In a report published today the Public Accounts Committee says
“HMRC’s unambitious plans” for recovering a total of £6 billion
it estimates it spent incorrectly in COVID-19 support payments –
whether through fraud or mistakes - could lead to “government
writing off at least £4 billion”taxpayers’ money. The PAC says
this “risks rewarding the unscrupulous and sending a message that
HMRC is soft on fraud”.
The Committee says “yet again customer service has collapsed and
HMRC’s recovery plans are not clear”, and it is extremely
concerned about HMRC’s capacity to clear backlogs while tackling
the “avalanche of error and fraud it now faces on the COVID-19
schemes”.
The report describes a litany of longstanding PAC concerns in
HMRC’s fulfilment of its most basic remit of collecting tax owed
including notresponding adequately to tax avoidance schemes,
failing on implementing or realising benefits from the ‘Making
Tax Digital’ and other long-term transformation ambitions and
programmes, and being without “a convincing plan for restoring
compliance activity back to pre-pandemic levels”.
The Committee also says HMRC simply doesn’t know why the cost of
key tax reliefs has increased, or how much of that is due to
abuse.
, Chair of the Public Accounts Committee,
said: “The PAC is concerned about how long HMRC will be
playing catchup to get back to revenue collection levels before
the pandemic.
“Every taxpayers’ pound lost to a fraudster will lead to honest
ordinary people feeling the post-pandemic pinch harder and
harder.”
PAC report conclusions and
recommendations
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HMRC’s unambitious plans for recovering overpayments of
COVID-19 support could lead to government writing off at least
£4 billion. HMRC currently estimates that error and
fraud across its main COVID-19 grant schemes totalled nearly
£6 billion in 2020-21. HMRC is focusing on egregious abuse and
it is currently planning that most recovery action will stop at
the end of 2022-23. It only expects to recover around £2
billion of the £6 billion it currently estimates has been lost
to error and fraud in 2020-21. Losses are likely to be even
greater as it has not yet published estimates of error and
fraud in 2021-22. HMRC will have a better understanding in 2022
of the level of error and fraud once it has investigated a
sample of furlough payments and examined 2020-21
self-assessment tax returns. HMRC’s approach to recovering
fraudulent payments sends the wrong signals and risks
encouraging abuse of tax and grant systems in the future.
Recommendation: HMRC needs to take a number of actions to
reassure parliament and the public that it is serious about
tackling error and fraud from the COVID-19 support schemes and is
taking all recovery action where it is cost effective to do so.
Alongside its Treasury Minute response to this report, HMRC
should write to the Committee setting out:
- the analysis it has undertaken, including the costs and
benefits, in determining the amount it plans to spend on
recovering error and fraud;
- whether its plans mean that it will have pursued all error
and fraud where money recovered should exceed the cost which HMRC
would incur in doing so;
- where further action would be cost-effective, commit to
recovering more of the support payments lost through error and
fraud and set out how this will be done;
- commit to reassessing whether its plans are sufficiently
ambitious, once it has improved its estimates of error and fraud
in 2022.
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HMRC does not understand the reasons for the growth in
the cost of research and development tax reliefs including how
much is due to abuse. The cost of research and
development (R&D) tax reliefs has grown by 240% over the
last four years, with claims exceeding forecasts. Over this
period R&D expenditure used to claim reliefs has grown at a
much faster rate than UK R&D expenditure reported by the
Office for National Statistics. HMRC does not know why the cost
of R&D tax reliefs has grown so much. Research and
development reliefs are complex and open up opportunities for
abuse. HMRC estimates error and fraud was £336 million in
2020-21, up £25 million from 2019-20. The C&AG considered
the level of error and fraud estimated by HMRC to be material
and qualified his regularity opinion in 2020-21 for the second
year in a row. However, the actual level of error and fraud
could be much bigger as HMRC’s estimates involve a considerable
amount of judgement. HMRC needs a better understanding of the
nature of error and fraud in R&D tax reliefs. It is
planning to examine a random sample of claims to improve its
estimates of error and fraud and has increased the compliance
resources it uses to check R&D relief claims. The
government is planning to make changes to the reliefs with the
aim of improving how they are targeted and protected from
abuse.
Recommendation: HMRC should, in its Treasury Minute
response, set down:
- how it will improve its understanding of the cost of research
and development tax reliefs; and
- the reduction in the level of error and fraud it is seeking
together with how and when that will happen. This should include
clear milestones for this Committee to monitor.
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HMRC does not have a convincing plan for restoring
compliance activity back to pre-pandemic levels. In
response to the pandemic, HMRC suspended some of its compliance
work in 2020-21 where taxpayers could not cope with inquiries,
and because it needed to redeploy staff. The number of
compliance investigations which HMRC opened and closed in the
year fell, which has led to a backlog of deferred cases. The
Committee expects HMRC to fully investigate this backlog of
cases and not leave them unchecked. HMRC told us that the
action it took in 2020-21 would lead to a deferral rather than
a loss of tax as tax legislation allows it to go back to
earlier years where it finds non-compliance. HMRC expects
compliance activity to get back to normal levels and timelines
in 2022-23, but did not explain how this would be possible if
it was clearing the backlog of cases at the same time. HMRC
tracks compliance yield to measure the effectiveness of its
compliance and enforcement activities. It considers yield will
get back on “even keel” in 2022-23. It will need to identify
and separate out the yield from deferred cases and new
investigations if it is to fully understand and explain its
performance.
Recommendation: HMRC should, alongside its Treasury Minute
response, set out:
- how and by when it will have eliminated the backlog of
compliance cases; and
- how it will report its performance on deferred cases and new
cases, so fair comparisons can be made with its pre-pandemic
performance levels.
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Resource constraints are limiting HMRC’s ability to get
the optimum level of compliance yield. Compliance
yield represents the additional revenues that HMRC considers it
has generated and the revenue losses it has prevented through
its enforcement and compliance activities. HMRC spent around
£1.5 billion on such activities in 2020-21 and generated a
yield of £30.4 billion. HMRC’s data indicate that it would
increase this yield if it spent more on compliance,
particularly if it increased its activities to ensure large
business complied with their tax obligations. On average HMRC
generates £17 of compliance yield for each £1 it spends, with
returns from its large business activity at £60 to £1. HMRC
told us that marginal rates of return from additional
compliance resources would be lower than average rates. It also
said it constantly adjusts the resource it applies to different
areas of its business, based on both expected yield and risks
that need to be managed. We understand from HMRC’s evidence
that the 2021 Spending Review gave it an additional £180
million over three years for “spend to raise”, of which £90
million is to come in 2024-25. The additional funding in
2024-25 is equivalent to 2% of HMRC’s total running costs in
2020-21.
Recommendation: HMRC should, in its Treasury Minute
response, set out:
- its analysis, including the costs and benefits, in
determining the overall size of its compliance programme; and
- an assessment of the extent to which additional spending
would lead to any further increase in tax revenue.
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It is too easy for taxpayers to be unwittingly lured
into tax avoidance schemes. HMRC introduced the loan
charge in 2019 to recoup tax from people who used ‘disguised
remuneration’ schemes to avoid tax. The
imposition of the loan charge on taxpayers who were unknowingly
sold an unlawful scheme by unscrupulous tax agents has led to
some being financially damaged. HMRC’s strategy for tackling
tax avoidance is two-pronged. It wants to reduce the supply of,
and demand for, avoidance schemes. It said there are now 20 to
30 unscrupulous promoters of tax avoidance schemes, most of
which relate to employment taxes. These promoters are mainly
based outside the UK and have complex organisational structures
which make them more difficult to investigate. However, HMRC
considers it has sufficient powers to tackle promoters of
avoidance schemes. On the demand side, HMRC is trying a new
approach to identify and alert users of avoidance schemes and
offer them help to get out. We welcome this change in approach,
and HMRC should develop it by helping taxpayers not to enter
into the schemes in the first place.
Recommendation: To reduce the risk of taxpayers getting
involved in tax avoidance schemes, HMRC should, in its Treasury
Minute response, set down how it will make it easier for
taxpayers to identify illegal schemes and the unscrupulous tax
agents who promote them.
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Yet again customer service has collapsed and HMRC’s
recovery plans are not clear. For over a decade this
Committee has repeatedly reported on HMRC’s inadequate levels
of customer service. Following an examination by this Committee
in 2016, HMRC’s customer service improved, but since 2017-18 it
has been declining. The decline in performance accelerated in
2020-21 as HMRC diverted resources to its COVID-19 response and
UK’s transition from the EU. HMRC told us that its call
handling performance had improved in 2021-22, but there were
still long delays in responding to correspondence. Since HMRC
was established in 2005, its staffing levels have reduced by
around 40%. HMRC told us that its customer service resources
had been reducing over time and that it was resourced to give a
“decent” rather than a “brilliant” service. HMRC’s strategy for
customer service is to discourage the type of calls that do not
change people’s tax outcomes or move such calls online. We are
concerned whether this strategy is deliverable. As the
Committee reported in 2016, HMRC tried a similar approach
before, but it was overly optimistic about reductions in calls,
with service levels collapsing when it cut staffing. HMRC is
not publicly reporting call handling speeds for 2021-22 and has
not a set a target for its correspondence response time
measure. We will continue to scrutinise HMRC’s response times
until confident that HMRC is sustaining acceptable service
levels.
Recommendation: HMRC should, in its Treasury Minute
response, explain:
- the service levels it is aiming to provide and by when,
including for the time taken to answer calls and respond to post,
and commit to publishing outturn against these measures;
- how it has tested the realism of its customer service plans;
and
- its contingency plans if the numbers of taxpayers writing and
calling exceed forecast levels.
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The benefits of Making Tax Digital to those with simple
tax affairs are not clear. The requirement for
taxpayers to keep tax records and submit quarterly returns to
HMRC digitally is a key part of its 10-year modernisation
strategy. From April 2024, HMRC will extend Making Tax Digital
to 4.2 million taxpayers with business and/or property income
over £10,000, including small landlords and sole traders, to
meet their income tax obligations. HMRC considers Making Tax
Digital is making tax easier, keeping tax in line with the
digital age, making business more productive and will provide
better data if it needs to introduce further support schemes
like SEISS. However, it is far from clear how those taxpayers
with the most straightforward tax affairs, such as a retired
person with rental income, will benefit from completing
quarterly digital self-assessment returns. There is also no
guarantee that the software they will need to submit returns
digitally on will be readily available or easy to use, although
HMRC is confident this will be the case. We question the value
of asking the large number of taxpayers with simple tax affairs
to take on additional costs and reporting.
Recommendation: HMRC should, in its Treasury Minute
response, explain how the introduction of Making Tax Digital will
be made easier, and less costly, for taxpayers with the simplest
and most straightforward tax affairs.
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Changed working practices have left HMRC with more
office space than it needs. We have long standing
concerns about the flexibility of HMRC’s estates strategy which
is seeing it move to 13 regional centres with long-term
non-breakable property leases. The shift to hybrid working
caused by the pandemic has reduced the office space HMRC needs.
HMRC is already renting out some spare capacity to other
government departments in its regional centres. HMRC relies on
the Cabinet Office to identify suitable alternative users of
its spare space and encourage them to use it. HMRC told us the
system is working well and there is a queue of organisations
wanting to use the spare capacity in its offices. We remain
concerned that changes in the commercial property market could
leave HMRC with unused spare space in the future.
Recommendation: HMRC should:
- work with Cabinet Office to draw up a plan for how they
intend to make sure that spare HMRC office space is not left
vacant, and write to the Committee explaining the plan within 6
months of this report; and
- each quarter, report the amount and cost of empty space in
its estate.
