenue department should develop a better focussed PSA target on compliance costs supported by work to develop a better understanding of compliance costs. (Paragraph 13)

Although measuring the administrative costs of tax compliance is difficult, comparative analyses confirm that the UK has lower administrative costs and fewer regulations than most EU countries. Nevertheless, we would like to see a determined effort to achieve a more accurate calculation of compliance costs. We believe a baseline figure would provide a greater impetus to the Government's objective of reducing compliance costs and inform decisions when the objectives of the tax system conflict. We recommend the Treasury consider the work done on this in the Netherlands. (Paragraph 21)

In the absence of firm data it is not possible to determine conclusively how the administrative costs of tax compliance have changed over time. Most business witnesses believed that tax compliance costs, particularly payroll-related costs, have increased. The Revenue Departments considered that compliance costs have been broadly neutral since April 2001. But the Inland Revenue accepted that a number of new payroll requirements had been placed on employers before this, such as the introduction of tax credits, that added significantly to compliance costs. We also note that in reaching its view on compliance costs Customs and Excise specifically excluded measures introduced to combat fraud. We note some evidence which suggested that the administrative costs of tax compliance have risen. But the absence of any reliable method of measurement makes it difficult to adjudicate between these claims. In the absence of any agreed method of measurement these ambiguities will remain. (Paragraph 28)

Witnesses agreed that employer (or payroll) taxes generate the highest compliance costs for business and that these can fall disproportionately on small businesses. The Bath study published in 1998 by the Inland Revenue examined the compliance costs of PAYE and NICs and identified how these costs had changed between 1981-82 and 1995-96. It made a number of recommendations for reducing these costs on which action is being taken by the Inland Revenue. We note that there are no plans to update this work despite the significant changes that have been made subsequently to the tax system, such as the introduction of self assessment and the introduction of tax credits. We welcome the announcement in Budget 2004 of the Government's intention to remove the responsibility for the payment of working tax credits from employers. We recommend the Bath study be updated to determine what changes there have been in compliance costs. (Paragraph 32)

The Revenue Departments use Regulatory Impact Assessments to assess and quantify the impact of policy decisions on the administrative costs of tax compliance. We note the concerns expressed by the CBI and others about the accuracy of the figures used for tax compliance costs and savings in these assessments. We endorse the introduction of post-implementation reviews of these assessments to provide assurance that the figures used were reasonable and we consider that the results of such reviews should be made available to business and tax practitioners for comment. We therefore recommend each individual review be published. (Paragraph 38)

The Regulatory Impact Assessment process does not apply to operational changes. Such changes can have a significant impact on tax compliance costs. We note the initiative by Customs and Excise to apply the process internally to major operational changes that have no legislative dimension. Given that such an assessment seeks to measure the impact of a major operational change on business, it is not clear why this process should be confined to the department. We therefore recommend that the full Regulatory Impact Assessment process be applied by the Revenue Departments to all major operational changes that are proposed. (Paragraph 39)

We note the complications that have arisen from definitions used in PAYE calculations differing from those used in calculating National Insurance Contributions and from Statutory Sick Pay being the responsibility of another Government Department. We recommend that a deliberate effort should be made to rectify and eliminate such unnecessary complexity by harmonising definitions, accounting principles, administration arrangements etc. (Paragraph 44)

We note the DTI's announcement that changes in employment regulations will only be implemented on two set days each year which should reduce costs and make it easier for businesses to implement and respond to changes made. We hope that other departments will follow this lead. In particular, we would welcome a statement from the Revenue Departments setting out how they intend to responds to this initiative. (Paragraph 46)

With the reorganisation proposed for the Treasury and the amalgamation of the Inland Revenue and the Customs and Excise, it is an appropriate time to establish a deliberate strategy for reducing or, at least, containing tax gathering and benefit paying compliance costs. (Paragraph 47)

The Treasury Committee is a Select Committee of the House of Commons, appointed to examine the expenditure, administration and policy of the Treasury, the Inland Revenue, Customs and Excise and associated public bodies.

Mr John McFall (Chairman), L, Dumbarton
Mr Nigel Beard, L, Bexleyheath and Crayford
Mr Jim Cousins, L, Newcastle upon Tyne Central
Angela Eagle, L, Wallasey
Mr Michael Fallon, C, Sevenoaks, (Sub-committee Chairman)
Mr David Heathcoat-Amory, C, Wells
Norman Lamb, Lib Dem, North Norfolk
John Mann, L, Bassetlaw
Mr George Mudie, L, Leeds East
Mr James Plaskitt, L, Warwick and Leamington
Mr Robert Walter, C, North Dorset