5 key risks confronting HMRC
By Donald Drysdale for ICAS
25 January 2018
There are few surprises in the latest report on HMRC’s performance in 2016/17, but Donald Drysdale finds that there is much to be done.
“Taxpayers must not suffer”
In November an article questioned how HMRC would cope. Given the pressures confronting them, the Autumn Budget might have been the last straw.
Wide-ranging concerns are expressed in a report out this month from the House of Commons Public Accounts Committee (PAC). It examines HMRC’s performance in 2016/17, and demands that taxpayers must not suffer as HMRC face tough decisions on the future.
HMRC transformation
The report concludes that HMRC’s much-publicised transformation is not deliverable as planned, owing to unrealistic assumptions made and a potential 15% extra workload from projects relating to Brexit. HMRC admitted that it was not credible to continue with their transformation programme as it was, and that it would have been less risky had they not tried to do everything at the same time.
HMRC plan to re-prioritise their programme by March and then advise ministers on what should be delayed or stopped. The PAC calls on HMRC to report back in April, with clear plans on how they will manage the many challenges arising from Brexit and their ongoing transformation projects. It asked them to update their assumptions and forecasts for the transformation, particularly those concerning demand for their various services.
Contrary to earlier advice from the PAC, HMRC have continued to negotiate predominantly 25-year leases without break clauses for their new regional centres. The PAC is not convinced that HMRC will obtain value for money from these, and calls for greater flexibility. It criticises HMRC for poor negotiating, and for failing to recognise the possibility of massive changes in business technology and tax administration over the next quarter-century.
HMRC service standards
HMRC employ 25,000 staff to deal with taxpayers and agents by telephone, post and online. The future quality of this service will depend on further funding currently being sought from HM Treasury.
A key assumption HMRC made in 2015 was that pressure on their phone contact centres would reduce as more digital services were introduced. However, in 2016/17 the number of calls increased by 8 million.
Based on the early months of 2017/18, HMRC expect reductions in the number of calls. However, they couldn’t assure the PAC that call centre staff numbers would be maintained until it was certain that demand for their services had reduced. This is potentially bad news for taxpayers and agents alike.
HMRC are criticised for how they measure call-handling performance. Claims of calls being answered after an average 4½ minutes waiting time concealed the fact that they measured this from when the automated messages end – which themselves could take up to 4 minutes. To add insult to injury, HMRC’s statistics assume that all callers who hang up during the automated messaging have had their query resolved!
HMRC claimed that an acceptable average speed to answer phone calls would be 5 minutes – including the automated messages. The PAC recommends that this be adopted as a target within a new set of measures that better reflect the actual experience of callers.
The PAC dislikes the disparity of service given to high-net-worth taxpayers compared with others – especially the vulnerable. It warns of potential risks to service standards in future, and calls on HMRC to deliver a consistent and reasonable level of service to all.
Tax credits
According to HMRC, error and fraud increased spending on tax credits by 4.8% in 2014/15. For 2015/16 this had worsened to 5.5%, equating to £210 million underpaid and a massive £1.57 billion overpaid. HMRC expect the rate to rise to 7% or 8% – well above their target of 5%.
HMRC blame the deterioration on several factors. First they cite a reduction in staff tackling error and fraud following the end of their controversial out-sourcing contract with Concentrix. HM Treasury decided not to replace the Concentrix costs in HMRC’s budget, nor to fund the £34 million cost of replacing lost staff which (on HMRC’s estimates) should have prevented fraud and error of £120 million.
Second, HMRC blamed the introduction in 2015 of a new test requiring self-employed claimants to show they are carrying on an organised and regular business on a commercial basis with a view to profit. This test reduced tax credits pay-outs by more than £500 million a year, but was expected to increase the fraud and error rate by 1%.
Third, HMRC explained that the migration to Universal Credit, which moves tax credit cases to the Department for Work and Pensions (DWP), is transferring the most straightforward cases first – leaving HMRC with a higher proportion of complex claims.
The PAC expresses particular concerns about how HMRC will work with the DWP to manage the transition of vulnerable people from tax credits to Universal Credit, and how such claimants will be protected from the DWP’s greater powers to reclaim overpayments due to error and fraud.
Tax avoidance and evasion
HMRC attributed almost half the tax gap to SMEs, and believed that several measures would address this sector – notably, introducing Making Tax Digital (MTD) for business, and working more closely with tax agents and online marketplaces. The PAC calls on HMRC to set target levels for reducing the tax gap, including for the SME sector, and to explain how they will be more responsive to emerging risks.
The Panama Papers, published in April 2016, have resulted so far in 66 criminal or civil investigations, expected to raise tax of £100 million.
The report refers to potentially serious allegations of tax evasion and avoidance arising from the Paradise Papers and calls on HMRC to obtain information from these as soon as possible. However, the PAC expresses doubt as to whether HMRC has sufficient resources to deal with the full scale of the recent allegations.
Brexit
The report says little directly about Brexit, largely because the PAC had addressed key concerns in Brexit and the future of Customs published in November.
That earlier report concluded that it would be catastrophic if HMRC’s new customs system is not ready in time to cope with a possible five-fold increase in customs declarations, and if there is no viable fall-back option. A failed customs system could lead to huge disruption for businesses.
The PAC acknowledged that uncertainty regarding the outcome of UK-EU negotiations is a complicating factor, but it should not be used by HMRC to avoid taking action – particularly scaling up the existing customs service, ensuring a viable contingency plan is in place, and communicating with traders.
Conclusion
We are often quick to criticise HMRC and other public sector bodies, with comments such as “a private sector business would never operate in that way”. Doubtless such an accusation could be made now, but Brexit adds a different slant and serves as a timely reminder of the importance of public services which are properly funded.
The actions or inactions of politicians and governments, not only in the UK but also across the EU, have introduced huge uncertainties for businesses and HMRC alike. HMRC must clearly sort out their priorities as a matter of urgency and abandon or suspend non-essential projects. And they must also receive the political support and funding they require – for if they don’t they may be powerless to continue administering the UK tax system in the way we expect of them.
Article supplied by Taxing Words Ltd