Every year, the Public Accounts Committee conducts a review of HMRC’s annual accounts, aided by a report from the National Audit Office. The PAC calls HMRC’s leadership to public hearings when committee members question the HMRC team.
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The first hearing was held on 16 October, where evidence was given by HMRC chief executive Lin Homer, director general personal tax Ruth Owen, director general benefits and credits Nick Lodge and CFO Simon Bowles. The second hearing on 28 October featured tax assurance commissioner Edward Troup, director general business tax Jim Harra and director general enforcement & compliance Jennie Grainger.
The resulting report from the PAC covered two areas: business tax and tax avoidance; and personal tax and tax credits.
It’s worth starting with the National Audit Office report, which was published alongside the 2011/12 accounts. The conclusion states:
‘While recognising that no tax collection system can ensure that all those who have a tax liability comply with their obligations, we conclude that in 2011/12 HM Revenue & Customs has framed adequate regulations and procedure to secure an effective check on the assessment, collection and proper allocation of revenue, and that they were being duly carried out. This assurance is subject to the observations on specific aspects of the administration of taxes in this report and our other reports to Parliament.’
The report then considers three areas:
The keen observer will thus note that there is no additional material from the NAO covering business tax and tax avoidance, where PAC members appear to have relied on their own views and perhaps views given to committee members by a number of campaigners. Some might thus regard the summary to the PAC report as more than a little misleading, since it scarcely mentions anything in the NAO report and its evidence base isn’t clear.
Still, let’s start with the good bits. Both the NAO and the PAC note that HMRC has indeed stabilised the PAYE system and that the initial RTI pilots went well. Both emphasise the importance of ensuring that HMRC keeps in mind the challenges faced by small and medium-sized businesses in coping with RTI – a point made well by the CIOT, the ICAEW and other professional bodies. As we all know, the move to the new PAYE system brought a huge cost in the form of tax not collected from individuals, due to the delays in processing PAYE records. However, the performance on error and fraud in dealing with tax credits is less encouraging; the design flaws of the current system do not make it easy for claimants and HMRC alike to achieve the required accuracy where incorrect payments are less than 5% of the total. The comptroller has qualified his audit opinion on HMRC’s performance ever since the system started in 2002/03. The PAC urged HMRC to hand over a clean slate to the DWP when universal credit commences and write off some £4bn of irrecoverable debt.
The Swiss tax evasion arrangements come in for some significant criticism, as it has brought in far less than indicated. HMRC isn’t yet able to offer any useful analysis – but, in its defence, no one has put forward an alternative plan to produce higher receipts.
The PAC is better known, in recent times, for its challenges on business tax – and here its factual basis for comment is much shakier. It is ridiculous to challenge HMRC’s tax gap calculation on the basis that it doesn’t include tax not due because the law is what it is – and not something different. As the chair put it in a question to tax assurance commissioner Edward Troup ‘… even as a theoretical figure, it does not include a lot of what ordinary punters in the street think we should be collecting, particularly from the large corporations’. As a long-standing parliamentarian and former minister, the chair is well aware that the law defines what tax should be collected and not what the ‘ordinary punter’ thinks. It is of course important that the Treasury – and its equivalents in the other 41 G20/OECD countries – has an idea of the potential impact of the possible changes under the OECD’s BEPS project, but everyone needs to remember that those changes are likely to cost the UK revenue as well as potentially bring in additional taxable profits. BEPS cannot be a proposal where every country gains and none loses.
There’s also an opportunity for the PAC to bring out its views on the UK’s changes to the controlled foreign company rules. It is plain that the chair does not like the finance company partial exemption regime – even though it was one of the key elements to retain UK multinationals in the UK. However, it’s just crackers to claim that no one realised that UK companies would continue to borrow in the UK and then invest share capital into overseas finance companies – effectively receiving a 23% tax deduction with income taxed at 5.75%. The recent change announced in the Autumn Statement does perhaps suggest that the potential for moving existing debt out of the UK had not been fully costed, though.
There’s also a throwaway comment about eurobonds, highlighted by a series of articles in the Independent newspaper: ‘While HMRC did carry out a public consultation, it explicitly sought comments from those who benefited from the loophole and who therefore opposed the change’. This ignores the evidence from Jim Harra: ‘What has happened is that the original proposal we consulted on, which we only consulted on because we believed we could implement it and make it work, we have had to conclude we were wrong about.’
This report is the 34th report from the Public Accounts Committee in the 2013/14 session. The previous reports are listed and the range of topics is huge. Perhaps this highlights one of the difficulties of the PAC’s modus operandi; it does not have the resources to conduct so many reviews and thus may drift away from evidence to opinion.
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