Examination of Witnesses (Questions 1-19)
HM REVENUE AND
CUSTOMS
11 JUNE 2008
Q1 Chairman: Good afternoon. Welcome
to the Public Accounts Committee where today we are considering
the Comptroller and Auditor General's Report on Tackling the
Hidden Economy. We welcome back to our Committee Dave Hartnett,
who is the Acting Chairman of HM Revenue & Customs. You have
been Acting Chairman for some time now, have you not?
Mr Hartnett: I have, Chairman,
nearly seven months.
Q2 Chairman: Is it not about time
you became the Chairman?
Mr Hartnett: There is a competition
for the Chairman.
Q3 Chairman: How long is this competition
going to take?
Mr Hartnett: I do not know. It
is being organised by the Cabinet Office rather than by HMRC.
Q4 Chairman: And is your hat in the
ring?
Mr Hartnett: Ah, that is a very
unfair question to ask, if I may say so. That is a secret.
Q5 Chairman: It was not meant unkindly,
Mr Hartnett.
Mr Hartnett: No, I realise that.
Q6 Chairman: We are very fond of
you really.
Mr Hartnett: I know.
Q7 Chairman: But you have been Acting
Chairman for some time.
Mr Hartnett: Hopefully doing a
decent job as well.
Q8 Chairman: Would you like to introduce
your colleagues?
Mr Hartnett: Of course, Chairman.
To my right is Naomi Ferguson, who is the Director responsible
for our national network of offices dealing with compliance, and
to my left is Mike Norgrove, who is the Director responsible for
compliance strategy.
Q9 Chairman: Now, Mr Hartnett, you
think, do you, that there are two million people in the hidden
economy? That is what the report tells us. Is that right? You
do not know, obviously, but is that a rough guesstimate that we
can have some confidence in?
Mr Hartnett: There are up to two
million. Chairman, as you say, it is very hard to have confidence
in a figure.
Q10 Chairman: If that is a figure
that we can have some confidence in why do you only investigate
28,000 of them?
Mr Hartnett: Because we have lots
of other areas of work where we think there is significant risk
as well, and we apply our resource to this.
Q11 Chairman: But 28,000 out of two
million—your chances of being caught are virtually nil,
are they not?
Mr Hartnett: I think that is not
right because we are getting better and better at catching people.
If you compare 2003/04 to 2006/07, we have increased the yield
by 13% and we have increased the number of people coming in from
the hidden economy to—
Q12 Chairman: I am sure you have
increased your yield from such a low base. It would be difficult
not to. Anyway, I will leave that point. You have got this telephone
hotline. It is mentioned in 3.10, is it not, but why do you not
investigate all these cases? It seems to be very successful. People
ring up all the time.
Mr Hartnett: People do ring up
very regularly indeed. We have one case of a wife who has phoned
up 68 times about her husband.
Q13 Chairman: I know the feeling,
Mr Hartnett!
Mr Hartnett: And we have looked
at him every time and we have not found a basis on which to investigate.
I did not say that just to create mirth, Chairman. It is to illustrate
that we get an awful lot of information on the hotline and it
is really important for us to risk-assess it properly, not to
trouble people where there is no reason to trouble them, and so
we use a filtration process to deliver packages for our people
to investigate where we think there is solid evidence.
Q14 Chairman: We have discussed how
you investigate so few of these people. Now let us discuss for
a moment, Mr Hartnett, what happens when you actually catch them.
You could, of course, impose a penalty of 100% of the tax, could
you not, but in fact on average you only impose 3%, so virtually
there is no chance of being caught and if you are caught you are
going to be asked to pay back 3% of the tax you owe? It is not
much of a deterrent, is it?
Mr Hartnett: The penalty regime
is changing. The old regime had a maximum of 100% irrespective
of the quality of the issue. This will change in the Finance Act
2008, so that where there is genuine error, where people have
taken reasonable care, the penalty will normally be nil because
people who have taken reasonable care clearly want to be in the
system. For people who have got things wrong without taking reasonable
care the penalty will be up to 30%, up to 70% for something that
is very deliberate, and up to 100% where it is deliberate with
concealment.
Q15 Chairman: Let us now look at
the prosecutions, shall we? Our friends in the Department for
Work and Pensions are prosecuting 60 cases per thousand benefit
fraud cases. You are only prosecuting two cases per thousand hidden
economy cases. I am not suggesting that you should rise to the
level of 60 per thousand but two per thousand is very low, is
it not? This is a tiny chance of being prosecuted if you are in
the hidden economy. These are people deliberately evading paying
tax.
Mr Hartnett: I think there are
three important factors here. The first is that the Department
for Work and Pensions generally know the precise amount by which
they have been defrauded. That might not be true if there is organised
crime involved but generally they know that so a prosecution can
be much more straightforward. If you are prosecuting for income
or profits where you require lots of witnesses to quantify the
amount, that is a lot harder, and we have a policy of using prosecution
as a deterrent. But that then gets me to the second issue, which
is that despite having a very talented communications and marketing
team in HMRC we do find it very difficult to get media attention
for our prosecutions. We get good attention in the regions but
not much nationally, and that makes it much harder to have a deterrent
effect. The third element is this: we have 2,000 staff in our
Criminal Investigation Directorate.[1]
In the last few years their principal focus has had to be missing
trader fraud because of the sheer scale of the numbers involved,
and they have done very well with prosecutions there recently.
We have got a much broader spread of need for criminal investigations.
Q16 Chairman: I was not asking about
the publicity. This is a fact contained in paragraph 4.9 of the
report, two cases per thousand. This is a low number.
Mr Hartnett: It is a low number
and we do have plans to increase it when we can apply the skilled
resource to it.
Q17 Chairman: You have had various
successful schemes like the Offshore Disclosure Scheme, have you
not? That was quite successful in bringing people out of darkness
into light. What other similar schemes are you going to use in
the future to try and tackle the hidden economy, particularly
at the upper end of the scale?
Mr Hartnett: We have got several
things going on. We have got more than 20 projects. We are trying
to do the same with builders and decorators and the like by matching
publicly available information, maybe advertisements in the Yellow
Pages or elsewhere, with our databases. That tends to be at
the lower end. At the upper end of the scheme we have a project
looking at barristers, for example 57 barristers who were in the
hidden economy at some time in recent years.
Q18 Chairman: What, barristers doing
legal work in this country perfectly normally are not paying any
tax at all?
Mr Hartnett: Not paying any tax.
Q19 Chairman: Right at the lower
end of the Bar? I was once an impoverished barrister.
Mr Hartnett: I hope you will not
mind if I check. There are barristers, medical consultants, who
have a job in addition to their remuneration from the NHS, and
something we touched on when I was last here which is broadly
at the upper end, we have a rich source of information at the
minute about people who have hidden their wealth in Lichtenstein,
so we are ploughing that field as well right now, and there are
many others.
1 Note by witness: 2,000 figure includes operational
and business staff, referred investigation teams dealing with
frontier casework, accountants etc as well as fully trained investigators. Back
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