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Potential impact of HMRC cuts on tax revenues is not fully understood, MPs warn

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HMRC needs to be clearer about how its cost-saving measures are likely to affect taxpayer compliance, a committee of MPs has warned.

The department faces a ‘huge challenge’ to resolve long-standing problems in the administration of PAYE and tax credits while making substantial reductions to its running costs, the Commons Public Accounts Committee (PAC) said in HM Revenue & Customs: PAYE, tax credit debt and cost reduction, published on 20 December.

The report was overshadowed by the PAC’s criticism of HMRC’s handling of tax disputes, set out in a separate report published on the same day.

The ICAEW Tax Faculty said the PAC’s statement that ‘the department does not fully understand the potential impact of cost reductions on customer service and taxpayer compliance’ echoed the concerns of many of the Faculty’s members, who deal with HMRC on a daily basis.

HMRC recognised that reducing resources could lead to a fall in voluntary compliance with tax rules, the PAC reported. HMRC accepted that ‘even a small fall in compliance could affect large amounts of revenue’.

The MPs warned that ‘the department clearly should not implement short term cuts which lead to a disproportionate loss of tax revenues’.

The department needed to stabilise administration of PAYE following the problems encountered after the introduction of a new processing system in 2009, and needed to recover a significant amounts of outstanding tax credit debt, the PAC said.

It noted that the 2010 spending review required HMRC to reduce running costs by 25% in real terms by 2014/15. ‘This amounts to cumulative cash savings of £1.6bn over four years. Over the same period it will reinvest £917m of these savings in tackling tax evasion and avoidance to bring in additional tax revenues.’

HMRC planned to achieve the reduction in running costs mainly through staff reductions; a significant reduction in the number of offices; improvements in efficiency and productivity; reducing the time spent correcting customer errors in incoming information; and reorganising corporate services.

The PAC found that HMRC was ‘making concerted efforts to improve its administrative performance while reducing costs’. But it had ‘concerns about how coordinated those efforts are and the department's ability to meet all of its intended objectives’.

Public Accounts Committee findings


‘The department has made welcome progress in improving PAYE administration since our last examination of this area in 2010. However, as a consequence of the department's handling of the 2009 transition to the new PAYE Service, it has had to forgo up to £1.2bn of income tax underpaid from 2004/05 to 2009/10. Under current plans, it will take until 2013 before all processing backlogs are cleared and the new PAYE Service is operating as intended. The department needs to focus on improving data quality in particular to sustain progress in PAYE administration.’

Tax credit debt and child benefit

‘Levels of debt arising from overpaid tax credits have been rising in recent years. Without a clear plan for reducing tax credit debt, the level of uncollected debt will continue to rise to an estimated £7.4bn by 2014/15. The department has been forced to acknowledge that much of this debt will never be recovered from tax credit claimants, and recently wrote off some £1.1bn of debt dating back to the introduction of the scheme.

‘The department is preparing to introduce means testing to Child Benefit in 2013. However, as for tax credits, unless the department can introduce systems that respond quickly to changes in circumstances, increasing numbers of families will find themselves receiving the wrong amounts and later being faced with repayment demands.’

Cost reduction

‘The department has made plans to reduce its running costs by £1.6bn (25% in real terms) by 2014/15. However, we are concerned that its plans are overly optimistic, including the intention to achieve more than one third of new savings in the final year of the spending review period. Furthermore, the department has not yet built in any contingency to allow for setbacks in the 24 projects currently included in its savings programme. The department also needs to be clearer about how its savings measures are likely to affect taxpayer compliance, to prevent the drive for cost reduction from having a counterproductive effect on its ability to collect tax revenues.’

Source: Summary, HM Revenue & Customs: PAYE, tax credit debt and cost reduction