Examination of Witnesses (Questions 40-59)
HM REVENUE AND
CUSTOMS
11 JUNE 2008
Q40 Mr Mitchell: Is that in respect
of overseas transfers or is it any suspicious activity?
Mr Hartnett: Anything like that
at all. There can be huge amounts of money involved and there
can be comparatively small amounts of money involved, and they
come to us through a central point.
Q41 Mr Mitchell: Do they all come
to you?
Mr Hartnett: All that look as
though they have a relevance for taxation come to us, but the
majority of them are not necessarily about the hidden economy.
On missing trader fraud that I was talking about earlier on we
get a huge number of suspicious activity reports where the banks,
for example, have become very good and actually say on suspicious
activity reports sometimes, "This looks like missing trader
fraud". They are not giving a professional or an expert opinion
but it is a helpful steer. Suspicious activity reports transcend
the whole range of our work.
Q42 Mr Mitchell: So you get the reports
and then you send investigators in to find out what the tax liabilities
are in all cases?
Mr Hartnett: We risk-assess the
issue in all cases.
Q43 Mr Mitchell: I see that you were
defeated in trying to get the same information from accountants
and solicitors. Were you getting information from accountants
and solicitors before that or not?
Mr Hartnett: I think we had received
some. I am not sure that it is right to say—and I say this
only to be perfectly accurate—that HMRC was defeated. I
think lawyers and accountants took the case generally about the
money laundering rules, and one of the things we were looking
forward to was receiving reports from family lawyers, for example,
about hidden monies that emerge in divorce cases and the like.
Q44 Mr Mitchell: Before this legislation,
of course, accountants were one of the major factors arranging
money laundering through shell companies and all that kind of
business, so they certainly know it is going on. I would have
thought that they were well worthy of investigation. Why will
you not do an estimate? We found the same problem, did we not,
on the large companies? We do not know how much tax is lost through
offshore accounts or whatever. Why can you not do an estimate
in this which is a much less important area?
Mr Hartnett: I am sorry; I do
not understand the question.
Q45 Mr Mitchell: Why can you not
give us figures estimating the amount of fraud that is going on?
You cannot really know the scale of the problem you are dealing
with unless you provide estimates of the people who are not paying
VAT, fiddling employment, doing ghost work in the economy. These
are all very bald estimates.
Mr Hartnett: They are the best
we can manage with the hidden economy about which necessarily
we know so little. Our best shot has been that it is upwards of
£1.5 billion a year.
Q46 Mr Mitchell: Finally, I see that
the European Commission is trying to push us to advertising now.
That seems fairly sensible in the sense that when you have advertised
it has produced a quite substantial return. Are you intending
to use that?
Mr Hartnett: We used it, Mr Mitchell,
in relation to the Offshore Disclosure Initiative. I can give
you some figures which are rough and ready but you will see the
point. We were unable to advertise for a long time in relation
to the Offshore Disclosure Initiative, which had its first point
by which people had to do things on 22 June 2007, and with a relatively
short time to go—two weeks—we had about 10,000 people
come forward. After advertising and correspondence then became
more vigorous another 54,000 people came forward in two weeks,
and I think that makes your point on the power of advertising.
Q47 Mr Bacon: I would like to ask
the NAO to clarify a point on figure 5 on page 19. Am I right
to understand that what the "Hidden Economy Teams—VAT"
bar on the left is saying is that the return in terms of added
revenue was roughly 15 times the cost of the team that did that?
Ms Wheeler: Yes.
Q48 Mr Bacon: Mr Hartnett, there
is very clearly a big variation between the VAT team producing
very high returns and some of the others producing much lower
ones. The hotline is the lowest of all, presumably because it
is about twice the cost and that presumably takes account of the
68 calls from—I will not describe her as your lady friend,
but you know what I mean.
Mr Hartnett: I do not know this
lady.
Q49 Mr Bacon: The lady whom you referred
to. That is incorporated into that figure of the yield being only
twice the cost; is that right?
Mr Hartnett: I think that is right,
but if you compare on this bar chart the large bar for VAT and
the smaller bar for income tax and national insurance next to
it, I think that brings out a great truth about these figures.
VAT is on turnover and income tax is on profit or income, and
it is hard to think of a business where the whole turnover is
profit, so that second bar is going to be much lower.
Q50 Mr Bacon: That brings me to the
question I wanted to ask about this. It refers to this in paragraph
3.8, that you have got particular groups who are more likely to
be in the hidden economy, such as hairdressers, trades involved
in the home. Two very obvious trades in the home are cleaning
and gardening. Generally speaking—and we are not talking
about landscapers at the Chelsea Flower Show—these are people
at the very low end of the income scale. They are just scraping
along to some extent and so although they might be liable for
tax that they are not paying it probably is not a lot, whereas,
shall we say, people running large market stalls every week are
effectively retailers but out on the street with an awning over
them. They are not paying any income tax or any VAT at all. Most
people would say that morally it is quite different even though
they are both failing to observe the obligation to pay some tax.
Do you, in the way you look at this and in the way you pursue
them, simply allocate the resources on the basis of where the
yield will come or do you take into account what one might call
a sort of social factor, that many of the people at the bottom
end of the income scale who are scraping along are not exactly
people whom you ought to be hot after anyway?
Mr Hartnett: The key is this:
we want to apply our skilled resource to risk. We have to apply
it across the hidden economy, so we will investigate some of the
less wealthy people you describe, but a market trader, a cleaning
organisation, something like this, that we identify as operating
without paying tax is much more likely to get pretty immediate
attention from us than someone with a much smaller income that
you describe.
Q51 Mr Bacon: If you look at paragraph
3.8 it says you did focus on self-employed people, although the
yield, over the page in paragraph 3.11, is much higher for small
businesses and employers. Why target the self-employed when the
employers, even relatively small ones, produce much, much better
yields?
Mr Hartnett: Well, the self-employed
are small businesses, and quite often we do not know. Let me give
you one or two examples. Through our data matching we identified
somebody providing a Rolls Royce hire service. They were not smart
new Rolls Royces, they were older ones, but had not cost a lot.
We are into that individual now for a sum of about £350,000.
Q52 Mr Bacon: Owed to you?
Mr Hartnett: Owed to the Exchequer.
Mr Mitchell mentioned a trade he might take up one day, but nail
bars are part of the fashion trade and we are finding those quite
astonishing. We are finding an awful lot of them are not known
to us and we have nail bar investigations involving over a million
pounds,[4]
and the important thing is here informing our risk assessment
all the time; we are learning more and more about different sectors.
I agree with you, however; only 14 cases in relation to employer
compliance reviews are insignificant, and that is one of the reasons,
probably the crucial reason in Naomi's area, that we have brought
together in single management function the employer compliance
teams working in this area and those looking at the self-employed
and others as well.
Q53 Mr Bacon: You mentioned data matching.
In paragraph 3.17 it is very clear that your work on data matching
is somewhat embryonic. In fact, it says: "This work is experimental
and is at an early stage of development and subject to further
testing", and "In time the Department intends to provide
an organisation wide data matching service to detect people and
businesses not complying ... ". The Department for Work and
Pensions, it says in the next sentence, carries out regular bulk
data matching exercises. Why are you so much behind them? Surely
the techniques for data matching, with huge groups of data of
either taxpayers or benefit recipients or pension recipients,
must be very similar?
Mr Hartnett: To a point they are,
but we are looking at much more complicated techniques to identify
risk. I wanted to say to Mr Dunne earlier on in terms of data
matching that the way to envisage it is as a great big hopper,
and today we can throw much more into the hopper than we have
ever been able to do in the past, and I am very proud of this
on behalf of HMRC. We are regarded in the world tax community
as probably the most innovative in tax administration, but it
is right to say it is embryonic because we are putting much more
data together than ever before.
Q54 Mr Bacon: But the hopper analogy
surely also applies to DWP. What is different about them which
enables them to be much better at it in the sense that already
they can do regular bulk matching, which is what you are not doing?
Mr Hartnett: I think that is right
but only to a point. It is much more straightforward for DWP than
it is for us because we are looking at a whole range of trades,
and at lots of people doing many different things.
Q55 Mr Bacon: In paragraph 3.9 it
says, "Of the 19,800 cases where the Department has produced
intelligent packages, 3,500 had been opened, of which almost 2,000
had been completed generating additional tax of £2.6 million".
You have a pretty big backlog there. How are you going to deal
with it?
Mr Hartnett: It is not necessarily
a backlog; we will have risk-assessed these packages and be taking
the ones that look most productive first.
Ms Ferguson: This is not a backlog.
Think of this as stock in hand, work in progress. Obviously the
report was written at a point in time and since then we will have
taken up some of the cases that were sitting as stock in hand
waiting to be taken up, and, indeed, have taken more up following
that, so those cases will now have been worked, and we have moved
on to other ones.
Q56 Mr Bacon: On page 21, and this
is really a question about how you do your estimates and how you
come up with your figures, the sentence that caught my eye was
where it said: "The continued slow progress in dealing with
cases means that the Department is likely to raise up to £7
million in additional tax in 2007-08 compared to its original
estimate of £77 million". Now, that is an enormous difference.
Who comes up with these numbers? That is out by a quantum of ten?
Mr Hartnett: I agree. We have
professional analysts doing this work for us, but this goes back
to one of Mr Mitchell's observations: we expected to have a very
rich source of data from accountants and lawyers, we planned on
that basis as the money laundering rules were brought in, and
then the obligations of accountants and lawyers were changed from
what was first envisaged, and we thought we would have a very
rich seam of very substantial cases.
Q57 Mr Bacon: This is because of
the court case?
Mr Hartnett: Yes.
Q58 Mr Bacon: Lastly in paragraph
3.15, "The national minimum wage team"—this is
the investigation team—"does not ... receive feedback
on what has happened to [the cases it has looked at] or whether
the information was useful in following up cases". It is
hard to think of a way more quickly to demoralise folk than to
ask them to give you information as an investigation team and
then not to tell them what you have done with it or whether it
was useful. How can you get more feedback?
Mr Hartnett: The only thing I
want to say, before bringing in Naomi, is that our investigators,
our teams, are anything but demoralised.
Ms Ferguson: They would normally
get feedback at the point where we undertake the risk assessment.
What the NAO picked up on, and were right to do so, is that sometimes
we are not very good at tracing all the way through to the end
outcome. It is something I will pick up with the teams because
you are right, it can certainly help. I know locally individuals
will do it but I think we should think about how systemically
we can provide that feedback.
Q59 Dr Pugh: Your estimate for the
number of people involved in the hidden economy is 2 million but
we have been trying to get some picture of what these people are
like. Have you any feeling, on that two million, how many are
big problems, in other words owe a huge amount of taxation, or
are the vast bulk of them small time offenders, the gardeners,
the hairdressers and so on?
Mr Hartnett: The picture is rather
more the second you paint than the first.
4 Note by witness: We are investigating a number of
nail bars but at this stage less than a million in tax recovered. Back
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