Examination of Witnesses (Questions 1-19)
HM REVENUE AND
CUSTOMS
1 MARCH 2006
Q1 Chairman: Good afternoon. This afternoon,
we are dealing with the management by HM Revenue and Customs of
Corporation Tax and we welcome back Sir David Varney. Do you want
to introduce your team?
Sir David Varney: Thank you very
much; it is nice to be back. On my right is Mr Stephen Banyard
who is Director for CT and VAT and on my left is Doug Tweddle
who is Director, Local Compliance and the Enforcement and Compliance
Operations Unit.
Q2 Chairman: I want to deal with
non-compliance to start with. If you look at paragraph six of
the Executive Summary, you will see that areas concluded inquiries
on 4% of active companies. Then later on, in paragraph nine, you
will see "It has detected errors by companies in around 40%
of company tax returns dealt with by Areas". Are you doing
enough therefore Sir David to tackle non-compliance?
Sir David Varney: You have asked
two questions put together so may I answer that with some statistics,
trying to put the framework in which we operate, which might lay
the background on which we might pursue the discussion this afternoon?
Centrally we require the areas to put 10% of their effort into
random inquiries. What that shows is how many companies, as a
result of the effort, have to pay more tax. We, in doing that,
come to see that there is only a small number of companies which
are responsible for most of the additional tax that is produced.
So we are looking at a situation in which, when we do the inquiry
into the number of companies which are the subject of raising
more tax, it is not the generality, it is a very small number
and that has led us, therefore, to think about how we focus our
efforts on finding the companies which have tax to pay. So the
fact that 40% get them wrong, when you come to the value of how
much is at stake, the majority of the value is in a very small
number of companies. What we need to do, given the scarce resources
we have, is to focus on those companies which are likely to produce
a yield, likely to produce a benefit for the tax system.
Q3 Chairman: Part of this inquiry
is about the performance of the various areas. How they perform
against each other and how they can be benchmarked against each
other, so let us just look at that. If you look at paragraph seven
of the Executive Summary—it is a bit confusing because once
again we have this figure of 40%—"Nevertheless, across
the network, 40% of all Corporation Tax enquiries produced no
additional tax yield or taxable profit adjustment". So that
rather leads one to ask whether you are putting your effort in
the right place.
Sir David Varney: Let me start
by saying that this is against us halving the number of inquiries
and increasing by 42% the yield we have got over the period since
1999 and 2000. So we are having more success. Like all statistics
this statistic is right, but if you are going to use it for managerial
purposes, you need to unpack it. We run two sorts of cases. We
run full cases, which are detailed inquiries, and we run aspect
inquiries. We have to open an inquiry if we are going to inquire
of a corporation about their tax position. We ran 5,400 full inquiries
and 38,900 aspect inquiries in the period under consideration.
We are successful in raising CT, corporation tax, in 81% of the
full cases and successful in 58% of the aspect cases. The aspect
cases cost about £500 to mount; the full cases cost about
£5,600. So the 40% is a blend figure of two different sorts
of inquiries. What it tells you is that CT yield is not found
primarily in the aspect cases, because they have a rate where
in 42% we find no CT. We have gone back since the NAO Report to
look at how much this has cost us. It costs us about £9 million
which means about 20% of the money that we spend goes into cases
for which we get no CT yield. What we do find though in quite
a few cases is that we might not get a CT yield, but will find,
for example, that a director has under-Reported their income.
So there may be a benefit. It is inevitable if you are targeting
against risk that you are going to have an amount of money which
is going to be spent on inquiries which do not produce an income.
Then the question is whether that has a deterrence effect. As
we say in the Report, one of the things we want to do is think
about the impact of our inquiry process on the wider deterring.
Q4 Chairman: What I particularly
want to ask you about is the different performance of areas; there
is a large variation. Look at paragraph 12 of this summary. "There
are also large variations across Areas in the additional tax yield
. . . Overall, the average yield from full inquiries was £27,000,
but ranged from an average of £13,000 in one Area to £60,000".
How are you going to raise the game of these areas which are apparently
not doing so well?
Sir David Varney: Let me say that
we are going to raise the game and the Report is a help in that.
May I direct your attention to the graph on page 31? I am sorry
if this is going to turn into a commentary on statistics, but
if we are going to use statistics, we need to understand the basis
on which these numbers are put in. What we are dealing with are
inquiries which take more than one year, so there is an element
in the settlement where, if you have a very large settlement,
it can have a disproportionate impact on where you are in the
scatter diagram. For example, if you look at the dot which is
above the £25,000 average yield, that is a result of 285
settlements. If you take the top two settlements out, the dot
immediately drops down to the blue line. The point I am making
is that a very small number of settlements have a big impact.
We have put all the areas together to look at the differences
between regions, because we primarily manage this centrally through
a regional structure. What we find is that there is still a gradient.
Is there an opportunity to improve? Yes, by sharing best practice,
investing in better risk management, better data control. A one
year snapshot does not do justice to a process which runs over
more time, but it does indicate the need to improve performance
and that is what we want.
Q5 Chairman: This is a one year snapshot
with the NAO? Were you doing your own snapshots before the NAO
came along?
Sir David Varney: No, this has
been helpful.
Q6 Chairman: So why were you not
doing it then?
Sir David Varney: Because we had
newly established the delegation. We were concentrating on yield
and taking comfort from the yield and fewer inquiries. This has
produced what is a valuable input for us. We shall consider it.
Q7 Chairman: But you do accept this
is one area where benchmarking does work in government. You can
benchmark between different areas, you can bring up the worst
performing areas, you can promote people, demote people. It is
something you should do more of perhaps?
Sir David Varney: I am sure you
would like to do it on the basis of good statistics. What this
does is make a case for management, which is the right role of
the NAO, for us to go away and think about the management implications
of this, to build the sort of performance management system which
will deliver better performance.
Q8 Chairman: How will you change
the way that these network managers do their business then?
Sir David Varney: We are investing
in better techniques about risk assessment, which is covered to
some extent in this Report. We are looking at different ways of
working, trying to aggregate more skills together in central places,
more team working and we have a programme which would transform
the way we receive data, receiving it really in an electronic
form, which would enable us to run better risk management than
we run at the moment. Most of the data we get can arrive electronically,
like it can come on a fax machine, but it is not set up in a framework
which enables us to put it into analysis systems which can then
identify risk.
Q9 Chairman: Why do inquiries take
so long?
Sir David Varney: Some evidence
has been given to the inquiry into medium-sized companies. First
of all it is a question of whether it is a gaming arrangement,
secondly whether it has the priority and thirdly, something we
can do something about. As a way of conserving public funds we
send replies by second-class mail and we have been investing in
what is called shared electronic workspace, which we started in
South Wales with a small number of agents where the data is common
and held in a secure e-room. That is the shared working initiative
which is partly covered in the Report. We are now looking to roll
that out in April to 10 of the area offices in London and that
has been a question of getting an enterprise licence and being
able to do that in an affordable way. That reduces the time spent
on the inquiries by about 20%.
Q10 Chairman: Lastly, in terms of
simplifying it and making it easier for the business community,
you and the business community have spent three years to try to
work out how to simplify corporation tax and apparently very little
of substance has emerged. Why is this? Why has so little been
achieved?
Sir David Varney: First of all,
as the Report shows, in terms of the compliance burden internationally
the UK's is significantly lower than most other countries which
are mentioned in the comparison, as is shown in figure nine on
page 24 where the compliance costs are identified. Two proposals
were put up for consideration. One of them did not get business
support, there was no support for it; the second was a proposal
which would have been costly to the Revenue and therefore a more
selective change was suggested. That had a distributional impact
between companies such that it might alter the nature of competition
within the markets depending on the size of the company. As is
often the case, there is a general agreement about the need to
make it simple: it is when you come to the actual precise measures
that the difficulties start.
Q11 Greg Clark: First of all may
I make a declaration for the record that my wife is a tax accountant.
When remarks like the Chairman's call for simplification of the
tax system are made she gives me a funny look and reminds me that
our family income depends on a degree of complexity. Nevertheless,
I believe in simplification. This is a good Report, it shows some
good practice, some good progress has been made and I congratulate
the HMRC on that. May I ask about these area offices? According
to page 10 you have 68 area offices. Do you actually need a local
presence to collect corporation tax?
Sir David Varney: The answer is
in theory no, although there would be a lot of travel if you only
had one office. You do need a number of offices. In theory, you
can have fewer. There are two conflicting pressures. We are growing
the technology to be able to share the work in the places where
we want it. It is a question of very skilled staff; it is question
also of local knowledge.
Q12 Greg Clark: Yes, but 68? I can
see perhaps a regional base but having 68 seems very local.
Sir David Varney: It goes from
about five to 20 in each location and of course they are part
of a much bigger command.[1]
What we are looking at today is the work of about 2,000 people
and in our area offices we have about 39,000 people. What we are
seeing is a need for a more strategic set of offices, but there
is also the local feel, knowing the local business, knowing local
people, knowing the local agents.
Mr Tweddle: Up to 5% of the work
will actually involve direct physical contact with the business
concerned. One of the things is that over the history the areas
were sorts of mini regions in themselves looking after all aspects
of direct tax. One of the plans that we shall be taking forward
as we re-engineer this work is to move to a smaller number of
locations where we can build up the expertise and start to integrate
it with other tax activities.
Q13 Greg Clark: It strikes me that
if 95% of the inquiries do not involve any actual physical contact
then the need for 68 area offices seems to be a trifle superfluous.
It does not give you the opportunity to organise it in another
way. It strikes me, for example, that although there might be
some local areas of consistency between firms, there are far more
likely to be common approaches across industries. The corporation
tax affairs of retailers, cement manufacturers, whatever, will
no doubt be more similar than firms which just happen to be located
in and around Teesside, for example.
Mr Tweddle: We are moving in that
direction and indeed, the pharmaceutical industry, for example,
is treated in that sort of way. We do believe there will be benefits
in taking that further. Also, as you can see from the charts on
page 18 of the Report, the average size of the offices is small
and varying between the smallest which has about five and the
largest fewer than 35 staff. I do not believe that they are big
enough actually to give that scale of economy and efficiency that
we need.
Q14 Greg Clark: Indeed, but I get
the impression that this is incremental reform. Is there not the
opportunity here for a real re-engineering in deciding that actually
the connections between companies in a certain type of industry
are more important than geographical location, especially if 95%
of times you do not need to visit them? Therefore, rather than
just inching that way, could you not tear up the whole thing and
start again and over two or three years move towards an industry
based structure?
Sir David Varney: We are agreeing
in part, but there are some constraints which we shall need to
build into this. This is not a cookie-cutter industry: this is
trained professional staff who take years to grow in skill and
expertise. What we are seeking to do is to invest in technology
which will direct their talents more productively. So it is not
that you could go to a small number of offices and suddenly recruit
off the street the sort of people you need. In some part of this
is a sort of tussle between where people are, where you would
like them to be. We have been thinking about direction of travel,
but this is part of a bigger problem of 40,000 people.
Q15 Greg Clark: I should just encourage
you to think perhaps a bit more boldly in this direction and no
doubt some people might be prepared to move. On page 30 of the
Report, paragraph 4.4, you say that you have 1,100 staff working
on corporation tax inquiries in 2004-05 out of a total staff in
the areas of about 40,000. A very small proportion. What do the
rest do?
Sir David Varney: There is self-assessment,
non self-assessment schedule E processing, end-of-year returns,
P45s, call centres, national tax and new tax credit callers. We
have P11Ds, management support; we have income tax compliance,
CT compliance, employer compliance.
Q16 Greg Clark: A whole lot of activities
going on there, but 1,100 people working on corporation tax inquiries.
Yet page 15, paragraph 2.8 says that some of the aspect inquiries
generates 23 times their cost in revenue. My question arising
from that is: do you have enough people? If they are managing
to achieve 23 times what they cost, is there not an opportunity
to have more people there and actually benefit the Exchequer?
Sir David Varney: This comes back
to the issue of the small number of cases which produce the yield.
We are obviously concerned about looking at whether the coverage
we have is at the right level. We are doing more research on that.
It is always tempting to think that you get a very high yield
because you have more staff at it, but actually of course the
yield that you get is an average and the question is how quickly
it declines, what the marginal yield is. The fact that we have
some failures to gather CT and maybe in some cases even anything
on directors, suggest that that is about the right resource. In
most of HMRC the dilemma is, given the resources you have, where
to deploy them for the maximum benefit.
Q17 Greg Clark: On that point, I
was looking at your Report and accounts and you helpfully compare
the yield-cost ratios for different activities. I could not help
noticing that you have these very high figures. We have seen 23
and 12.9 is a broader average for corporation tax aspect inquiries,
yet for self-assessment business inquiries it is typically a yield
of three to one. So 23 to 1, versus three to one suggest to me
that perhaps some more people should be working here and perhaps
fewer people on some of the income tax or self-assessment activities.
Sir David Varney: If I might just
take the logic a bit further, in things like serious compliance,
which is our heaviest form of investment in evasion, which is
highly targeted and we use many of the powers that we have, we
have an even higher yield than 23. Our anti-avoidance group has
very high rates of return and there is a balance of how much resource
you deploy for what benefit. What we do feel is that we need to
do more research in this. Bringing the two departments together
also raises new issues in terms of their different experiences
of compliance in both VAT and in terms of income tax and corporation
tax.
Q18 Greg Clark: May I invite you
to do that with some urgency? There is an important point which
arises from that, which is that there is always pressure from
the Treasury and from your experience to close loopholes and to
squeeze more revenue out of the existing tax system and that is
obviously right. The temptation is of course to change the rules
and to sort of fiddle with them and close loopholes, which causes
a lot of complexity which the Chairman talked about, whereas in
actual fact if you could get the same increase in revenue from
the existing rules by just enforcing them better, then that is
better for business all round. So it is important for the structure
of the tax system that you do have the right number of people
here and it is not just a figure that denotes your efficiency
but is actually very important from a policy point of view.
Sir David Varney: I agree with
that and the fact is that we have been conducting fewer inquiries,
getting a higher yield and overall the amount of money that we
are collecting in corporation tax has been high. I do agree with
you but it is not a question of giving it more urgency, we are
giving it a lot of urgency. It is having a factual base on which
to make real decisions.
Q19 Greg Clark: In terms of the administrative
savings that can come from electronic filing and this sort of
thing, obviously it is desirable that you should make them. I
was just slightly surprised to find in the Report on page 30 that
you expect only to be able to make savings equivalent to 30 staff
through savings in processing by 2007-08. Out of 1,100 30, with
all the advances in technology, seems—
Sir David Varney: Savings would
be in the processing area rather than the inquiry area.
1 Note by witness: Correction: The number of
staff in each location ranges from five to 33 (not 20) individuals. Back
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