PAC warns HMRC workload risks ‘catastrophic consequences’

The public accounts committee (PAC) believes HMRC has over-estimated its capacity to deal with reducing the tax gap, while maintaining acceptable customer service levels, in the face of its own digital and organisational transformation programmes and the effects of Brexit. The CIOT has also warned HMRC against stigmatising SMEs in its efforts to explain and reduce the tax gap.

Commenting on the report, HMRC’s Performance in 2016–17, published on 12 January (http://bit.ly/2mlQKY4), PAC chair Meg Hillier said: ‘HMRC’s transformation programme would have been less risky had it not attempted to do everything at the same time’. These plans are now being ‘battered by the winds of Brexit, with potentially catastrophic consequences’.

The report makes eight main recommendations for action:

• HMRC should obtain information from the ‘paradise papers’ as soon as possible, and report back to the PAC by March 2018 on any additional revenue likely to be at stake. The ‘paradise papers’ suggested potentially serious and extensive allegations of tax evasion and avoidance. The Financial Secretary to the Treasury told the House of Commons in November that HMRC had requested the International Consortium of Investigative Journalists (ICIJ), The Guardian and the BBC to share data from the ‘paradise papers’, without any response so far.
• HMRC should set target levels for reduction of the tax gap, including for the SME sector, and set out how HMRC will be more responsive to emerging risks. HMRC is not currently able to provide a realistic estimate of how far the tax gap can fall. Almost half of the tax gap is attributable to SMEs, at whom measures such as making tax digital for business are aimed.
• HMRC should update its original assumptions and forecasts for managing Brexit and its ongoing transformation programmes, particularly those concerning customer demand for its various services, and report to the PAC by April 2018 on the financial implications. This should build on recommendations in the PAC’s recent report on ‘Brexit and the future of Customs’. HMRC accepts its transformation programme is not deliverable as originally planned due to unrealistic assumptions and increased pressure from the additional workload caused by Brexit, estimated at a potential extra 15%.
• HMRC and the government property unit should use their strong negotiating position to ensure they secure the best terms for the four regional centre leases yet to be signed, and examine ways to gain greater flexibility from the eight regional centre leases already signed. HMRC is closing its national network of offices and intends to operate from 13 large regional centres by March 2021. It has already signed seven 25-year leases and one 20-year lease, all without any break clauses, for these regional centres.
• HMRC should ensure it continues to deliver a consistent and reasonable level of service to all its customers. HMRC’s original assumptions on the extent to which customer demand could be reduced through new digital services were too aggressive. The PAC expressed concerns about the disparity of service between HMRC’s treatment of high-net-worth individuals compared with ordinary taxpayers.
• HMRC should introduce a new set of telephony performance measures that better reflect the actual experience of customers. Automated telephony time should be included within HMRC’s five-minute speed to answer target. Customers typically spend an additional two to four minutes listening to automated messages before entering a queue for an adviser, so the total time spent waiting could be more like nine minutes.
• HMRC should report back by March 2018 on how it will protect the interests of vulnerable people receiving tax credits in the transition to universal credit. Responsibility for collecting these tax credit overpayments is being transferred to DWP, which has greater powers to recover debt than HMRC, including the ability to deduct amounts directly from earnings.
• HMRC should set out its strategy for tackling tax credits error and fraud, given the additional risks posed by transfer to universal credit, including a cost-benefit analysis of its approach. The PAC was ‘alarmed’ to hear that the level of tax credits error and fraud had risen to 5.5% of total spending on tax credits in 2015/16, and could peak in future years between 7% and 8%. HMRC expects a further 1% increase from introduction of the ‘commercial with a view to a profit’ test for self-employed people claiming tax credits.

CIOT tax policy director, John Cullinane, called on HMRC to produce more evidence of the impact SMEs have on the tax gap. Without such an explanation, HMRC risks ‘stigmatising SMEs, which could be unfair and does not seem calculated to improving whatever underlying behaviour is the cause of the problem’, Cullinane said.

The CIOT also would like to see publication of a final report following HMRC’s ‘business records checks’ initiative (http://bit.ly/1PUp46X), which ran between 2012 and 2015, for an indication of the extent to which inadequate record keeping contributes to the tax gap.