Public Accounts Committee report: 'Cracks showing' as HMRC seeks to manage daunting workload

- Fresh action needed on fraud and error in Tax Credits and value for money of tax reliefs

- Customer service targets are too narrow; the authority should broaden its performance measures

- Serious concerns remain over risks to customs and borders after Brexit, especially if there is no deal

Please find attached the embargoed Report noted above.

REPORT SUMMARY

HM Revenue & Customs (HMRC) has a daunting task as it prepares for the UK’s exit from the European Union, in whichever form that takes, whilst reprioritising its ongoing projects and day to day services.

The Committee recognises these challenges but we remain concerned about the risks to customs and borders post Brexit and the impact on British businesses.

The recently announced further delay to HMRC’s new Customs Declaration Service, which means that it is very unlikely to be ready for exporters by the time of Brexit, and the need for further development of HMRC’s systems so that by March 2019 they can handle postponed accounting for import VAT in the event of no deal, underline the risks. We have written separately to HMRC to emphasise our continued concerns.

And whilst managing these projects, and with staff and resources diverted, HMRC has had to make choices about how it delivers its ongoing work.

Error and fraud in Tax Credits is a long-standing problem for HMRC, with £1.3 billion lost to error and fraud in 2016-17 alone. It is very disappointing that HMRC expects the rate of overpayments to increase and exceed its target to keep error and fraud below 5% of Tax Credit payments. 

Our concerns last year that HMRC lacked an incentive to reduce error and fraud in Tax Credits have now come to fruition. HMRC has de-prioritised action to reduce error and fraud because Tax Credits are being replaced by Universal Credit.

We remain concerned about HMRC’s management of tax reliefs. There are too many reliefs where HMRC has only a limited understanding of whether they represent value for money.

We are also concerned by the variable standard of Pay As You Earn (PAYE) administration by employers and pension providers. Poor administration leads to errors in tax collected, causes problems for taxpayers and results in errors in Tax Credits and Universal Credit payments. 

HMRC has tried to encourage employers to improve administration of PAYE but considers it does not have the sanctions to tackle the issue effectively.

HMRC’s customer service targets are too narrowly focused and do not help it understand the overall quality of service it provides to individuals and to businesses.

COMMENT FROM PAC CHAIR MEG HILLIER MP

“HM Revenue & Customs is under pressure and in some areas the cracks are showing.

“The authority expects fraud and errors in Tax Credits to exceed its target in successive years, driven in part by policy changes that have effectively removed HMRC’s incentive to bring fraud and errors under control.

“It lacks understanding of the costs of a vast swathe of tax reliefs, which means it cannot take an informed view on their value for money.

“HMRC’s customer service targets do not fully reflect the customer experience, undermining its ability to plan and deliver these services effectively.

“And, as we have recorded elsewhere, serious concerns remain over the new Customs Declaration Service and operations at the border after Brexit.

“The potential consequences of no-deal are extremely serious and the Committee will be seeking clarity from HMRC when we take further evidence on Monday next week.

“Our Committee recognises the scale of the challenges facing HMRC and the time-critical nature of its Brexit work. But the authority must not lose sight of its wider responsibilities to UK taxpayers. 

“There are practical steps HMRC can take to better safeguard public money and we encourage it to respond positively to our recommendations.”

CONCLUSIONS AND RECOMMENDATIONS

HMRC expects the rate of error and fraud in Tax Credits to rise and exceed its target, but it has de-prioritised improvements to reduce these losses. HMRC has a target for the level of error and fraud in Tax Credits to be no more than 5% of its overall spending on Tax Credits. HMRC estimates that error and fraud led to overpayments equal to 4.9% of spending on Tax Credits in 2016-17, which was lower than the 7% to 8% it had forecast. HMRC now expects the error rate to rise to 5.5% in 2017-18, and to 6% in 2018-19. HMRC’s forecasts reflect the reduction in resources for tackling error and fraud following the termination of its contract with Concentrix in November 2016. HMRC told us that, as Tax Credits are being replaced by Universal Credit, they “are not a permanent feature of the landscape” and therefore the appetite within government to change existing systems and processes is very low. HMRC does not report what factors cause error and what factors cause fraud and has cancelled its plans to improve its systems and thus help people make and change Tax Credits claims. Weaknesses in the accuracy of HMRC’s forecasting of error and fraud mean that it does not have a good understanding of the wider costs of it de-prioritising improvements to the Tax Credits system. We are concerned that HMRC’s decisions on Tax Credits error and fraud are not well-informed and it is not adequately safeguarding public money.

Recommendation: HMRC should, in its next annual error and fraud statistics, include an explanation of the impacts of terminating the Concentrix contract and de-prioritising improvements to the Tax Credits system, and an explanation of the different causes of error and fraud. By April 2019, HMRC should report to the Committee on what actions it is taking to help claimants avoid errors and what impact these actions are expected to have on overpayments and underpayments.

New mandatory reporting by multinational enterprises helps HMRC assess compliance risks, but it has not been adequately involved in plans for a register which would help it tackle compliance risks from properties owned by overseas companies.  HMRC gains new powers and access to information to help it tackle risks to tax compliance. It is now getting better access to data on multinational enterprises through country-by-country reporting which requires these enterprises to give HMRC financial information, including how much tax they have paid in each of the jurisdictions where they have a presence. HMRC told us this data is helping it assess the risks of non-compliance by multinational enterprises. The Department for Business, Energy & Industrial Strategy is leading a project to introduce a register in 2021 of those people benefitting from property owned by overseas companies. HMRC told us this register should help it tackle avoidance and evasion of both property tax, and tax due on the money used to purchase properties. However, HMRC’s senior-level engagement with the project appears to have been limited. HMRC was unaware of how the government would enforce the register or validate the information held.

Recommendation:  HMRC, by April 2019, should write to the Committee setting out what actions it has taken to secure the opportunities provided by the register to tackle tax avoidance and evasion arising from properties owned by overseas companies. 

HMRC does not know whether a large number of tax reliefs deliver value for money.  HMRC currently provides 424 tax reliefs. The number of tax reliefs continues to grow, increasing the complexity of the tax system. HMRC estimates that 105 of these tax reliefs cost £416.8 billion in 2017-18. HMRC estimates that a further 80 tax reliefs have nil or negligible cost. But HMRC does not report a cost for the remaining 239 tax reliefs because in the large majority of cases it considers the cost of collecting the data needed would be disproportionate, although it does make internal estimates for some of these reliefs. Gaps in HMRC’s understanding of costs means it cannot assess the value for money of many tax reliefs designed to deliver particular policy objectives. It also limits the input HMRC can make into HM Treasury’s decisions on the design and scale of existing and new reliefs.   

Recommendation:  HMRC should take more responsibility for ensuring tax reliefs provide value for money. In particular, HMRC should set out, by April 2019, an approach for improving its understanding of the cost for those tax reliefs where it does not already have that information. 

HMRC’s management of taxes and Tax Credits is hindered by the poor administration of PAYE by some employers and pension providers. HMRC told us that the quality of PAYE administration by employers and pension providers is variable. Poor administration of PAYE by employers can result in the wrong amount of Income Tax being deducted from employees’ earnings and leads to many of those affected contacting HMRC to discuss their tax. Inaccuracies in PAYE can also result in HMRC receiving inaccurate data from employers and pension providers, and can lead to errors in Tax Credits, and in Universal Credit administered by the Department for Work and Pensions. HMRC told us that it had held senior level discussions with some employers with large workforces to encourage them to improve their administration of PAYE, but it said it does not have sanctions that it can apply. HMRC told us that, as part of the Spending Review, it is developing proposals for Minsters on how to improve PAYE administration by employers and pension providers.   

Recommendation: HMRC should report back to the Committee by the end of 2018 on how it will improve the quality of PAYE administration by employers and pension providers.  In subsequent years, HMRC should report publicly on changes in the quality of PAYE administration and how this is affecting taxpayers, Tax Credits and Universal Credit. 

HMRC’s customer service targets are too narrow and do not provide a full picture of performance, limiting their value to the Department in identifying future risks to customer service.  HMRC is changing its services to reduce the calls and letters it needs to respond to. HMRC achieved six of its eight customer service targets in 2017-18. It met its targets for processing Tax Credits and Child Benefit claims and changes, and responding to customer post, with performance similar to 2016-17 levels. It also achieved its targets for call handling but performance was lower than in 2016-17. HMRC’s performance against its digital targets declined in 2017-18 and it missed both targets. For call handling, HMRC’s performance results show the average speed to answer calls from when a caller enters a queue to speak to an adviser. But this does not include the time callers spend listening and responding to automated messages, meaning the results only provide a partial view of call waiting times. HMRC’s performance targets do not cover other important aspects of customer experience, such as the quality of advice received by individuals, or the quality of service given to businesses. HMRC’s surveys show that business satisfaction with its services varies, with only 55% of mid-sized businesses rating their overall experience of dealing with HMRC positively.  HMRC told us that it has recently changed the support it provides to mid-sized businesses, but it does not yet know the impact of this on their satisfaction. HMRC recognises the need to develop its performance measures and told us that it plans to put in place a balanced scorecard of performance measures which it can track and report on from 2019-20.

Recommendation:  HMRC should, by the start of 2019-20, develop and report a scorecard of performance measures which provides a broader overview of the customer experience of both businesses and individuals, including measures of quality and a full view of call waiting time.