NATIONAL AUDIT DFFICE
REPORT BY THE COMPTROLLER AND AUDITOR GENERAL
HM Customs and Excise: Checking Large-Traders’ VAT Liability
ORDERED BY THE HOUSE OF COMMONS TO BE PRINTED 17 MARCH 1997
LONDON:TheStationeryOffice HC368 Session1996-97 Published19 March1997 E7.40 HM CUSTOMSAND EXCISE: CHEC~NG LARGE-TWERS VAT LIADILI~
This report has been prepared under Section 6 of the National Audit Act, 1983 for presentation to the House of Commons in accordance with Section 9 of the Act.
John Bourn National Audit Office ComptroUer and Auditor General 11 March 1997
The Comp@oUerand Auditor General is the head of the National Audit Office employing some 750 staff. IIe, and the National Audit Office, are totaUy independent of Government. He certifies the accounts of aU Government departmentsand a widerange ofotherptihc sectorbodies;and he has statutory authori~ to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources. HM CUSTOMSAND EXCISE: CHECKING WGE-TWDERS’ VAT LWILI~
Contents
Page
S~ary and conclusions 1
Part 1: Introduction 5
Part 2: Gearhg resources to risk 10
Part 3: Undertaking large-trader audit 21
Part 4: Measuring the success of large-trader work 30
Glossary 33
Appendices
A: Local offices tisited by the National Audit Office 34
B: Traders’ organisations constited by the National Audit Office 35 HM CUSTOMSAND EXCISE: CHECKING WGE-TRADERY VAT LWILI~
Summary and conclusions
1 Value Added Tax WAT)is a se~-assessed tax which is coUected by 1.6 miRion registered traders who are required to keep adequate records to be able to calcdate their VATEabfities correctiy and to enable the Department to verify their VATreturns. The Department check the accuracy of traders’ returns and the compliance of traders tith the VATre@ations during their risk-based programe of audit visits.
2 The Department give particular priority to auditing the tax throughput of large-traders. They have identified some 1,500 Jraders (0.1 per cent) who, because of the large sums of VATpassing through their accounting systems antior the complexity both of those systems and of the companies’ trading activities, represent a higher concentration of risks to the revenue than do the general trader poptiation. In 1995-96, these 1,500 large-traders contributed fll.4 biRion (34 per cent) of the total net VATcollected (S34 biK1on)through the trader return system.
3 Customs and Excise is a muki-fmsctional Department which operates on Next Steps lines with a separation of actitity and responsibihty between headquarters ‘core’ functions and the detivery of operational functions, currently organised as executive units. On VAT,headquarters responsibfity is to set policy and to provide guidance and training. Heads of executive units (collectors) are responsible for deploying resources, orgatising VATassurance work and de~vering resdts from that work in Hne with key targets set out in the Department’s management plan each year.
4 The National Audit Office investigated the Department’s performance in auditing the VATrecords of large-traders. This examination considered:
. the identification of risks associated tith large-traders and the consequent aUocation of resources (Part 2 of this Report);
. the conduct of large-trader audit work (Part 3); and
. the measurement of performance (Part 4).
5 In general, the National Audit OfRce found that the Department’s arrangements for gaining assurance about the completeness, accuracy and vtidity of large-traders’ VATEabfity work we~. The Department have introduced enhuced systems of control to provide improved audit coverage in ke with their strate@c objective of geartig their resources to areas of greatest risk to the revenue. The revenue from large-traders accounts for aPPrOfimatelY one-tid of total VATreceipts each year, and the Department’s staff have identified additional Hahfity of around S300 mfion a year. A number of initiatives are currently in development which will further improve HM CUSTOMSAND EXCISE: CHECNNG LASGE-WERY VAT LWILITV
the Department’s arrangements for large-traders. Nevertheless, there are some ways in which these arrangements cotid be made more efficient and effective, and these are summarised below.
Gearing resources to risk 6 Foffoting a review of the organisation of VATlarge-trader audit, the Department issued new guidance to local offices in Jtiy 1993 providing specific criteria for assessing large-trader status. The Department expect local offices to exercise discretion in their use of the guidance to determine whch traders shmdd be allocated large-trader status md were satisfied that most large-traders had been properly designated. Tbe National Audit Ofice found that many local offices surveyed by them had used additional factors. The Department recognise that the use of additiond factors may indicate that current guidance might be insufficient to identify all those for whom the large-trader regime would be appropriate. They therefore started, in 1996, a review of existing guidance which takes into account local office practices (para~aphs 2.5 to 2.12).
7 Current guidance provides for regtiar reviews of the composition of trader poptiations, tith the objective of identifying potential new large-traders. The National Audit Office found that tbe arrangements for retiew were generaUy appfied, hut may not have been fully effective at some local offices (para~aphs 2.13 to 2.15). The Department should remind coUectors of the pohcy requirement for formal arrangements for regular review of the composition of their large-trader populations.
8 Some traders wfich, accordng to Departmental @dance, might have been expected to be allocated large-trader status had not been class~led as such. The Department are satisfied, however, that most of these cases have received adequate scrutiny under the Department’s local visit selection arrangements, and that non-designation was appropriate. The remaining cases may have received insufficient examination under these arrangements. The Department wmdd need to undertake further work on the traders’ ~es to see whether or not this was the case and they have undertaken to review the status of au traders tith annual tax throughput h excess of ~7mtilion, who are not currently classified as large, to identify potential new large-traders (paragraphs 2.16 to 2.20). The resufts of this review wiU inform the Department’s central risk analysis and resource aUocation for 1998-99. This should impact positively on the outcome of large VATtrader assurance work.
9 Some local offices have speciUc arrangements for autiting traders which are no longer, or have not previously been, assessed as requiring large-trader status, but are nonetheless larger and more complex than the typical general trader. The Department are already reviewing their guidance for gaining assurance in such cases (paragraphs 2.21 md 2.22). In order to determine whether these current wrangements represent the most cost-effective use of resources, the Department wUl be including in their review consideration of aff larger and more complex traders, whether or not they have previously been classified as large.
2 HM CUSTOMSAND EXCISE: CHECKING LARGE-TRADERS VAT LIMILI~
10 The National Audit O~ce found some variations between collections in the resources which were deployed on the audit of large-traders assessed as presenting similar risks to the revenue. Disparities in resource deployruent may be expected, reflecting local office judgments of the differing circumstances of traders. Wide disparities, however, may suggest over or under assurance of traders at some offices, leading to the inefficient use of resources or the placing of excessive burdens on some traders (paragraphs 2.23 to 2.27).
11 The National Audit Office recommend that the Department review the methods nsed by local offices to relate resource deployment to risk, so as to spread best practice and to minimise unwarranted inconsistencies between traders of similar risk.
Undereating large-trader autit 12 The Department issued audit standards to an officers responsible for large-trader assurance in February 1995, which were a usefd development in their continuing efforts to improve the assurance gained. The Department are reviewing these standards, as planned, and intend to issue additional guidance in 1997, which til protide fwther assistance to large-trader audit staff. The review ~ include those aspects of the audit which the National Audit Ofice found to be sometimes deficient, in partictiar, planning, testing and documentation (para~aphs 3.5 to 3.21).
13 Work to obtain assurance on VATgroups operating from mtitiple sites maybe carried out by staff from more than one local office. Co-ordination of the work is the responsibility of those local office staff who audit the trader’s head office or main accounting centre. The National Audit Office found that audit work on parts of a group carried out by other local offices was sometimes less than planned because of local priorities (paraWaphs 3.22 to 3.28).
14 Departmental guidance already provides for co-operation between collections, and tie National Audit Office recommend that the Department review whether there ie scope, within their current structure, for improving co-ordination of work on VATgroups.
15 Annual assurance certificates are the principal means Cn addition to internal audit) by which the Department obtain assurance from co~ectors as to the ~a~ty of local office work. They are based on reports from line managers and co~ection assurance teams. The National Audit Office found that the prescribed content of collectors’ assurance certificates does not routinely include specific reference to large-trader assurance. The Department plan to review the nature and content of assurance certificates affecting comphance, including the coverage of large-trader assurance. The National Audit Office also found that quahty control procedures for large-trader audit work were not formaEsed at all local offices, although existing audit standards require local offices to estabfish appropriate quafity control arrangements (paragraphs 3.29 and 3.30). The Department should remind collectors of current poticy with respect to quaIity control arrangements.
3 HM CUSTOMSAND ~CISE: CHEC~NG WGE-TWERS VAT LWILITV
16 The Department reqtie aU stdf responsible for large-~ader assmance work to undertake additional training on audit and accountancy. However some trader representatives and some of the officers interviewed by the National Audit Office felt that some deficiencies remained. The Department expect that changes tieady made in the training avti~le shoufd lead to improvements for new large-hader staff, and that their torrent review of update training W protide for the needs of efisting staff (pmagaphs 3.31 to 3.36).
Measuring success 17 The Department’s vmious databases for recording information on large-traders were not fuffy reconcilable. However, as a resoft of forthcotig changes to their computerised analysis and planning systems, the Department expect, from Aprif 1997, to be able to dlstin@sh be~een lmge-traders and the general trader population within their curent performance measmes. In addition, they have had no specific measues of performance for theti large-tiader assurance work. The Department plan to develop thek management information systems so as to protide further analyses of performance data on large-hader assuance and ensme that fufl, consistent and timely information is available for the use of Departmental managers (paraWaphs 4.8 to 4.13).
18 The National Audit Office recommend that the Department take this opportunity to drvclop, \*,ith collections, specific performance indicators for large-trader assurance to inform judgcmcnts ahoul the effectiveness of this work and the efficicnry of resourcing.
4 HM CUSTOMS~D EXCISE: CHECKING WGE-TRADERY VAT LWILITV
Part 1: Introduction
Back@ound 1.1 Value Added Tm wAT) is a self-assessed tax which is co~ected by 1.6 Won and objectives registered traders who are required to keep adequate records to be able to cdctiate their VATHabfities correctly and to enable the Department to verify their VATreturns. The Department seek to assure themselves of the accuracy of traders’ returns and the comphance of traders with the VATre@ations during their risk-based programme of audit visits. These visits are also used by the Depmtment to provide education and advice to traders and to correct my dsunderstandings they might have about the operation of VAT.
1.2 The Customs and Excise management plan for 1995-96 states that the Department’s aims with regard to VATare: to collect the right amount of tu at the right the; to obtain best value for money from their resources wtie safeguarding the integrity of the tax, and to keep adsninistrative burdens on businesses to a ~u. The Department have developed a range of key objectives to assist their achievement of these aims. None of these objectives are specfic to groups or categories of traders.
1.3 FoUoting a fundamental expenditure review in 1994, the Department adopted a strate~c approach to increasing their efficiency and effectiveness in all business areas. A key component of this strategy is the focusing of activities according to risk and need, as determined through, for example, better risk assessment methodology.
1.4 Within this strategy, the Department continue to give partictiar priority to assuring the tax throughput of large-traders. Such traders present a higher concentration of risks to the revenue than do the general trader popdation because of the large sms of VATpassing through their accounting systems antior the complexity both of those systems and of the companies’ trading activities.
1.5 The Department have developed an approach through which they have identtiled some 1,500 traders (O.1 per cent) who represent this higher concentration of risks to the revenue. The Department’s strategy for the control of these large, complex traders is to employ a systems based audit apprOach. This is designed to obtain sufficient evidence that the traders’ internal controls which secure the completeness, accuracy and validlty of tax throughput are operattig effectively. The key accounting systems of the traders shotid be audited over a two or three year cycle. Large-traders are, therefore, subject to a higher level of tisiting than the general trader popdation.
5 HMCUSTOMSANDEXCISE: CHEC~NG WGE-TRAOERY VAT LWILI~
1.6 Figure 1 shows the contribution that large-traders have made to total receipts of VATover the last five years. This contribution rose from 30.5 per cent of total receipts in 1991-92 to aped of 38.5 per cent in 1993-94 and then declined to 34.5 per cent in 1995-96. Figure 2 shows the net additional Habfity discovered by large-trader assurance staff over the same period.
91/92 92/93 93/94 94/95 95/96 Year
Souze: HMCustoms and Excise
Notes: i. A// figures have beenconveti8d to1995-96prices us!ngthe GDPdef/ator.
2. Thedata isderivedfrom thetraderdatabase, which records h//sin thenumberofIarge-traders each year from 1,865 in 1991 to 1,444 in 1996.
3. VAT on imports from outside the European Union has beenexcluded.
Organisational 1,7 Customsand Exciseis a mtiti-fmctional, mitary Departmentwhichoperates structure on Next Steps lines. There is a clear separation of activity and responsibtity between headquarters ‘core’ functions and the dehvery of operational functions, currently organised as executive units. On VAT,headquarters responsibihty is to set pohcy and to protide @dance and training. Heads of executive units (coUectors) are responsible for deploying resources, organizing VATassurance work and dehvering restits from that work in he tith targets setoutin the Department’s management plan each year. CoUectors are accountable to the Department’s Board of Commissioners, md titimately the Chairman, through the two Board members responsible for managing outfield operational matters. Figure 3provides anoverview of the Department’s orgmisatirm for undertiating work on large VATtraders.
6 HM CUSTOMSAND EXCISE: CHECKNG LASGE-TWERY VAT LWILITV
E Netadditional liaMliu - Net additional liatili~ per session in f in 2 million
f per session f million
4000 400
3500 350
3000 300
2500 250
2000 200
1500 150
1000 100
500 50
0 0 91/92 92/93 93/94 94/95 95/96 Year
Netadditionalliahlilyp ersess(orihasr is60"sihsel 993-94and : ‘“. “ ~~~ net additional hitility irif million since 1994-95
SOUC8:HMCustomsand Fxcjse
Notes: 1. All figures have beenconvetiedto 1995-96prices using the GDPdeflator.
2. Thedatafs detivedfrom themeasures database which records afallin thenumberoflarge- traders each year from some 2,600 in 199f to some 1,500 in 1996.
S. fioures exclude disputed input taxon cars.
1.8 The work is principally undertaken by staff located at local offices tithin 14 executive units (coUections) which are responsible for the geoWaphical coverage of the United Hngdom. Prior to 1988, responsibility for the audit of VATfrom each large-trader was, in most cases, managed routinely by the local office dea~ng tith the main accounting centre or head office of that trader. Since then, however, the Department have estabhshed fow regional large-trader control units to audit the very largest and most complex traders (for example, mtiti-re@stered, muki-located businesses tith annual turnovers inexcessof El billion) .Thesetraders arenormaUy located tithln the regional units’ own, or neighboring collections. Some collections have estabhshed separate large-trader single team units tith simflar responsibilities. In addition, the majority of local offices (79 per cent) now assign their large-trader work to one or more speciahsed teams tithln the office. The remaiting offices assign large-traders to staff on the basis of their personal experience and suitabihty, irrespective of their other work. HMCUSTOMSANDEXCISE: CHEC~NG LARGE-TRAOERS’VAT LWILI~
SO”rCe.HM Customs a“d Excise
1.9 Figure 4 shows, as at May 1996, the distribution of large-traders and the associated audit staff responsible for this work. Together, the regional and single team units were responsible for 16 per cent of the large-trader population, representing 38 per cent of the total VATthroughput of these traders in 1995-96,
Scope of the 1.10 The National Audit Office investigated the Department’s performance in National Audit auditing VATlarge-tiaders. TKIs examination considered: Office examination ● the identificationofrisks associatedMth large-traders and the conse~ent affocation of resources (Part 2 of this Report);
. the conduct of large-trader audit work (Part 3); and
● the measurement of performance (Part 4).
1.11 The National Audit Office issued a ~estionnaire to au local offices responsfile for VATlarge-traders work to obtain information about the resourcing, organisation and management of this work. The ~estiomaire dso sought detailed information tiout the audit of 526 specfllc large-traders, representing around one-third of the total large-trader poptiation.
8 HMCUSTOMSWD EXCISE: CHECflNG LARGE-TRADERS’ VAT LWILI~
Type of office Number Percentageof Perceflfage Number of Time sperrt of Iarge-fradera oftax staff by afaff offices fbrougbpuf involved in involved on iarge-frader large-trader assurance
RegionalLarge TraderControl Units and Large 15 16% 38% 162 Largely TraderSngle full-time TeamUnits
Local otices 72 84°h 62”A 824 Approximately l/3rd time
Total 87 986
38 percent of tbe lax fhrmrgbput from large-traders is assured by speciahst large~ttider unite. ~ ~‘ ‘
SOums: Nationa/A”d\t Ofice suwey and HM Cmtoms and&cbe main tmd@rdz&bB@
Notes: 1. Tm throughput figures are based on 1,397 large-traders for which the NationalAudit Office could obtain data
2. The number of local otices given does not ;nclude sub-obTces.
1.12 In addtion, the National Audit Office visited Customs and Excise headquarters ~d 14 local offices in eight collections (Appendix A) and examined a representative sample of 60 case fdes. The National Audit Office also sought the views of a small number of trader representative bodies (Appendix B).
9 HM CUSTOMSND EXCISE: CHECHNG ~GE-TRADERS’ VAT LIABILITY
Part 2: Gearing resources to risk
2.1 This pwt of the Report examines how the Department’s risk assessment methodology is used to identify large-traders and how it informs the subsequent deployment of resmrrces to meet the risk and obtain assmance as to the revenue received.
Categorisation 22 The correct categorisation of traders for audit purposes is important because of traders for the systems based audit approach recommended by the Department for audit purposes large-traders requires more staff resources than for other traders. Systems based audit requires that an evaluation is made of the abiUty of an accounting system to deliver the right tax at the right time, taking into account the controls on the system put in place by the trader. Auditing traders under such a regime who do not merit this approach is not an efficient use of resowces. By contrast, failure to identify tiaders who do reqnire systems based audit in order to obtain effective assurance may have consequences for the revenue if those traders’ systems are unsatisfactory. In 1995-96 the average net onderdeclaration found for each half-day session of assmance visiting for large-traders was S2,052, whflst the same figure for the remainder of the trader population was f656. The categorisation of traders between large-traders and other traders is determined as follows.
Local visit selection system 2.3 The Department employ a computerised system to assist in tbe selection and timing of assurance tisits to the trader population. This is known as the local visit selection system. The system holds a range of data to inform the Department’s analysis of risk associated with individual traders and the level of resource required to assure the tax against the malysed risk. The system produces five levels of risk analysis (the highest of which is ‘(exceptiona~) which are combined with information on the time since the trader was last tisited to generate suggested trader tisiting profiles.
2.4 The analysis provides suggested time ranges from one to twelve half-day sessions of staff time, and the regularity of tisiting may vary from one to thirty years. Local risk assessment allows for the dnration and re@arity of tisits to be varied in the Eght of risk factors not folly recognised as part of the national analysis. Within the local tisit selection system there is provision for the allocation of a particular officer to a larger trader on a contenting control basis. For otier traders, an officer may select a trader from the local tisit selection system for a visit without hating had any prior direct involvement with tbe tiader. However selected, assurance about the tax declared is gtied under the local visit selection system by officers testiog individual accounting entries and transactions associated with specific VATreturns.
10 HM CUSTOMSAND EXCISE: CHECKING WGE-TWDBRY VAT LWILI~
Large-traders 2.5 In addition to the assessment made by the local visit selection system, traders shodd be considered for assessment as to the suitabtity of audit under the Department’s large-trader approach. Following a review of the organisation of VATlarge-trader audit the Department issued new guidance to local offices in Jtiy 1993 providing specific criteria for assessing large-trader status (Figure 5). Each of the criteria is subdivided into between two and five weighted levels of risk. The weighings are mtitiphed together to arrive at an over~ risk factor score for each trader. A risk factor score of five or more indicates that local staff shotid consider classifying the trader as large. Generally, large-trader status would not be a~ocated to any trader whose tax throughput was less than E3 million per annum.
2.6 The criteria are also used for dividing the large-trader population into two sub-categories. The fwst category (Category 1) shmdd contain the highest risk traders; these traders require a fd systems based audit approach over a two year cycle. The remaining large-traders (Category 2) require a mixture of systems based control supplemented by a test of general credibihty over a three year cycle. Were tax throughput cxcccdcd S200 mi~ion (or S1OOmiUion in the case of traders classed as “exceptional risk” according to central risk data held by the Department - see paragraph 2.3), the trader should normally be classified as Category 1 without the need for further risk assessment. As with local visit selection traders, the Depwtment expect local offices to exercise discretion in their use of these criteria where they judge them to he inappropriate for an individual trader.
2.7 Applying an extended audit cycle to Category 2 traders in this way allows resources to be released for either the audit of Category 1 traders or the general trader popdation. In 1995-96, Category 1 comprised some 400 large-traders. The remaining 1,100 large-traders were Category 2.
Local office 2.8 The 1993 risk criteria matrfi is a usefd tool to assist in the identification of identification large-traders. As the constituents of the risk criteria are dynamic and may of large-traders change over time, the risk guidance needs to be regularly reviewed if it is to remain current.
2.9 The National Audit Office analysed responses to their local office questionnaire and interviewed managers at each of the 14 local offices visited to estabHsh how, in practice, staff identified their large-trader poptiations. Wle they were able to confirm that staff had used the Department’s 1993 guidance to reclassify their large-trader poptiation for the 1994-95 control year, the National Audit Office also found some variations to the practices contained in the guidance, The National Audit Ofice asked staff to report their assessments of risk for 526 designated large-traders, selected at random. Staff were asked to provide any additional information about the risks associated with the selected traders.
11 HMCUSTOMSAND EXCISE: CHECKING WGE-TWERS’ VAT LIMILITY
Hgure 5 The criteria for identi~ng large-traders
2001-5000 5001-10000 1.6
...... ?lQQQ!...... ------1.8 ----- 2 Uahifify Essentiallyone rate inputs and outputs 1.0 Mixed rate but simple tiabi[ty or simple retail schemes 1.3 Complex Iiabiliv m retail schemes 1.7 3 Partial Exempffon None 1.0 Simple one pot or stand method 1,1 Smple multi pot 1.3
Complex . . . 1.7...... - 4 Turnover (as per returns) per annum
The selesled weighings for each risk factor are molfiplied together to give an overall score. If the resulting score is five m more the trader is suitable for large-trader status
Soum: HM Customsand Bcise
12 HM CUSTOMSND EXCISE: CHECKING MRGE-TWERS’ VAT LWILI~
2.10 Local offices protided additional information about many of the 526 traders. In analysing this information, the National Audit Office found that a range of risk factors had influenced local offices’ decisions on the allocation of lwge-trader status. In 126 cases the overa~ risk factor score allocated by staff feUbelow the specified minimum threshold for large-trader status (pa~?~aph 2.5).
2.11 The National Audit Office analysed the reasons given by local staff for attributing large-trader status in these 126 cases and found that local staff may perceive some factors as more important than others in determining both the risk posed by the trader and the amount of resource needed to assure that risk adequately. For example, local staff cited some risk factors to which, although already contained in the Department’s guidance, they gave greater weight than was suggested (Figure 6).
Other
.iaMli~ 48°h or~anisafion~ 13“/0
Patial exemption 12%
So”ze: N8f/onalAdd Offices.wey of local offices, based on data received for 126Iarge-tradem
2,12 Mthmrgh the Department were satisfied that most large-traders had been properly designated, the National Audit Office found that many local offices surveyed by them had used additional factors. In total, local offices had identified 45 additional risk factors not prescribed in the Department’s guidance; these have been summarised into eight broad categories in Figure 7. The Department recognise that the use of additional factors may indicate that current guidance might be insufficient to identify all those for whom the “large-trader regime would be appropriate. They therefore started, in 1996, a retiew of existing guidance which takes into account local office practices. HM CUSTOMSAND EXCISE: CHECKING LARGE-TWERS’ VAT LIAOILITV
1.6 million 1800
❑ Large-traders 1600 ❑ Other traders 1400
e 1200 m = = 1000 = : 800 = = 600
400
200
0 o-1o 10-20 20-30 30-50 50-100 100-200 200-5000
Taxthroughput bands f million
So”ze: HM Customs and Excise, based on data fo, a pop”ladon of 1,397large.tmders drew” f,om se”eml databases
Notes: 1. The tax throughput shown is the sum of input tax and output tax for 1995-96 financiaiyear.
2. There are approximately 1.6 million tmdera with tax throughput of up to f 10 million and 2,400 traders with tax throughput in excess of f 10 million which are not allocated Iarge-trader status
2.20 The National Audit Office noted that there were 2,231 traders tith tax throughput of between f 10 milhon and f 50 miUion per year who were not aUocated large-trader status hy local offices. The Department have undertaken to review the status of all traders tith annual tax throughput in excess of f7 million, who are not currently classified as large, to determine whether any ofthese traders nowrequire enhancedaudit as large-traders.
Declassification 2.21 Following the application of the new guidance in Jtiy 1993 the number of of traders large-traders fell, as expected, from around 2,000 in 1993-94 to just over 1,400 in 1994-95. The National Audit Office found that iR several cases where large-trader status was no longer considered appropriate the traders had subsequently been assigned to individual oficers. Such traders were common to many of the offices visited by the National Audit Office and are referred to locally as “allocated”, “permanently held” or “Category 3“ traders. Futher investigation showed that some local offices have similar arrangements for auditing traders which have not previously been assessed as requirtig large-trader status, but are nonetheless larger and more complex than the typical general trader.
16
:.. .“...... HM CUSTOMSAND EXCISE: CHECKING WGE-THADERY VAT LWILI~
2.22 The audit of such traders is undertaken using resouces initia~y assigned to the local visit selection system trader poptiation. The Department rely on collectors’ judgments as to whether this represents the most cost effective use of resources, The Department are already revieting their guidance for gaining assurance on these cases.
Resowce 2,23 The Department aim to carry out soundy based risk assessments in each of deplo~ent tieir business areas and to allocate resources accordingly to achieve the best restits. Within the VATbusiness area, the collections bid for specific resources for large-trader work separately from their other resource bids.
2.24 The National Audit Office reviewed local office procedures for allocating resources to large-trader work and found that in some cases, resources were clearly allocated in the fight of known risks and in line with the Department’s strategic objectives; and others were based on previous deployment levels. In many cases, however, prioritisation in the use of resources led to adjustments being made to planned work. For example, this was the main reason for extending audit cycles from two to three years in eight of the 29 Category 1 large-trader case ffles examined.
2.25 The Department’s guidance to local offices does not provide specific advice on how to relate overall risk factor scores assigued to large-traders (paragraph 2.5) with the level of staff resources. The National Audit Office consider that, in general:
a) resource requirements wotid increase in fine with higher risk factor scores; and
h) traders assigned similar overall risk factor scores should be resourced to comparable levels.
This is subject to variations arising from the app~cation of local knowledge to refine the central risk analysis.
2.26 Using risk factor points information, gained from their sample of 526 large-traders and from trade class data extracted from the main VAT database, the National Audit Office analysed resource allocations made hy local offices. The analysis, undertaken using three different measures of risk, showed that there were some variations between collections in the resources which were deployed on the audit of large-traders assessed as presenting similar risks to the revenue:
17 HMCUSTOMSANDEXCISE: CHECKINGLARGE-TWERSVATLWILITV
(i) By overall central risk factor score Figure 9 shows the differences between confections in their planned use of audit sessions per overall risk factor point for the 526 traders sampled by the National Audit Ofice. For example, North West CoUection apply ahnost twice as much resource to their traders as Thames Valley Collection.
central England’-
Southern England’~
Thames ValleY:~
SOuth LOndOn& Thames ~
South East England’~
Eastern England ~
NO~hern England”~ Wales, the West & the Borders’~
Anglia ~
Scotland’~
London Central’~ Notih West , .....——____ ...... ———, 4 6 8 10 12 14 16 Average sessions plsnned per risk fscfor point
Souce: National A“dd office suwey of local offices
Note: 1. Nonhero Ireland data has bee” excluded because the small number of /argg.t[aders jn that C~//eCtfon prevents meaningful comparisons with other collections.
(ii) By traders of similar central risk Within the sample, 123 traders had been assi~ed risk factor scores of five or six - the lower end of the large-trader risk scale, Figure 10 shows that Wales, the West and the Borders Ccdfection planned to apply an average of 91 sessions of staff time per trader in 1995-96. London Central CoUection, on the other hand, allocated an average of 42 sessions per trader.
1s HM CUSTOMSWD EXCISE: CHECKING MGE-THABBRS, VAT LMBIL1~
London Central ~
South London & Thames
Southern England
Central England
Eastern England
Anglia
S0uthEastEn91and~
NO~hern En91and~~
Thames Valley _
N::::~ WaleatheWeat&the BOrders -~ ~~ 30 40 50 60 70 80 90 AUeragesessions planned in 1995-96
Source: rdat;onalAudit Off;.e s“wey of focal offices
Notes: 1. Average sessions planned are for large-traders scoting 5,0 to 6.99risk factor points. There were 123 such traders within the survey sample of 526 traders.
2. Northern Ireland data has been excluded because the small number of Iarge-tradem in that Collection prevents meaningful comparisons with other collections.
(iii) By specific trade class (local authorities) Local authorities formed the largest block of large-traders within a single trade class -158 traders. Rgure 11 compares the average audit sessions used per f Won of t= throughput for local authorities in 1995-96. It shows tide variations between co~ections in the level of resources judged necessary to gain assurance for each f of throughput. Resource usage ranged from 9.5 sessions per f mfion of tax throughput in North West CoUection to 2.3 sessions in South East England CoUection. Within a single trade class, however, tkoughput alone may not be a rehable guide to the audit effort reqtired as other factors such as complexity will dso have an effect.
19 ] HMCUSTOMSANDEXCISE: CHECKNG MGE-TMDERS VAT LIABILI~
South East England ‘D
Scotland’~
Anglia ~
Wales, the West & the Borders -~
SOuthernEn91and’~
Central England ‘~
London Central”~
Eastern England ‘~
Northern England “~
South London & Thames
Thames ValleY ‘~” ~ North West ——— 2 3 4 “5 6 ;“-”-”-”’”8 9 10 Average sesaiorra used in 1995-96 per f million lax throughput
So”xe: HM Customs and Excise
Note: 1. Notihern Ireland data has been excluded because the small number of large-traders in that Collection prevents meaningful comparisons with other collections.
2.27 The National Audit O~ce also found variations in reeowces applied to simflar traders within collections. Disparities in resouce deployment maybe expected, reflecting local office judgments of the differing circumstances of traders. Wide disparities, however, may suggest over or under assurance of traders at some offices, leadtig to inefficient use of resouces or the placing of excessive burdens on some traders. To try to minimise local variations in resource deployment, several collections have recendy undertaken strate~c retiews of theti large-trader work. The Department have yet to retiew the methods used hy local offices to relate resource deployment to risk on a national basis.
20 HM CUSTOMSAND EXCISE: CHECKING LARGE-TRADERS’ VAT LMBILI~
Part 3: UndertaHng large-trader audit
3.1 This Part of the Report examines the conduct of large-trader audit in practice, and is based on the National Audit Office’sanalysis of 60 trader fdes, responses to their questionnaire, and interviews with staff at 14 local ofices iu eight coUections.
Application of 3.2 To gain assurance about the VATfrom large-traders, Customs and Excise a systems examine traders’ VAT-relevant systems using system audit techniques. The based approach principles of this approach are that it shmdd be planned and performed so as to provide sufficient evidence to give reasonable assurance that traders are ftifd~ng their legal obhgations tith respect to the tax. The Department advise their staff that in most cases aU the main VAT-relevant syetems for Category 1 traders shotid be evaluated and tested within a two yew period, and over three years for Category 2 traders.
3.3 In reviewing the audit work undertaken by local offices the National Audit Office found that in 28 of the 60 cases examined staff had not ftily used the systems based approach to audit traders. Officers who had not used the apprOach stated that, in orgatisations such as local authorities and large mtiti-national companies, signiOcant risks often He outside the main accounting systems.
3.4 In some cases, the consideration of issues such as product or service Habfity, or group structure changes was, some staff beheved, of a higher priority than the evaluation of an VAT-related accmmtfig systems. In addition, the number of systems employed by some traders, and the frequency of changes to them, wmdd mean that aU the major systems might not be evaluated within the two year cycle recommended for Category 1 traders. In one case examined by the National Audit Office, for example, a large trader comprised some 160 subsidiary companies, with up to 30 of those companies moving into and out of the group every month. In view of the dynamic characteristics of the trader, local staff did not consider that a fti system based audit approach was appropriate, and concentrated their assurance effort on direct s~stantiation of the figures presented in individual VATreturns.
Guidance 3.5 In February 1995, the Department issued audit standards to all officers issued to responsible for large-trader assurance. This was a useful development in the assurance staff Department’s continuing efforts to improve the assurance gained. The standards were to be used, from Aprfl 1995, in conjunction with existing audit guidance, to ensure that au staff undertaking large-trader assurance work appfied sound auditing procedures. The audit standards cover the key stages of, and issues relating to, a systems based audit, namely
21 HM CUSTOMSAND EXCISE: CHECKING LARGE-TNERS’ VAT LNILI~
Plannhg the objectives of planning and the types of plans that shmdd be prepared;
ControRing tbe direction and supervision of staff involved in audit work and tbe retiew of audit work;
Recortig the purpose, nature and contents of the documentation of audit work which should be rettined in trader files:
Nature of etidencti the reason for collecting evidence and the natwe of the evidence to be retained;
Reporting md foUow-up requirements for officers to report theti conclusions about a trader’s systems to line managers, for notifying system weaknesses to traders and for ensming problems identified are followed-up;
Sttimg and fitimg general competencies required to undertake large-trader audit work and the requirement for a plamed training proWamme; and
Anditors’ respons~tity of dne care: standards of tite~ity and accmacy required of an auditor and the responsibility that management have in ensuring the work undertaken conforms to those standards,
3.6 Audit staff responsible for 28 of the 60 trader files examined befieved that the standmds had led to improved planning and documentation of thek work; for six of the trader files examined staff reported that they had not seen the audit standards; and in the remaining 26 cases staff had seen the standards but did not beheve that they had needed to amend their audit approach signiRcantly as a resnft.
Planning and 3.7 The audit standards require large-trader audit staff to prepare thee levels of controfing audit plans for their work: work . strate@e covering tbe complete two or three year cycle;
. periodic: covering the current financial year; and
. operatimsaf: covering a quarter or a spectilc audit task.
The standards fwther require that plans should be based on an assessment of risk requiring a thorough understanding of a trader’s operations, mess of high risk and any known problem areas.
3.8 Afthmsgh most files examined by the National Audit Office contained stiategic plans and risk assessments (Figure 12), in many of those cases these were limited to a list of systems to be examined without any recorded evaluations of the risks associated with them. In those cases where strate@c plans had been
22 HM CUSTOMSND EXCISE: CHECKING LARGE-TRADERS VAT LWILI~
Msk Assessments
1 I
Pedod/Annual Plans
OperatiOnalflaak Plans
o 10 20 30 40 50 60 70 80 90 100
Percentage of fi[ea examined
Source: Nafiona/Audir Office
prepared, some had not heen reviewed recentiy, or were undated, making it dlffictit to determine whether they were extant at the time of the National Audit Office review.
3.9 hnual or period plans were present in aU the trader fdes examined, and in ahuost aU cases planned audit objectives were allocated to particofar quarters. Many of these amual plans were subdivided tito individual quarterly plans, but in the main they did not amount to detafled operational or audit task plans. The National Audit Office found a few examples of plans detaihng the tasks for individual systems examinations (Figure 12).
3.10 The absence of good quahty risk assessments and strategic plans may detract from the preparation of periodic and operational plans and may undermine the effective management review of the plamed audit coverage of a trader’s VAT-related systems. The National Audit Office codd not therefore confirm that the audit plans addressed the key tisks in many cases examined by them. men asked about the absence of risk assessments, several case o~cers stated that they were confident that they knew where the key risks lay but were unconticed of the need always to document them.
3.11 The National Audit Office found that several local offices had researched risk assessment methodologies. The Department are evaluating these for issue as good practice ~idance in support of the audit standards.
23 HM CUSTOMSAND EXCISE: CHEC~NG LARGE-T~ERS VAT LWILI~
3.12 The National Audit Office found that planned work had not been completed h many of the cases examined. Reasons given, included:
. insufficient time planned for tasks;
. instificient resources available to meet planned time;
. changes to traders’ systems; and
● resources diverted to deal tith trader instigated enquiries or VATTribunal cases.
3.13 Work not undert~en in any one year was norm~y carried forward to the fo~oting year. Where this was not possible, perhaps because of prioritisation in tbe use of resources, VATfloting through unaudited systems might not be audited as origindy planned.
Continuity of 3.14 In 30 of the 60 cases examined by the National Audit Office, responsibtity for assurance the trader had transferred tithln tbe pretious WO years. In 23 cases staff said that the file documentation was insufficient for them to proceed directly with the planned work; in 18 of these cases staff had needed to do significant work on the files. This may also resdt in addltiond burdens on individual traders. Complete planning documentation was not always etident from the National Audit Office examination of trader files (Figure 12 shove).
3.15 The issue of turnover among large-trader officers was a concern of some trader representatives interviewed by the National Audit Office. In these cases, they perceived that the Department’s handover arrsmgements were insufficient, For example, new officers raised queries about accounting systems which had already heen raised by their predecessors, and previously agreed tisits had sometimes to be deferred.
3.16 The Department have developed documentation comprising standard scheddes and work programmed specifically for large-trader audit work. The Department recognise, however, that the standard documentation may not he appropriate in all circumstances. Staff may therefore adapt it to meet their own needs, provided always that they ensure that case ffles include the information required, if in a different format. The standard of the documentation used is very important, partictiarly when responsibfity for the assurance of a trader is transferred from one officer to another,
QuaUty of 3.17 The level of testing of individual transactions, invoices and other trader work records shotid be determined by an officer’s assessment of the security and undertaken accuracy of the system. A poor system wotid require a high degree of subsequent testing, whereas a secure system tith appropriate key controls wotid require a correspondingly lower level of testing. Clearly documented evaluations of the systems reviewed hy local staff are therefore pre-requisites to informed decisions about tbe appropriate level of detailed testing required to achieve satisfactory assurance of the revenue.
24 HM CUSTOMSAND EXCISE: CHECKING MGE-TWERY VAT LMILI~
3.18 In some cases, where a systems based audit approach had been adopted, staff had not recorded detatis of the work undertaken or their conclusions about the acceptabfity of the systems reviewed. In addition, there was insufficient explanation of the bases for the selection of the popdation which was tested or the sample method used in any of tbe cases examined. Staff stated that they had drawn upon their previous experience of the trader and of the systems examined to select their transaction samples.
3.19 In some offices staff employed computer assisted autit techniques to select test samples in a manner which meant that they cotid test large numbers of transactions for anomahes such as duphcate transactions or high value items. Such computer techniques, which me being used increasingly by staff, are a valuable tid to their assurance work. Tbe National Audit Office found that they were not always being used in association with systems based auditing techniques. This may restit in staff not obtaining assurance about the adequacy of system controls.
3.20 In many of the casee examined by the National Audit Office, there was not enough evidence Hnking the evaluation of the system and the amount of testing undertaken. In many cases where staff perceived systems to be weak, samples t&en were not sufficient to enable them to determine tbe probable impact on the trader’s declared Eabfity. TMs may indicate that some officers have insufficient understanding of tbe app~cation of sampfing techniques and that further guidance is needed.
3.21 The Department are revieting the audit-etandards, as planned, and intend to issue additional guidance in 1997, which W provide further assistance to large-trader audit staff.
Control of 3.22 Groups of companies may present increased opportunities for tax avoidance self-accounting and dso an increased risk of error if a large number of accounting systems branches and are used. VAT Groups 3.23 Many of the largest traders in the country have subsidiary companies or divisions within the same VATregistration which prepare their own VAT figures for inclusion in an overaU VATreturn. There are over 13,000 of these “seM-accounting branches”, of which the vast majority are autited by the Department under local visit selection arrangements. In 360 cases, however, the branches’ systems are sufficiently large and complex to have been aflocated large-trader status in their own right.
3.24 Work to obtain assurance on VATgroups operating from mtitiple sites maybe carried out by staff from more than one local office. Co-ordination of the Department’s work to obtain assurance about VATgroups is the responsibfity of those staff who audit the trader’s head office or main accounting centre. For some of the largest traders head office staff orgatise annual seminars to co-ordinate the assurance effort for the group and prepare periodic newsletters for the information of other staff involved in auditing tbe group. The head office staff also agree annual plans and resourcing for the work to be carried out across the group.
I HMCUSTOMSANDEXCISE: CHEC~NG WGE-TRADERS’ VAT LNIUTV
3.25 Current guidance already provides for co-operation between co~ections. AD visits by brancb audit officers sbmdd be carried out to the agreed plans. Local management are responsible for reviewing the quality of the work done, but co-ordinating staff should work in close conjunction with the visiting staff. Of the 360 branches which have been allocated large-trader status in their own right, 185 were audited by staff who were not co-located with those who were responsible for auditing the head office or principal place of business of the trader. The National Audit Office found that audit work on parts of a group carried out by other local offices was sometimes less than planned because of local priorities.
3.26 In one case, for example, until 1993, the head office of a major construction company with many large branches throughout the United Mngdom was audited by a single officer in a local office. The officer used about 60 half-day sessions a year.
3.27 In 1993, the Department transferred responsibihty to a Regional Large Trader Control Unit and a team of oficers was assigned to work on the trader. The team found that the available information on the company’s structure and activities at different locations was inadequate and that branch visits had been carried out without any consideration of the risks posed by the group as a whole, The team arranged for the transfer of responsibihty for certain key branches from another local office to a different regional unit.
3.28 The team used 500 half-day sessions in 1995-96 on the trader’s head office activities and on co-ordinating the audit strategy for the whole group, and sessions spent on the key branches dso increased. Nthough the team were satisfied that they had obtained improved assurance about the group as a whole, they remained concerned that staff responsible for some branches had not carried out planned work because of the priorities set by their local management.
Quatity control 3.29 ~nual assurance certificates are the principal means (in addition to internal audit) by which the Department obtain assurance from co~ectors as to the quafity of local office work, They are based on reports from ~ie managers and collection assurance teams. The National Audit Office found that the prescribed content of collectors’ assurance certificates does not routinely include specific reference to large-trader assurance. The Department plan to review the nature and content of assurance certificates affecting compliance, including the coverage of large-trader assurance.
3.30 Existing audit standards require local offices to estab~sh appropriate quahty control arrangements. Analysis of responses to the National Audit Office ~estionnaire showed that at 42 of the 98 local offices responsible for lwge-traders quahty control arrangements were not formahsed.
Staff training 3.31 Value Added Tax is a complex tax and, to ensure that large-traders are pa@g and experience the right tax at the right time officers must be fatiar with VATlaw and its interpretation as well as possessing auditing and accounting s~s. The
26 HM CUSTOMSAND EXCISE: CHECKING MGE-TWDERY VAT LIADILITV
National Audit Office fomd that the Department generaUy employed their more experienced staff on large-trader work. Some 88 per cent of such staff had worked on VATfor more than five yews and nearly half of those had more than five years experience of large-trader work.
3.32 The Department require aU staff responsible for ths work to nndertake additional training on audit and accountancy. The current training protided for staff responsible for large-trader work was introduced in 1995. The Department intend to constit staff about the effectiveness of ttis training after an appropriate interval, but early feedback indicates that the course is meeting the needs of officers. The course comprises a combination of guided learning modufes and residential training covering the following topics:
. Understanding financial statements;
. Planting
. Analytical retiew,
e Systems evaluation;
. Samphng and computer assisted audit tec~ques;
. Action planning
. Tax plating
. Audit management.
The course covers a total of 28 days and has no final examtiation or test of competence, although trainees uudertake assessment tests foUoting completion of the guided Iearuing modnfes and prior to the residential phase. Any weahesses identified are advised to the trainee to enable them to complete further study. Staff may also volunteer for speciahst training in computer audit.
3.33 The perception of some trader representatives interviewed by the National Audit Office was that some officers lacked aU the necessary auditing skiUs. In addition, some trader representatives considered that some officers were not sufficiently weU versed in the law, tending to rely on the Department’s own guidance. In the opinion of some trader representatives, this may lead to the Department’s decisions being contested before VATTribunals. Other representatives, however, perceived an improvement in this area, tith a number of officers taking relevant examinations.
3.34 The National Audit Ofice questionnaire showed that half of the large-trader staff surveyed had received additional tratilng in computer audit and computerised data interrogation techniques (Figure 13). In two offices visited by the National Audit Office, managers ensured that aU staff involved in HMCUSTOMSANDEXCISE: CHECKNG LARGE-TMERS’ VAT LMILI~
Advanced Accountancy
Computer Audit and Advanced Accountancy 22”/.
Computer Autit 31“h
Source: National Audit Ofice s“r”Gy, based o“ data on 986 officem
large-trader work received training in computer systems audit techniques. In all the cases retiewed by the National Audit Office, traders had computerised accounting systems,
3.35 N the staff interviewed had undertaken the large VATtrader training course; for one-third of them this was more than five years ago. Nthough few staff had received update training, the Department are currentfy underttig a review of the needs of existing staff for update training, On further training needs, roughfy one-third of the 53 staff interviewed by the National Audit Office would Eke training in VATlaw. One-third of the staff interviewed also expressed an interest in undertaking a relevant professional WaUfication. Figure 14 summarises the resdts of staff interviews on training needs.
3.36 The Department expect that changes already made in the training avaflable should lead to improvements for new large-trader staff. In addition, the Department are identifying the key competencies required for specfic jobs and ti consider whether professional qualifications or accreditation @ support the achievement of job standards once these have been set. In October 1996, the Depwtment announced that they would work tith the Chartered Institute of Taxation to produce advanced tectilcd training for local staff.
28 HMCUSTOMSND EXCISE: CHEC~NG MGE-TWERY VAT LWILI~
~--_.:–...,y..._...y. .:...... _ .—.. — ...——— —..
! ‘Hgure 14 Percentage of staff inlewiewed who. expressed an interest in specialised ~~ training
Types of training
Systems BasedAudit
Ana[~cal Review _’ ,’... i: “ ,~1
Processional Quatiflcation
Vat Law
Computerised Data Analysis Techniques
o 10 20 30 40 50
Staffirrtewiewed were irderesfed in a variety of types of training relevant 10their work. The Deparfmeot are reviewing their training needs.
Source: National Audit Office, based on in(emiews wifh 53 staff at 14 offices
/ 29 HMCUSTOMSANDEXCISE: CHECHNG LARGE-TRADERS’ VAT LWILIH
Part 4: Measuring the success of large-trader work
4,1 This part of the Report considers the Department’s cmrent approach to performance measurement, including the suitabih~ and rehabtity of the management information avaflable.
Performance 4.2 The Department have one overarching objective for their work in the field of measurement VATcollection, which is to collect “the right tax at the right time”. AR other objectives support th]s principal objective. Secondary objectives include such aims as applying resources in tine with risk, meeting the needs of the @ader, and gaining assurance about the revenues co~ected md the abfity of traders’ accounting systems to produce the right tax at the right time.
4.3 One of the dl~ctities that the Department face in assessing their performance in the VATfield is that they do not know what the right tax is. They have developed a tax yield indicator which is a comph~ce tiend indicator and measures the relative movement in comphance of certain soups of traders. The model depends upon identif@g simRw poptiations of tiaders, judged either compliant or non-comphant, and comparing the tax yield from the two poptiations. To make such comparisons statistically vafid it is necessary to examine data on a large number of traders with very similar characteristics. The large-trader population, however, is neither large nor homogeneous enough to permit this type of analysis.
4.4 In the Department’s view, underdeclwations are not a good measwe of thek success as they do not know the expected tax yield and cannot therefore measme the proportion of the underdeclared tax they are coUecting. The Department feel that the past emphasis on underdeclwations led officers, in some cases, to concentrate on specific areas of work where they knew that they were Kkely to find errors, to the detriment of audit coverage as a whole. They also suspect that setting underdeclarations as targets might have discowaged their oficers from educating haders on how to get the VATright fist time.
4.5 The Department do not distinguish between large-traders ad other traders in their published performance measmes. Before 1995-96, the Department measured their success in auditing the trader poptiation as a whole in terms of misdeclarations of tax identified as a restit of the assmance proWamme. In 1995-96, the Department introduced performsmce measures based on tisits to reflect the strate~ of proWessively excluding from tbe pro~amme comptiant traders. Thus their key measmes are now the average value of net errors per visit and the percentage of visits on which net errors are found,
30 HMCUSTOMSANDEXCISE CHEC~NG LARGE-TMERS VAT L~ILITV
4.6 The National Audit Office do not consider, however, that these measwes are stitable performance indicators for large-trader assorance work, or that the restits from large-traders shoofd he combined with those from local visit selection traders in the Department’s ptihshed performance data. Under large-trader assurance arrangements the trader is visited several times within the year in a p~mmed programme. In these circumstances, a measure which is based on the number of tisits to traders each year seems inappropriate, since the resofts maybe easfly altered by redefining visit length. The National Audk Office feud that there was wide variation in the length of a visit recorded on the Department’s work retorn system for large-traders. In April 1996 the Department asked large-trader officers to open and close visits on the work retwn system quarterly.
4.7 The inclusion of large-trader resdts in the average value of net errors per tisit measure in particofar makes it less easy to determine the success of the risk-based visiting programme for the general trader poptiation. This is because large-trader work can identify large errors which outweigh smaller but more frequent errors identiiled at local visit selection traders. There is less effect on the percentage of visits on which errors are found, as the overa~ nmnher of visits to large-traders is smaU in proportion to the number of tisits to the general trader population.
4.8 At present there are no specific measues of performance for large-trader asswance work. The Department’s intended performance measure on large-trader work is that officers shmdd conform with the audit standards issued in Aprif 1995 (paraWaph 3.5). The Department expect collectors to assme performance against the audit standards. Tbe National Audit Office fomd that many local offices use the nmher of half-day sessions planned and spent by staff on these audik to indicate satisfactory performance.
Management 4.9 The main management information tool relevant to large-trader work is tbe information analysis and planning system (the Visit Analysis and VATOperational Planning System) which was implemented in Aprif 1988. This system is a combined planning, work return and performance recording system. Information from officers’ work returns feeds into a visits database which records trader-specific visit information, and a measores database which records achievement in terms of additional Eabihty, cost and staff time, In addition, some information from the analysis and planning system (for example, visit information) also feeds into the local visit selection system database.
4.10 The design of the analysis and planning system predated developments in large-trader work. For example, at present the system cannot record whether a trader is in Category 1 or Category 2. There is also no separate code for trade sector co-ordination work and officers nndertaklng such work spread this time between their assigned traders. It is therefore not cnrrently possible at a national level to assess how much effort trade sector co-ordination involves.
31 HMCUSTOMSAND EXCISE: CHECHNG LARGE-TWERS’ VAT LWILI~
4.11 &y errors in the analysis and plmg system are comected by local tiput. The National Audit Office selected the traders for thek suvey &om this system, using a report from the measwes database which recorded large-trader work, Replies from local offices showed that tiee per cent of entries on the report were either deregistered traders or the VATregistration nuber was incorrectly recorded, and seven per cent of the traders had not actually been assigned lmge-tiader status by the local office.
4.12 In carrying out their work, the National Audit Office fomd that the three databases described at para~aph 4,9 above were not tiy reconcflahle and record different, and overlapping, large-trader poptiations. The different n~bers and somces of lwge-trader tiformation are shorn in Fi~e 15. The National Audit O~ce identied 1,397 traders common to W thee databases.
Figure 15: The large-trader populaUon
Organisation source Information source Number of Iarge-tradsra NationalAudit OfOce Survey of local OMces 1,545 NationalAudit OfOce Analytic of VAVOPSwork return report 1,750 HM Customs and Excise Local Mait Selectioncyctem database 1,646 HM Customs and Excise Traderdatabase 1,444 HM Cuctomc and Excise VAVOPSmeasuresdatabase 1,534
At present,tbe available sources of informationon the large-traderpopulationdo notagrae completely.From April 1997, the Department expectto be able to resolvethis.
Notes: 1. VAVOPS is the Wsit An8&sis and VAT Opemtiorral Plannfng System.
2. The Natforral Audit Office ana~sis of the VAVOPS wok return npofl counted all traders fisted where more than 12 half-day sessions coded to Iarge-tmder assurance had been used in 1995-96.
4.13 As a restit of changes that the Department are making to thek computerised ansdysis and plaming systems, they expect, from April 1997, to be able to distin~ish between large-traders and the general tiader poptiation witi theti current performance measurea. In addition, they plan to develop tbek managementinformationsystemsso as to protide further analysesof performance data on large-trader asswance and ensue that fti, consistent and timely itiormation is avatiable for the use of Departmental managers.
32 HMCUSTOMSANDEXCISE: CHEC~NG MGE-TMERS VAT LIABILI~
Glossary
Additional Uabfity Amounts of tax revenue additional to amouuts declined through the trader return system and the voluntary disclos~e system.
Assessment An action taken by HM Customs and Excise to notify a trader of additional tax due from, or to, the trader.
Assurance The degree to which HM Customs and Excise are satisfied that a trader’s VAT retuns are correct.
Audit/work cycle:. The period over which HM Customs and Excise seek to assure the VAT accounting systems of a large-trader.
General trade~ Any VATregistered trader which is not classified by HM Customs and Excise as a large-trader.
Gross additional The total amount of additional Eabtity in favonr of HM Customs and Excise. habfity
Net additiond The amount of additional Eabfity in favour of HM Customs and Excise less the KabOity amount in favour of the trader.
Overdeclarations: The amount of tax revenue which the trader bas declared on tax returns which is not properly due to HM Customs and Excise for any reason.
Systems based anditi An audit technique based on assessing the integrity of a trader’s key VAT-related accounting systems, rather than the accuacy of individual transactions.
Tax tbroughpnti The total tax flowing through a trader in a financial year; the sum of input tax and output tax.
Underdeclarations: The amount of tax revenue which the trader has fafied to declare on tax returns which is properly due to HM Customs and Excise for any reason.
VAT ~onp A ~oup of co-owned compaties whch make a joint VATretmn of thek Habilities,
Voluntary disclosure: A declaration made by a trader of an underdeclaration or overdeclaration of VATdiscovered by the trader. HMCUSTOMSAND EXCISE CHECKING MRGE-T~ERS’ VAT LI~ILIW
Appendix A
Local offices tisited by the National Audit Office
hgha CoUection Colchester local office
Eastern England CoUection Derby local office Derby Regional Large Trader Control Utit
London Central CoUection City local ofHce London Large Trader Group
Northern England CoUection Washington Large Nader Single Team Unit Washington local office
North West CoUection Manchester local office North West Region Large Trader Ditision
Scotlmd CoUection Edinburgh Large Trader Single Team Unit Edinburgh local office
South London and Thames CoUection Croydon local office
Wales, the West and the Borders CoUection Bristol local office South Wales and Borders Large Trader Unit
34 HM CUSTOMSAND EXCISE: CHECKING MGE-TWDERS’ VAT LMBILI~
Appendix B
Traders’ organisations constited by the National Audit Office
British Baders’ Association
British Property Federation
British Retafl Consortium
Confederation of British Industry
VATin Industiy Group
) 35