Gaping holes in the tax net

Self-assessment taxpayers have just over a week to send in cheques to the Inland Revenue to beat the July 31 deadline for tax payments. This time they must pay the second instalment of the bill whose first slice was due last January. Failing to do so will attract a 5% surcharge on the amount due.

The July 31 pay date affects taxpayers who have substantial pay from self-employment or a partnership or substantial investment income. It does not concern the two out of three taxpayers outside the DIY tax return net or self-assessment filers who owe less than £500 or who have at least 80% of their income taxed at source.

But the late payment penalities are low compared with the fines running up for the estimated 300,000 taxpayers who have still to file their 1998/99 returns which were due on January 31. They could end up with a second £100 penalty on top of the one they collected in February as well as a second surcharge and interest. Tax inspectors can fine the worst cases £60 for each day they are late with filing.

Earlier this month, the Inland Revenue opened its own internet tax return filing service on www.inland.revenue.gov.uk as part of a government plan to put a quarter of its transactions with the public online. So far the site has seen little business with just 3,000 using the net filing site despite offering a one off £10 tax credit. In fact, no one has yet claimed the tenner because the revenue on the net still requires a 28 day minimum turnround time.

The site has not impressed professionals. Mike Warburton at accountants Grant Thornton is among many who have stopped using the electronic lodgement service aimed at tax practitioners and designed as a precursor of full online filing. He has found the system "unstable and able to cope only with the simplest of returns".

David Brodie of Taxaid, which helps with the tax affairs of those who cannot afford an accountant, is ready to give the tax man a second chance. On the charity's newly launched website (www.taxaid.org.uk), which includes free advice and practical guidance on tax issues for those on low and average incomes, he says: "It is too early to say whether the system is working well, but one advantage of e-filing is that you reduce the risk of your tax office making a mistake in keying information from your paper tax return on to its computer. In its latest annual report, the National Audit Office indicated that 6% of tax returns - more than 500,000 forms - may have been wrongly entered onto tax office computers last year, leading to errors in tax demands."

The Computer Weekly revelation that millions of tax records have vanished between one computer and another will not help confidence. The magazine claims that taxpayers who have settled their bills in full could be shown as owing thousands, while fly-by-night entrepreneurs and black economy workers could escape as the Inland Revenue will have no way of proving their evasion.

The Inland Revenue admitted there had been a failure but said nothing had actually vanished.

Even if taxpayers are willing to entrust their details to the net, it is not easy. They can download special software from the Inland Revenue site which could take up to two hours - with the £10 discount largely rubbed out by the internet phone bill.

Alternatively, they could ask for a free CD-rom from the Revenue. TaxSaver 2000 Lite should solve most problems, but it requires downloading still more software. This can take up to 15 minutes.

All this is a total waste of time for a few taxpayers with an exceptional pensions pattern involving contributions refunds. They can't use the internet at all. Nor can anyone with an Apple Mac. Net returns are strictly for PC users. Many taxpayers may decide that the discount, paid for one year only, is hardly worth the effort.

A second option is to buy software from suppliers such as Sage and the Consumers' Association. Expect to pay around £20 for these. Sales have been uninspiring.

Tax Link, a firm of tax specialists that has developed a £19.99 program taxchecker program has leapt to the revenue's defence.

Chris Walton, of Tax Link, believes accountants dislike the new net service because it threatens their stranglehold on tax form filing. He says: "Taxpayers can e-file from their own PC, validate the return, instantly receive confirmation the revenue has received their data, speed repayment cheques and get a £10 tax credit - all without paying an accountant's fees."

He claims his software has greater functionality than the Inland Revenue's offering. It also has a spread sheet function so taxpayers can test "what if?" questions such as changing or abandoning a company car or adding or subtracting pension payments. The Which? software also has a "what if" function.

But while accountants concede that simple cases can be dealt with over the net, they are dubious about more involved returns. And they say the difficulty is that taxpayers may have moved into a complicated area without realising it.