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PAC highlights pressures on HMRC

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In its latest report on HMRC’s performance, the Public Accounts Committee (PAC) has warned the department not to ‘lose sight of its wider responsibilities to UK taxpayers’ amid the ‘daunting’ workload of Brexit preparations. The PAC calls for more information to be published on the causes of error and fraud in tax credits and for HMRC to ‘take more responsibility’ for assessing the cost of tax reliefs.

The PAC’s report, HMRC’s performance in 2017/18, published on 2 November, recognises the size of the task facing HMRC as it prepares for Brexit. The PAC chair wrote to the HMRC chief executive in October to emphasise its continued concerns about delays affecting the new Customs Declaration Service and administration of postponed accounting for import VAT.

The committee’s recommendations focus on how HMRC delivers its ongoing work in other areas. These concern:

  • error and fraud in tax credits;
  • using the new register of overseas companies owning property in the UK to tackle tax avoidance and evasion;
  • a better assessment of the cost of tax reliefs;
  • improving the quality of PAYE administration by employers and pension providers; and
  • developing a broader set of customer service targets.

HMRC does not currently report what factors cause error and what factors cause fraud. The PAC recommended HMRC should include an explanation of these various factors in its annual error and fraud statistics and asked HMRC to report back on its actions by April 2019.

The PAC found it ‘disappointing’ that HMRC expects the rate of overpayments to increase and to breach its target of keeping error and fraud below 5% of tax credit payments. HMRC gave three main reasons for the sustained high levels:

  • the system is flawed as the cycle of annual assessments does not suit those people whose employment and other circumstances change more frequently;
  • fewer resources are being put into administering tax credits since the termination of the outsourced contract with Concentrix; and
  • improvements to existing systems and processes have been ‘de-prioritised’ in the transition to universal credit in 2023.

The PAC recommended that HMRC set out for the committee by April 2019 what actions it has taken to secure the opportunities provided by the register of owners of overseas companies owning property in the UK to tackle tax avoidance and evasion arising from properties owned by overseas companies.

HMRC said that country-by-country reporting by multinational enterprises has helped its risk assessment and will help target enquiries better and make them faster. However, the effect of reporting on compliance overall is ‘marginal’ as the same information could have been obtained by opening enquiries.

HMRC said that the new register of owners of overseas companies which own property in the UK would be important for its management of tax avoidance and evasion. The register would help identify where tax might be due on the money used to buy property, and tackle avoidance or evasion of SDLT or CGT tax by people hiding behind entities.

HMRC thought it would not be directly responsible for enforcing compliance, as the project was being led by BEIS, although it was involved as part of a cross-departmental working group.

The PAC recommended HMRC should take more responsibility for ensuring tax reliefs provide value for money and 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 total forecast of the costs of tax reliefs for 2017/18 is £416.8bn, which reflects the costs of only 185 of the 424 tax reliefs it administers. HMRC said that for 179 of these 239 reliefs, information on the use of the relief is not required in tax returns and the cost of collecting usage data would be disproportionate. HMRC divides reliefs into two types: those that are structural and define the tax base (such as personal allowances); and those that are considered ‘tax expenditure’ as they are designed to achieve particular policy objectives (such as entrepreneurs’ relief). It evaluates certain ‘tax expenditure’ reliefs according to risk profile and political priority, but cannot undertake such exercises every year for every relief.

The PAC recommended 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 and report publicly in subsequent years on how any changes affect taxpayers.

HMRC said the standard of PAYE administration by employers is variable and some employers do not administer PAYE to the standard that it expects. It has tried to encourage employers to improve administration of PAYE but considers it does not have the sanctions to tackle the issue effectively. HMRC said it was preparing proposals to improve PAYE administration by intermediaries for ministers to consider as part of the spending review in the Spring.

Catherine Robins, tax partner at Pinsent Masons, commented that, ‘poor administration of PAYE by private sector employers is likely to get even worse when they have to cope with the new off-payroll working rules which the chancellor announced in the Budget will be introduced from April 2020’.

The PAC recommended HMRC should develop and report its scorecard of performance measures by the start of 2019/20 providing a broader overview of the customer experience of both businesses and individuals, including measures of quality and a full view of call waiting time.

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. HMRC has eight key targets against which it judges its customer service. It achieved six of these targets: two for processing post (measured after 15 days and 40 days), two for tax credits and child benefit claims and changes (UK and overseas), and two for answering helpline calls (within 5 minutes and longer than 10 minutes). The committee noted that HMRC still does not report the time people spend in its automated telephony system listening and responding to messages before they enter a queue for an adviser. The other two targets, for customer satisfaction with its digital services and the time to process online forms submitted by customers, were narrowly missed. HMRC admitted that its current customer service targets are narrow and ‘do not really measure quality at all’. HMRC expects to report on a new balanced scorecard of measures from spring 2019.