NAO Urges HMRC To Even Out Regional Variations On Corporate Tax Collection

by Robert Lee, Tax-News.com, London

16 January 2006

While the management of corporation tax by HM Revenue and Customs’ Area offices has improved in recent years, the ironing out of regional variations offers much potential for considerable cost savings and revenue generation, according to a report by the National Audit Office.

The Department’s Area offices administer Corporation Tax for all but the largest UK companies and generate almost half of the overall revenue from Corporation Tax, approximately GBP15 billion. The Department spends around GBP220 million a year on Corporation Tax work in the Areas, including processing of tax returns and compliance and enquiry work. These Area offices have also had to cope with a surge in new incorporations in recent years.

The NAO report noted that there has been a 42 per cent increase in the extra revenue secured by area offices from their detailed enquiries on tax returns since 1999 when Corporation Tax Self Assessment was first introduced, giving a total of GBP602 million in extra revenue for 2004-05.

Focusing on higher risk cases has meant that this increase in revenue has come from fewer enquiry cases, down from over 80,000 in 1999-00 to 44,000 in 2004-05, achieved through greater use of databases and risk profiles.

Areas undertake two types of enquiry. One type scrutinises every part of a company return and according to the NAO yielded on average £27,000, five times their average cost. The other type concentrates on particular aspects of a company’s affairs and and yielded an average of £12,000, nearly 23 times their cost.

Yet the report observed that yields varied widely from office to office, even after the effect of geographic location had been taken into account. Variations in coverage mean that companies of a similar size have different chances of being selected for enquiry depending on where they are located. Similarly, there were wide variations in Areas’ efficiency in processing returns and undertaking enquiries, with, for example, average enquiry costs in some areas being twice as high as in others.

"These variations in performance and costs across the 68 Areas suggest scope for efficiency savings in processing and enquiry work, together with still higher yields," the report stated.

According to the NAO, these variations stem from imbalances across areas in the number and experience of tax inspectors and other staff compared to the size and complexity of company caseload dealt with by each Area.

The Department is consulting staff on plans to restructure local compliance work into fewer but larger offices.

"This would provide opportunities to match staffing levels and experience more closely to local workloads and compliance risks, and more easily to share best practice and experience of new techniques," the report said.

However, the NAO noted that these improvements will hinge on identifying some of the underlying reasons for non-compliance. The report said that HMRC's programme of random enquiries has detected errors in about 40% of corporate tax returns.

Head of the NAO Sir John Bourn commented:

"I welcome the improvement in the Department’s management of Corporation Tax over the last five years, which has led to higher tax yields from fewer formal enquiries, bringing benefits to the Department and company taxpayers alike."

However, Sir John went on to observe that: "My report highlights how HM Revenue & Customs can build on these achievements, by deploying its staff to focus its work on tax returns that pose the greatest risk, while helping companies to meet their obligations."

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