Examination of Witnesses (Questions 20-39)
HM REVENUE AND
CUSTOMS
11 JUNE 2008
Q20 Mr Dunne: Mr Hartnett, you are
at the moment in the process of looking at your national office
network in order to meet your Gershon targets and so on.
Mr Hartnett: Yes.
Q21 Mr Dunne: I had a meeting this
morning, as it happens, with two of your staff members to discuss
the closures in the Welsh Borders where the offices in Shrewsbury,
Hereford and Ludlow are all expected to be closed, or at least
the personnel relocated, apart from contact centres. I do not
know the precise breakdown in Hereford and Shrewsbury but in Ludlow
you have the local compliance team which will cease to operate
from Ludlow. What impact will this have on catching people in
the hidden economy if you are moving your personnel to more centralised
locations where they are further away from the activity you are
trying to stop?
Mr Hartnett: The crucial issue,
Mr Dunne, is this: once upon a time we identified people in the
hidden economy and other individuals or corporates to investigate
by local knowledge. Today that is not right. Today data matching
done by machines is probably the best source of information we
have, and you can do that data matching anywhere in the UK, for
Ludlow or for anywhere else. We have increased the yield from
investigation work. We are increasing the skills of our people
and we believe that having this work done in a smaller number
of centres than in the past is more effective. Maybe I can bring
in Naomi. She is responsible for this.
Ms Ferguson: I very much echo
what David has said about the use of technology to increase the
risk rating of the companies that we look at or the individuals
that we know or who we are looking for. We can target our resources
more effectively. We are also creating some different ways of
working. Traditionally we have perhaps gone out with an individual
to investigate a company on its premises. We will still do that
but some of that is not effective for us and is quite a burden
on the customer and we believe we can do some of that remotely.
We have been trialling some of that very effectively.
Q22 Mr Dunne: What proportion of
the 28,000 cases that the Chairman referred to are detected electronically
rather than through other means?
Ms Ferguson: For the majority
of that we will use our technology. These days we would not normally
keep statistics that would allow us to say it is a certain percentage.
Q23 Mr Dunne: But broadly speaking
is the majority collected in that way or is it in a small number
of cases?
Ms Ferguson: All my cases in the
hidden economy area will come through our Risk and Intelligence
Service which means we will have run them through that IT kit.
Q24 Mr Dunne: Why do you call the
department "Local Compliance" if it is not locally conducted?
Mr Hartnett: That is historic,
not very historic. It goes back three or four years when that
was the approach. We will find a new name when we have finished
changing the organisation.
Q25 Mr Dunne: Chairman, if you will
allow me, I must make a plea for you to consider, as I mentioned
to your officers today, retaining office premises in rural locations
where I think you will find they are cheaper to maintain and occupy
than in city centre locations, which is, I fear, what may be happening
in our region.
Mr Hartnett: Mr Dunne, the plea
is noted and some of your colleagues have made similar pleas to
us, but one thing I would say very quickly if I may. It may seem
cheaper. Given what we have to do some of the larger centres we
are developing look as though they are going to be cheaper overall,
better value overall, and produce more as well but we would be
happy to talk about that on another occasion.
Q26 Mr Dunne: Thank you. Turning
to an aspect of the report which is very much focused on, I am
amused to see ghosts operating in the economy; one of the thrusts
of your investigative work that has been brought to my attention
is to seek to increase the yield from VAT registered businesses
where there perhaps has not been full recovery. I have had representations
from the trade association representing leisure centres, SpoRTA,
which represents 120 leisure trusts across the country, most of
which are legacy transfers from local authorities into independent
trusts. At the moment there is considerable anxiety amongst these
groups that you are seeking to target VAT recovery inappropriately,
and this arises in relation to the supply of services which are,
let us say, a membership subscription which is mixed, both exempt
supply of membership of a swimming pool or a gymnasium and a standard
rate supply such as membership of a spa. The attitude that has
been taken by the Revenue thus far is that you should apply full
VAT across all such mixed supply and that is in contrast with
all the advice that the trusts have been receiving. They submitted
a case to you in January through PricewaterhouseCoopers looking
for a decision on this and have had no response at all nearly
six months later. This is causing considerable anxiety in this
sector because the consequence, if you were to get your way in
this (and there is apparently some £20 million or so at stake
according to your calculations), would be that if you were to
apply three years' worth of penalties most of these trusts, which
have no reserves as a rule, would cease to operate.
Mr Hartnett: Let me say several
things. We have indeed heard from PricewaterhouseCoopers. They
spoke to me. I do not think it is as long ago as January. The
second thing is that I would be very happy to sit down with SpoRTA
if they have significant representations to make that are not
already made, but I think, Mr Dunne, you touch on one of the most
difficult areas of VAT. This is not particularly a SpoRTA issue
but it is partial exemption for a trader or an organisation that
is registered for VAT. It is one of the areas that I think is
both technically difficult and where, if I may say so—and
this is again not a comment about SpoRTA—traders sometimes
take the benefit of the doubt. We regard it as one of our major
risk areas in relation to VAT but on the particular issue I would
be very happy, with Mike and/or Naomi, to sit down and talk to
them.
Mr Dunne: I would appreciate that and
I will follow that up if I may, Chairman. These are organisations
which are social enterprises. There is not a question of any kind
of fraud or personal gain coming out of this. It is a question
of whether they can, for example, meet the Government's recently
announced aspirations for swimming for all. If we do not have
any sports facilities we certainly will not have any swimming.
Q27 Mr Mitchell: How many staff are
employed on this kind of work? You mentioned 2,000 inspectors.
The report says 1,270. How many is the actual number dealing with
this area?
Mr Hartnett: Let me just clarify
the 2,000, Mr Mitchell. The 2,000 are roughly the total number
of staff in our Criminal Investigation Directorate.[2]
The work on the hidden economy that is covered in this NAO report
involves about 1,270/1,300 of our people and we have had 50 staff
in our Criminal Investigation Directorate[3]
engaged in the work as well.
Q28 Mr Mitchell: How does that compare
with the numbers which you gave us in the earlier inquiry investigating
the financial affairs of large companies?
Mr Hartnett: It is a smaller number.
Q29 Mr Mitchell: Much smaller?
Mr Hartnett: We have about—and
I am doing this from memory so I will correct it if I need to—1,700
people in the Large Business Service. We also have people in our
special civil investigations. We have an international team working
on large companies. I would say that at least twice as many work
on the affairs of large companies.
Q30 Mr Mitchell: But the return on
those investigations on large companies must be more than twice
as much as the return on pursuing piddling VAT matters or barrow
jobs in the hidden economy.
Mr Hartnett: Of course, but the
difficult issue is this: if we were to abandon work on the hidden
economy—
Q31 Mr Mitchell: I am not saying
that, but there is a need surely for more staff on the bigger
projects and less on this?
Mr Hartnett: Our difficulty is
that if we were to reduce the number here the people who are really
good at their job but who would become available could not necessarily
do big corporate work and, second, we have to be active in the
area of the hidden economy to protect the integrity of the tax
system, because if there was a perception that we were inactive
or less active then I think the hidden economy would grow.
Q32 Mr Mitchell: How far are your
efforts co-ordinated with those in other departments involving
potential fraud, people not paying the minimum wage, for instance,
people involved in social security fraud who might well be doing
barrow jobs at the same time? How far do the efforts of those
departments or agencies co-ordinate with yours?
Mr Hartnett: We do the compliance
work in relation to the national minimum wage, for example, but
we are very joined up indeed with the Department for Work and
Pensions. The head of that department and I recently agreed to
set up a joint rapid reaction team to deal with, in particular,
the effects of organised crime in relation to the hidden economy
and in other areas of benefit and tax fraud, so we are very joined
up.
Mr Mitchell: So if I am prosecuted for
not paying the minimum wage in the Mitchell drive-in bar and brothel—
Chairman: What did he say?
Q33 Mr Mitchell: It is just an idea.
We have got an election coming up. If I was prosecuted for that
your lads would shortly follow.
Mr Hartnett: Yes. Where we prosecute
we often do so jointly with our colleagues in the Department for
Work and Pensions because there is benefit fraud too.
Q34 Mr Mitchell: I was a little surprised
at some of the figures in the report because I think the English
have got the well-known habit of snitching on each other. We all
hate each other so much we are anxious to turn in our neighbours
for fun and profit, or even where there is no profit at all. I
see that, while that is a major source of information, and you
have 120,000 calls to the tax evasion hotline, and I know that
people doing barrow jobs often snitch on each other, you are not
very good at investigating those.
Mr Hartnett: I think this goes
back to what I was trying to say to the Chairman. I am not sure
whether snitching is a particular English disease or not but there
are undoubtedly callers to our evasion hotline who think that
by simply calling the line, whatever they say, accurate or inaccurate,
they can cause pain to somebody.
Q35 Mr Mitchell: Oh, yes, of course,
but you have 120,000 calls and only 2,000 investigations completed.
That is a very small proportion.
Mr Hartnett: Because there are
plenty of investigations in hand. That is the number completed.
Q36 Mr Mitchell: 5,500 planned. Again,
that is not a high proportion.
Mr Hartnett: It would be fair
for us to say that we have been a bit disappointed with the quality
of some of the calls, which has made it hard for us to justify
starting an investigation. I venture to suggest, if I may, Mr
Mitchell, that you would be pretty fed up with us if you had a
stream of calls from constituents who said that they knew they
had been shopped by the next door neighbour, there was no substance
to it but we had started an investigation.
Q37 Mr Mitchell: It is not a question
of reporting on the next door neighbour because you do not tell
them who has reported.
Mr Hartnett: Absolutely, we do
not.
Q38 Mr Mitchell: But it must be a
fertile source of information about people evading VAT or doing
barrow jobs.
Mr Hartnett: It is a fertile source
and what we have found is that the figures for 2007/08 are not
audited so are not accurate yet and you will excuse me: I am not
going to offer anything to you today, we will write when we have
got them audited, but they do show a much higher level of success
in terms of yield than for 2006/07.
Q39 Mr Mitchell: I see that you are
working on suspicious activity in bank accounts under the money
laundering regulations. That is surely not what they were intended
for. I am not being critical but that is not what the money laundering
legislation was intended for.
Mr Hartnett: The money laundering
legislation provides suspicious activity reports which go into
the—
2 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
3
Note by witness: Have had 50 in the past but currently under
that figure. Back
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