Examination of Witnesses (Questions 1-19)
HM REVENUE AND
CUSTOMS
14 OCTOBER 2009
Chairman: Good afternoon and welcome
to the Committee of Public Accounts where we are bright and breezy
in the new parliamentary session, the last before the general
election. Today we have a very important hearing; we are considering
the Comptroller and Auditor General's Report on HM Revenue
and Customs 2008-09 Accounts. Before I introduce that may
I just put on the record and welcome what I have read today on
the Treasury website, and this is advice to ministers and civil
servants but it is very helpful and so I would like to read it
out and repeat it. It says here: "Witnesses to PAC hearings
sometimes find that there is supplementary material which would
be helpful to the Committee in addition to the NAO report. When
this happens it is good practice to submit it to the Committee
with adequate time to consider it, clearing it first with the
NAO. If time does not permit this, witnesses or their representatives
should discuss the best approach with the Clerk to the Committee."
By the way, in that context I welcome our new and most gracious
clerk, Sian Woodward.
Mr Bacon: Hear, hear!
Q1 Chairman: We put on record our
obligation to Mark Everton, our previous clerk, who has gone on
to work with the Journal Office. The Treasury also say here on
their website, which is even more helpful, "After a PAC hearing
witnesses and ministers are sometimes invited to comment publicly
on the PAC's report. It is bad practice to do so immediately as
the Committee finds this practice discourteous to parliament.
The substantive response should instead be made in the Treasury
minute published a few weeks after the PAC report. Accounting
Officers should be aware that the PAC chairman is prepared to
censure witnesses and ministers who do not observe this basic
parliamentary convention." I have noticed that in recent
years there has been increasing tendency for departments to comment
on PAC reports and, as the Treasury's own website makes clear,
this is bad practice because of course the Government replies
to PAC reports in the Treasury minute, and we have got to try
and maintain this convention. It is important because it does
buttress the non-political nature of this Committee, that we do
not get involved in policy, and if we start having a ding-dong
between PAC reports and ministers it is not going to help the
process. Our job is not to apportion blame, it is to try and cast
light on the work of this Government. I am very pleased to have
read this on the Treasury website. As I say, today we are considering
the Comptroller and Auditor General's Report for HM Revenue
and Customs 2008-09 Accounts and we welcome Lesley Strathie,
the Chief Executive of HM Revenue and Customs. Obviously at a
time of economic downturn and declining tax revenues the Department
plays a crucial role in doing everything possible to maximise
tax yield. This is the engine room, as the Comptroller and Auditor
General has just reminded us, of government; for every pound that
they spend they get £100 back so this is not some sort of
dry subject, it is immensely important and lies at the heart of
everything that we are trying to achieve in government, in other
words maximising tax yield. Yet when we read this report we see
serious weaknesses in information systems, skills and capacity
which limit the Department's ability to operate effectively in
such a complex environment. In taking evidence today on the issues
covered by the C&AG's Report, in particular stamp duty, corporation
tax and tax credits, I would like to focus on whether the Department
has the knowledge and capability it needs to deploy its resources
intelligently so that the risks are managed and the tax revenues
are maximised at such a critical time. Before that may I say I
am delighted to say a very happy birthday to Mr Alan Williams,
who is 59 today and tomorrow will celebrate a magnificent 45 years
in Parliament. Shall we give him a clap? That is the nice part
of this. Ms Strathie, would you like to introduce your colleagues?
Ms Strathie: I would. On my right
I have Richard Summersgill, Director for Benefits and Credits
and on my left Jim Harra, Director for Corporation Tax and VAT.
Q2 Chairman: Okay. When we read this
Report we see, Ms Strathie, that a massive £11.2 billion
of the money owed to the Department by tax debtors has been assessed
as "doubtful". This is a term of art but it means "unlikely
to be collected". That is 40% of tax debt, so what are you
doing about it?
Ms Strathie: Going to your opening
statement we have been doing quite a lot about it since we very
warmly welcomed the NAO's Report on debt. It is important to just
put some context around that 40% which represents the provisions
we have made in our account. The debt balance, when we laid the
accounts on 31 March, which was £27.7 billion, is a snapshot,
but there is a lot of volatility in those numbers because of the
different tax regimes, but it is important to remember that it
is a snapshot.
Q3 Chairman: You are not denying
the figures that I have given you.
Ms Strathie: No, no.
Q4 Chairman: We are now talking about
40% of total debt is doubtful, unlikely to be collected. Two or
three years ago it was 20% to 25%; this is worrying so let us
not waste a lot of time, Ms Strathie, saying it is a snapshot.
This is broadly correct; what steps are you taking to get the
matter of tax debt under control? That is what I am asking.
Ms Strathie: I hear what you are
asking, Chairman, but I still think it is really important to
understand that we believe it is prudent to make that provision
given the recession, given that we have seen an increase in debt,
particularly since 2005. When we add the recession to that we
think it is right to make that provision. What I also think it
is important to understand is that all of that is not what we
would consider to be fiscal risk; you do not have a direct read-across
to what you would have in the private sector for example. Much
of our debt is not paid on the right day and within that total
tax take of almost £436 billion there is £100 billion
which is paid late. We have completely revised our debt strategy
and we are very, very keen to move our interventions with business
upstream rather than compliance yield which very often becomes
debt and is quite costly to chase down and in some cases can be
written off. The intervention regime that we have is that we focus
much, much earlier on the debt and, indeed, although debt is rising
it is important to understand that this year alone we have actually
collected almost £3.5 billion more this year than last year.
Q5 Chairman: Can I now turn to PAYE?
You have transferred the processing of individuals' PAYE onto
the national insurance reporting systems but we have got a backlog,
have we not, of 20 million cases—how can you start to clear
this backlog?
Ms Strathie: First of all I do
think it is important to put in context HMRC's tremendous success
in delivering this huge and fairly high risk modernisation which
we did at the end of June, albeit we would have hoped to have
delivered that programme sooner. In preparation for it we considerably
reduced the number of open cases as part of our preparation, because
we had an increase right up to 30 million. We managed to get that
down to just under 17 million by March. We have another two releases
to come, one in November and another in April for the modernisation
programme. At that point we will then have the functionality to
start reworking those old cases. In some cases people will owe
tax and in others people may be entitled to a refund of tax.
Q6 Chairman: But as many as ten million
of these cases may not be worth working on. I was hoping you were
going to say you were going to concentrate on what you can actually
achieve progress on.
Ms Strathie: We are actually working
through with our own internal audit and with the National Audit
Office at the moment to see of the remaining cases outstanding
which may be much more appropriate and cost effective to write
off and which cases have to be worked and in what order.
Q7 Chairman: Can I ask you about
Stamp Duty Land Tax—time is moving on, I cannot ask a lot
about this, but you are only now developing a strategy for compliance
work. The tax was introduced in 2003; why have you waited so long?
Ms Strathie: The answer is that
the Department did not wait so long. Looking back in the history,
2003 and what followed was probably not the Department's finest
example of managing change. We did end up with huge resource implications
because we did not have the technology to support. It now actually
has the greatest take-up of any of our electronic channels which
are not mandated, 83% file on-line.
Q8 Chairman: All these are excuses,
Ms Strathie. I have been told that in 2008-09 there were one million
transactions on SDLT and only 200 of those were subject to inquiry
by you. This does not sound to me as though you have got a grip
on this.
Ms Strathie: If you look at any
of our compliance regimes—because this is self-assessment
and file on-line and, as I say, 83% of people are filing on-line—what
we have now is a really good centralised approach, a real productivity
gain in terms of taking those numbers of people out and an increase
in yield well beyond expectation. We are delivering against the
objectives and we now need to be very clear about at what point
you intervene in that process and, on a risk-based approach, what
compliance activity we would want to take.
Q9 Chairman: I have got to move on
very quickly now to corporation tax. Some of the assessments on
corporation tax cases have been postponed for 16 years; what are
you doing to resolve these very old cases, Ms Strathie?
Ms Strathie: Could I ask Mr Harra
to answer that question? Thank you.
Mr Harra: The vast bulk of the
postponements for the very oldest accounting periods relate to
large businesses. We conducted an exercise in May of this year
where we reviewed all of those largest cases and we found that
all of them are actively working. It is the case that in some
of the largest businesses we have got very complex matters under
dispute, some of which have to go through litigation and it takes
time to resolve those. It is also the case that we can assess
where we discover suspected fraud or negligence many years after
the end of the accounting period, so although a postponement may
relate to an old accounting period that does not mean it is an
old postponement, it may be on an assessment made much more recently.
Q10 Chairman: But £3.6 billion
of this debt relates to 1993-99, already a long time ago; a further
£1 billion is even older. You cannot tell me this is good
management.
Mr Harra: Certainly if you look
at the oldest ones there that you have mentioned,[1]
we have reviewed those, and the amount that is in there that does
not relate to a very small number of large businesses is negligible.
All of those inquiries are being actively pursued but we have
to go through the courts for most of those. For example, one of
the oldest cases which represents half of all that stood-over
tax from before 1993 is going through the French courts, and that
is taking a very long time.
Q11 Chairman: Quickly on tax credits—this
is one of the most difficult areas of all and we have reported
many times on this. Ms Strathie, you have made no progress in
the recovery of £4.4 billion tax credits overpayments; £2.3
billion of this is considered doubtful, in other words unlikely
to be collected. How much debt do you expect to recover? How long
will this take?
Ms Strathie: First to say there
has been an increase in that and I will not bore you with all
the reasons why, but the focus on recovery is one where we are
trying to take some even-handed approach to those people who are
finding quite a degree of difficulty in paying this back. One
of the things we have done is arranged for people to have their
PAYE codes adjusted so that we can take repayments there; we have
also joint work that I co-chair with Sir Leigh Lewis in DWP. We
are working with that Department so that on a voluntary basis
people can have their tax credits recovered from DWP benefits
when they are in those and there are a number of other ways where
we have changed our approach to recover while people are in payment.
There still is an issue about a large chunk of that debt which
may be written off, but we have to strike a balance with all of
those people who have paid back in how we handle those who have
so far failed to do so.
Q12 Chairman: My last question really
relates to the Treasury. It is clear to me that HMRC is stressed
at the moment. What extra help have you given them in terms of
helping them to manage this debt?
Ms Diggle: HMRC seem to be managing
very well on fewer staff. They have managed to lower their number
of staff quite successfully over the last few years; if they needed
more staff I am sure they would tell us.
Q13 Chairman: The answer is you are
not giving them extra help.
Ms Diggle: But we maintain a constant
dialogue.
Chairman: Okay; thank you very much.
Richard Bacon.
Q14 Mr Bacon: Ms Strathie, you said
that you had to strike a balance between deciding to write off
tax credit debt and having regard to those people who had done
the right thing and paid back where they should have done. At
what point do you decide that there is so little a chance realistically
of getting back the debt that you choose to write it off?
Ms Strathie: We have done a reasonable
analysis on this at the moment. Essentially HMRC recovers nearly
all debt of any kind and that is our starting point. Generally
we write off debt when we believe there is no possibility at all
of getting it back, like in a company case when there is an insolvency
or if we just cannot track clients down after a great length of
time. Basically, therefore, writing off is not our starting position,
but some of this is quite old and we feel on a cost-benefit analysis
there is a question mark over some of it.
Q15 Mr Bacon: I noticed the Report
says 94% of tax credit debt is less than £5,000 and 6% is
less than £250; could you send us a breakdown, which probably
would look neater than this, but something like that where you
band it for us so that, for example, you would show less than
£250 6%, and then the total in millions of pounds represented
by that band.
Ms Strathie: Yes.
Q16 Mr Bacon: Then the £250
to £500 slug, what that represents in per cent in total and
the number of millions of pounds, all the way up to £5,000
in £250 increments.
Ms Strathie: Yes.
Q17 Mr Bacon: Then presumably it
is the bit from 94% to 100% that is over £5,000; can you
do a detailed breakdown of that as well so we can see better where
the debt lies. If you can find a way to factor into the same chart
something about how old the debt is as well, I am really trying
to understand—
Ms Strathie: Age and value.
Q18 Mr Bacon: Yes, the value and
the proportion that is in each band, if you could do that.
Ms Strathie: We shall certainly
take that request away and within the limitations of our system
give you a written response.[2]
Q19 Mr Bacon: One of the things that
concerns me about the entire tax credits system is that in the
Annual Report and Accounts (not the C&AG's Report) in paragraph
6.15 you are still having 7.9% to 9.2% of the final value of tax
credit awards classified as fraud and error. This is after many
years of the tax credits system, during which you have paid out
over £84 billion—I have just totted up the figures
in the chart. The 7% to 9% of £84 billion in fraud and error
is a lot.
Ms Strathie: Yes.
1 Note by witness: At 31 March 2009, £3.6 billion
was recorded as postponed on the COTAX IT System for the years
1993-99. The further £1 billion mentioned relates to 949
Million recorded as postponed on other, legacy IT systems, of
which £491 million was for the years 1993-99 and £458
million was for earlier years. Over half of this latter sum relates
to the case which is going through the French courts. Back
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