HM Revenue and Customs: Improving the Processing and Collection of Tax: Income Tax, Corporation Tax, Stamp Duty Land Tax and Tax Credits - Public Accounts Committee Contents

Examination of Witnesses (Questions 1-19)


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

2   Ev 13 Back

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