Enticing tax filers online

Online tax filing has had a slow start and it is not yet clear whether it will have a big future. The Inland Revenue thinks it does; its e-revenue strategy is built on it.

This is good news for the government as the Revenue is leading the way in providing online services and a key user of the government gateway, the secure online portal to public services. So why is the Revenue so keen on online services?

Probably because it estimates saving #3 for each self-assessment return submitted online and that 50% take-up of online services would allow it to cut 1,300 staff (or reassign them to more remunerative investigative duties).

The benefits to the taxpayer are less clear. The Revenue says they are: the quicker handling of a taxpayers’ affairs and less paperwork (following the Treasury’s line that if a form can be completed online it does not count as ‘red tape’). The idea of giving cash incentives to those filing online has lost favour after the failure of the £10 one-off incentive offered to encourage them to file online.

The £50 cash incentive for businesses to file VAT returns and payroll returns online (for the first time only) has been retained. Apparently employers and payroll bureaux covering six million taxpayers use the payroll service.

The Carter review of payroll services suggested cash incentives should be extended for small businesses, but only in the run-up to 2007 by which time online filing should be made compulsory. It also said compulsory on-line filing of payroll returns for large firms should be introduced as early as 2004.

This year the Inland Revenue will run ‘live trials’ of online filing for corporation tax returns and interest in this service is expected to be strong. It is planned to give users viewing access to their tax payment records, as well as secure messaging and expanded online payment facilities.

With 80% of UK businesses already online, this type of ‘portal’ service should prove popular with companies and accountants and, if successful, is likely to be extended to individual taxpayers.

While businesses may be in favour of online filing, it seems individuals are not: only 75,449 self-assessment returns were submitted online for the 2000/01 tax year, less than 1% of all returns issued.

In a recent report on e-revenue, the National Audit Office identified the probable reasons for this reluctance as lack of confidence in government services and security worries – likely to arise from the well-publicised teething problems the Revenue’s FBI form for employers had: four out of five return submissions for 1999/2000 failed the first time. It also highlighted the lack of any real reason to change from paper filing.

The NAO says these issues make it unlikely that take-up of online services will be any more than a fraction of the government’s 50% target by December 2005. So what more can be done to tempt taxpayers to file online?

The Revenue thinks ‘adding value’ by providing better free help facilities would be a start and it is apparently investigating the provision of interactive tools to help taxpayers resolve their queries through its website. It has also taken a direct lead from the NAO and started marketing its other online services.

Improvements to the Revenue’s own free tax return software are also planned for this year, including providing automatic calculation of the tax liability and automatic validation of data entered (for example checking that the gross, tax and net figures agree).

Despite these efforts, there is still likely to be a majority of taxpayers for whom online filing is a step too far. So more radical methods of persuasion may be needed, and judging by the existing self-assessment regime, these are likely to take the form of penalising paper filers to provide an ‘incentive’ to file online. The Revenue could refuse to accept paper tax returns after the 30 September deadline or where a taxpayer uses an accountant. The government could even make 30 September the final tax payment deadline for those submitting paper returns.

Looking ahead, if online payroll returns do become compulsory the Revenue could pre-fill the employment boxes on personal tax returns. Requiring banks, building societies and dividend payers to provide electronic details of payments would allow the Revenue to pre-fill investment income sections as well. Taxpayers could log on to their customised Inland Revenue homepage, add missing details and click the submit button.

Despite current low levels of take-up, the demand for tax compliance services will fall as the use of online services increases and the internet generation become taxpayers.

In the long-run, accountants will need to adopt online filing and adapt their services if they don’t want to see their client base decline.

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