My first reaction to the Budget was to breathe a sigh of relief that we are not yet going to have to face the prospect of a General Anti-Avoidance Rule, or even a mini-GAAR, as advocated by Customs & Excise.
My second thought was relief that the chancellor had not made any major changes to the tax system, for example, in relation to company capital gains, which might give us a chance to come to terms with corporation tax self-assessment.
This thought brought me back to income tax self-assessment, and an area which continues to give rise to more complaints than any other, which is the system of taxpayer statements, and the incomprehensible figures which seem to appear on it out of the blue.
Although it is fashionable to blame the computer system, I expect that the fundamental problem goes deeper than this, and that we should have a total rethink of the basis of the accounting arrangements between taxpayers and the Inland Revenue. What I would like to see considered is a system where interest is charged on a monthly basis on amounts due to the Revenue, and credited on a similar basis if tax has been overpaid.
Differential between interest
The interest rates would be adjusted to take account of a change from what is effectively simple interest to compound interest, and there would still be a differential between interest charged by the Revenue, which would be at approximately the mortgage cost of borrowing, and the interest paid, which would be broadly equivalent to deposit interest less a composite rate of interest to keep the system as simple as possible.
Tax for each year has a due and payable date, and would be entered on the taxpayer’s statement at that date. If it is adjusted at a later stage, then the adjustment entry would show both the additional tax and interest from the due date of payment to the date it appears on the statement for the first time. Thereafter, interest would be debited or credited on the overall balance in the same way as on a credit card statement, which is familiar to taxpayers.
The system should also enable taxpayers to make payments by standing order, or fixed sum direct debit, to the Revenue on a regular monthly basis, if they so wished, which would no doubt improve the Revenue’s cash flow and reduce bad debts and avoid taxpayers getting into financial difficulties with their tax.
Although the Revenue has instituted a trial budget payments plan, it is very difficult to recommend anybody to adopt it, because no credit interest is available, and taxpayers are effectively being invited to pay tax in advance for no reward.
Overpayments to be credited
Where an overpayment is agreed with the Revenue, this would be credited to the statement, together with cumulative interest to the date it is so credited, and thereafter interest would be added or charged on a monthly basis. A taxpayer in credit could apply to the Revenue to have the credit balance paid, in the same way as a normal instalment payment plan. There would also be a requirement to pay a minimum amount each month, in the same way as with a credit card statement, although the Revenue would no doubt require a higher percentage minimum payment than most credit card companies.
Obviously immediate payment of the entire balance would prevent interest continuing to run.
Such a scheme would no doubt require a change in the tax law, but it would produce a scheme which would encourage prompt payment, and give taxpayers greater opportunity to avoid tax liabilities becoming a major cash flow problem.
If anyone has any better suggestions, and I am sure they do, I would be very interested to hear from them, because I think the taxpayers’ statement is one of the least satisfactory areas of self-assessment and, if not changed, could eventually bring the system into total disrepute.
Nigel Eastaway of TaxServe is chairman of the technical committee of the Chartered Institute of Taxation.
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