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Millions lost in foul-up by Revenue

Penny pinching on new computer systems by the Inland Revenue has cost the government "many millions" of pounds in lost tax revenues, according to a damning report to be published today by the National Audit Office.

It also revealed that a huge number of irregularities in the pay as you earn (PAYE) system, which collected pounds 105bn of tax in 1995-96, were uncovered during checks by Revenue investigators. Irregularities were uncovered in more than 76 per cent of the the 54,156 employers whose tax assessments were reviewed and brought pounds 290m into government coffers in the form of unpaid tax, national insurance contributions and interest penalties.

The NAO reserved its strongest criticism for the Inland Revenue's decision in the early 1990s not to spend pounds 20,000 on a "simple" national database of employers. As a result of the decision local compliance units, which check companies' tax assessments, have been hampered by unnecessary duplication of information.

The report found experiments by the Revenue in building local versions of the database had raised the yield of investigators by 219 per cent in one case and 22 per cent in another. Had yields gone up by just 1 per cent across the UK it would have raised pounds 2.5m in additional taxes. The new computers in the trials had slashed the amount of time wasted by Revenue staff in finding productive cases to review.

Yet instead of building a temporary national system for some pounds 20,000, the Revenue waited to construct a much wider compliance computer system, at a cost of pounds 6.9m, which is not due to start work until April 1998. Worse still, according to the NAO, the Revenue "felt unable to estimate" how much tax had been lost because of the delay.

Though the compliance teams recovered pounds 6 in unpaid tax for every pounds 1 spent by the Revenue last year, the NAO also found widespread discrepancies between regions and occupations. The proportion of employers visited varied between different trades, though in many cases the level of irregularities uncovered was the same.

Just 25 per cent of employers in the construction industry were reviewed in 1995-96, though 80 per cent of the spot checks uncovered non-compliance with PAYE rules. In contrast 62 per cent of mechanical engineering employers' assessments had been reviewed, though they uncovered virtually the same proportion of irregularities. On average each review carried out recovered pounds 4,300 in unpaid taxes.

Surprisingly, the NAO found fish and chip shops beat accountants as the most law abiding occupations, though irregularities were still discovered in 54 per cent of reviews.

The building industryemerged with its reputation as the biggest tax dodger intact. The worst offenders were equipment hire businesses, where 89 per cent of checks found irregularities, followed by civil engineering contractors and draughtsmen.