E-Commerce Innovations in the Personal Tax System of the United Kingdom
McCourt-Larres, Patricia, Middleton, Peter, International Journal of Management
This study finds evidence that attempts to reduce costs and error rates in the Inland Revenue through the use of e-commerce technology are flawed. While it is technically possible to write software that will record tax data, and then transmit it to the Inland Revenue, there is little demand for this service. The key finding is that the tax system is so complex that many people are unable to complete their own tax returns. This complexity cannot be overcome by well-designed software. The recommendation is to encourage the use of agents to assist tax payers or simplify the tax system.
The system of self-assessment for individual taxpayers was introduced in the United Kingdom (UK) for the 1996/97 tax year and therefore took effect for people submitting tax returns from 6th April 1997 onwards. The consequence of self-assessment is that the individual taxpayer rather than the Inland Revenue is responsible for recording all sources of income, claiming deductions and calculating the tax liability. The taxpayer is also specifically required to retain detailed business records for six years to support the tax calculation. Failure to comply with this statutory obligation could result in the taxpayer facing a fine of up to L3,000.1 Furthermore, as a consequence of self-assessment, the Inland Revenue has been granted extensive powers to carry out random audits on individual taxpayers' records at any time during the twelve months following the date of filing2.
However the move to self-assessment affects only a minority of UK taxpayers. For example in the tax year 1998/99 the total number of individual taxpayers was 26.9 million' yet only 8 million' tax returns were submitted to the Inland Revenue. The reason why under one third of individual taxpayers complete a tax return is that the UK's cumulative Pay-As-You-Earn (PAYE) system, by taking account of earned income and tax paid to-date within each period provides for the deduction of the correct amount of tax at source from employment income throughout the year. Furthermore most investment income such as interest earned on building society savings accounts also suffers a deduction of tax at the lower rate at source. Interest and employment income are the only sources of income for many taxpayers. Consequently unless they wish to deduct expenses from their employment income or their investment income is taxable at a higher rate, income taxpayers in this category, for the most part, do not need to complete a tax return.
While it is correct to state that only one third of the tax-paying population in the UK are required to complete a tax return it would be incorrect to claim that this third self-- assess. Those who submit their returns on or before the 30t" September following the year of assessment will have their tax calculated by the Inland Revenue whereas those who submit after this date are required to calculate their own tax. In effect, the UK operates only a partial self-assessment system.
The complexity of the UK's tax system
Several factors contribute to the complexity of the UK's personal tax system. First, in the UK tax legislation is drafted in the context of the common law system. The level of detail and precision required in a common law system, if certainty of application is to prevail in a variety of different circumstances, results in verbosity and volume on a grand scale and `leads by its very nature to complicated law' (Godman, 1998, p.21). Secondly, the annual renewal of income tax in the Finance Act ensures that those who draft the legislation are working under constant time pressure. In these circumstances the draftsmen not only have to provide the level of detail necessary to ensure certainty, but they also have to limit the potential for avoidance. These dual requirements produce legislation which is vague in some places, to discourage avoidance, but detailed in others to ensure certainty (Godman, 1998). …