NAO wide of the mark

accawebmaster —  22 October 2010 — Leave a comment

By Jason Piper, technical officer, ACCA

Every so often you come across a statistic that makes you stop and think. For example, did you know that more coal mines were closed by Labour governments than Conservative ones? But, then again, context is all and that's why everyone remembers the coal mines that the Conservatives shut.

Last week, I came across another surprising finding. According to an article in the Guardian, paying an accountant to do your tax is a waste of money because they make more mistakes than unrepresented taxpayers.

Any temptation to dismiss it out of hand was dispelled by the source – the National Audit Office. But that surprised me too, because I had read the NAO report, and while it makes some sensible and timely suggestions about how to save money on tax administration, it actually didn't say that paying tax agents is a waste of money.

What it said was that it didn't have enough information to draw any meaningful conclusions about whether agents are better than taxpayers at preparing tax returns, but that unrepresented taxpayers undoubtedly under-declare more tax than represented ones. They don't know actually who gets it right more often because they only have information about returns that show too little, not too much tax. Now it's a huge leap from there to saying that tax accountants are a waste of money, so what could have led the journalists in that direction?

Well, I suppose the first clue is the executive summary to the report. It mentions the finding that a higher proportion of represented taxpayers declare too little tax than of unrepresented taxpayers. It goes on to say 'represented taxpayers are not without risk, despite their professional advice'. Which is true, although nothing in life is without risk.

The summary doesn't highlight the further finding that unrepresented taxpayers, while they may not under-declare so often, do so far more seriously when it happens – by 35-40% of the tax finally due, compared to 15% for represented taxpayers. Now I'm not sure that space was so tight in their report that they couldn't have found room for that little bit of balance.

But by the time the NAO's press office got hold of that sentence, it had become 'paying for professional advice is not without risk', backed up by the percentage finding that fewer unrepresented taxpayers under-declare their tax. And that simply isn't the important message from the statistics. Professional commentators and HMRC pointed out instantly that represented taxpayers, having larger bills based on more complex affairs, were naturally more prone to misdeclarations, while for the smallest and simplest cases, an agent isn't needed. Paying for tax advice doesn't remove risk, but it can reduce it. Now, if this is so obvious, why didn't it show up in the NAO figures? And this is where incredulity turns to anger.

The NAO figures, incomplete and out of date though they are, do actually show that it is the highest earning unrepresented taxpayers who under-declare the most tax. Twenty-six percent of the unrepresented taxpayers in their sample were responsible for all the under-declared tax, which was 40% of all the tax due. We don't know how much the remaining 74% had overpaid, but we do know that they paid somewhat less than 60/74ths each (£810) compared to at least 40/26ths (£1,540) paid by those with under-declarations. If only one quarter of returns had any level of under-declaration, they must have been the bigger ones if they account for more than one quarter of the tax in under-declarations alone. 

All of which raises some very serious questions about the process by which the NAO sets about drawing conclusions from this report, and then publicising them. No one I've spoken to (professionals or journalists) has read the NAO press release as meaning anything but that paying for tax advice is a risk, maybe even a waste of money.

Now, I don't have figures to demonstrate how wrong that is – but by its own admission, the NAO doesn't have figures to prove that it's right, just the ones I've mentioned above that tend to suggest it's wrong. So why, at a time when the whole tax system is creaking at the seams, would one government agency think it sensible to try to make life harder for another?

Suggesting that tax accountants are at best incompetent and at worst crooks can only undermine the relationships between taxpayers, agents and the tax authority. We cannot know whether the shift in meaning between the order of words in the report and the press release is a deliberate spin or simple failure to understand the importance of syntax, but there should be no place for either in government-funded work of this nature.

Over the coming months, the NAO will play a pivotal role in guiding and assessing budget cuts that will shape the face of our nation for years to come, the success of which will depend upon their previous reputation for measured and sensible conclusions based on sound evidence and effective analysis. The doubts raised by this report come at the worst possible time for the NAO and for our confidence in it.

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