In a report published today, "HMRC: Engaging with tax agents", the National Audit Office (NAO) claims that taxpayers who are represented by agents are more likely to have under-declarations of tax than returns filed by non-represented taxpayers.

The under-declarations result from error, failure to take reasonable care or evasion (editorial note - are any other types of error possible? More importantly who is responsible for each error?). The NAO concludes that HM Revenue and Customs (HMRC) might be able to increase tax revenues by providing more support to professional tax agents and by better targeting of poorer ones.

A key reason for these findings may be, the NAO acknowledges, that the tax affairs agents deal with are more complex. It adds “However, the analysis indicates that paying for professional help is not without risk for a taxpayer…”

The report indicates that small and medium-sized tax agents appear to be associated with higher rates of under‑declared liabilities than the largest 100 firms. The NAO suggests that further analysis and data is needed to establish why.

The NAO data was extrapolated to arrive at these conclusions after reviewing some 5,000 closed self-assessment "random" enquiry cases from between 2002/3 to 2004/5. It admits that there were shortcomings in this approach as HMRC does not hold data on individual firms.

Anthony Thomas, Deputy President of the Chartered Institute of Taxation, commented:

“We see this as a missed opportunity. It would have been really useful to have had proper analysis of who are making these errors and why. We have been working with HMRC for many years on these issues; it is unfortunate that the report does not reflect this. Nor does it look at HMRC’s own error rate.”

The Association of Taxation Technicians (ATT) shares the same sentiments and expresses disappointment at what is a missed opportunity. It is "particularly concerned that comments made in the report could be misinterpreted without proper analysis."

Simon Braidley, ATT President commented:

“We continue to work together with HMRC to improve the tax system for the benefit of taxpayers generally.”

Editorial comment: Nichola Ross Martin adds:
The methodology behind the figures in this report is very suspect.
First off, the NAO took its sample from data supplied by HMRC on the outcome of "random" enquires back in 02/03 to 04/05. HMRC's data was incomplete, because the department did not retain records of any enquiries where there was a tax overpayment, no adjustment, or the case was settled by agreement. So HMRC was only able to supply data in some types of cases where there was an underpayment. This raises the question, Why did HMRC keep some data and not others? It seems a bit odd. Were these all really "random" cases or did HMRC include all cases? If not all cases then again, why did HMRC keep some data and not others, what use would keeping only a third of the data be to HMRC? What of the errors? If they were the advisers errors, why were penalties charged?

By coincidence, the Institute of Chartered Accountants in Scotland has today published its 2010 member survey on HM Revenue & Customs errors and shortcomings.

Source: NAO report Engaging with tax agents