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


Conclusions and recommendations


RECOVERING TAX DEBT

1.  The Department estimates that £11.2 billion of the £27.7 billion of tax debt at the end of March 2009 is unlikely to be collected. The percentage of debt where recovery is assessed as doubtful has risen to 40%, up from 23% in March 2006. This increase reflects the effect of the economic recession and a deteriorating trend in debt recovery from previous years. The Department needs to improve its performance in recovering tax debt as a matter of urgency. It is currently focusing on collecting debt earlier and prioritising its collection by risk. The Department should establish targets for the amount of debt it collects, including the recovery rate it expects to achieve, and should report its progress against these targets. It should also set out the actions it will take to reduce the levels of debt assessed as doubtful to below those of 2006 and the date by which it believes this will be achieved.

2.  Weaknesses in the Department's existing systems prevent it from analysing debts by age and value and from calculating a taxpayer's total debts across all taxes. The Department has deferred its plan to invest in a new debt management system because of other priorities. An effective debt management system would improve the Department's ability to recover debt by providing a profile of debt across taxes by age, value and risk of recovery. With £11.2 billion at risk of non-recovery, the benefits of investment in a new system could easily outweigh its cost. There thus appears to be a very strong case for investment. The Department should re-evaluate the costs and benefits of investing in a system that would enable it to profile debt effectively.

3.  There is a risk that the wider economic benefits of investment in revenue systems are not realised where the Department has to prioritise investment decisions within the constraints of the funding limitations of its spending review settlement. The Treasury should reconsider its approach to evaluating the economic case for investment in key revenue systems, and assess the costs of investment against its best estimate of the wider benefits to the public finances.

BACKLOGS IN TAX PROCESSING

4.  The backlog of unresolved Pay As You Earn (PAYE) cases awaiting processing stands at 17 million. The elimination of this backlog is vitally important to taxpayers as it will identify who owes tax and who is entitled to a refund of tax. The Department can start clearing these cases in April 2010, when the final stage of its modernised PAYE system will be implemented. The Department should then clear this backlog as a matter of priority, focusing its effort on those cases which are likely to involve a refund or additional payment of tax. It should plan to clear the backlog by March 2011.

5.  At March 2009 Corporation Tax assessments amounting to over £10 billion, and in some cases over 16 years old, were 'postponed' awaiting resolution. A postponement occurs when a company appeals against the Department's view of its tax liability, or when the Department expects that a company's tax assessment will be reduced. Cases can be complex and difficult to resolve and the Department is reviewing how it handles them. As part of this work, the Department should analyse and prioritise postponements to establish a clear action plan to resolve them. The action plan should include targets to allow the monitoring of progress in managing high value cases and reducing the existing volume of lower value cases.

TACKLING TAX AVOIDANCE

6.  The Department does not have an estimate of the total value of tax lost through tax avoidance or the number of staff it deploys on tax avoidance work. Following the introduction of anti-avoidance legislation in 2004, the Department has collected £11 billion of revenue that may otherwise have been lost through tax avoidance. The Department's decisions about how to deploy its resources in tackling tax avoidance for 2010-11 and subsequent financial years should be informed by a full assessment of the revenue it is not receiving because of avoidance.

7.  The Department considers that general anti-avoidance rules as adopted in other jurisdictions may not work in the United Kingdom. The Department should evaluate the relative merits of its existing anti-avoidance measures compared with the general anti-avoidance provisions adopted elsewhere, including the comparative cost of administering an effective general anti-avoidance rule.

STAMP DUTY LAND TAX

8.  The Department lost knowledge and expertise when it reduced its headcount and centralised its administration of Stamp Duty Land Tax (SDLT). The Department has been successful in increasing online filing of SDLT, with 83% of returns now filed online, and has reduced the number of staff working on the tax from over 400 to around 135. However, the closure of the Bristol and Manchester offices and the centralisation of SDLT administration in Birmingham resulted in a loss of expertise. In future, the Department's plans for reducing or redeploying staff should identify how it will retain key knowledge and skills, particularly for jobs requiring specialist expertise, such as avoidance work.

9.  The Department's work to test taxpayers' compliance with the SDLT regime has been disrupted by delays in implementing the computer system and the effect of office closures. In 2008-09, it only opened 203 enquiries on one million returns. Effective compliance work is essential to the successful operation of the tax, helping taxpayers to meet their obligations and deterring people from deliberately under-estimating the tax they owe. The taxpayer must know there is a possibility that any return could be subject to an enquiry. In deciding how much compliance work to undertake, the Department should estimate the volume of enquiries needed to provide an effective deterrent against non-compliance and should resource the work accordingly.

10.  The disclosure rules for SDLT did not require taxpayers to tell the Department when they were using an avoidance scheme, making it difficult to estimate the scale of avoidance. The Department is extending the disclosure rules to residential property and requiring taxpayers to tell it when they use an avoidance scheme. The Department should use the additional information it gets on the use of avoidance schemes to improve its estimate of the tax it ultimately fails to collect and to direct its compliance resources to the areas of highest risk.

TAX CREDITS

11.  53%, or £2.3 billion, of the £4.4 billion debt arising from tax credits overpayments is unlikely to be collected. The Department has already written off £1.3 billion of tax credits debt where it believes there is no possibility of recovery. It is reviewing its approach to tax credits debt, recognising that it has to reach a judgment as to whether the people it is pursuing are able to pay and whether collection is cost effective. As a priority, the Department should identify all debt that is either uncollectable or not cost effective to collect and decide by March 2010 what should be written-off. It should ensure that all tax credits debt remaining on its books at 31 March 2010 is being actively pursued and not ignored.

12.  The Department has been less successful in recovering overpayments directly from claimants where the award has ended. In 2008-09 it recovered £225 million of this type of debt, which grew from £1.8 billion to £2.1 billion. It is examining new methods of recovery including recovery by adjusting income tax (for those in employment) and, working with the Department for Work and Pensions, by adjusting benefit payments (for those in the welfare system). The Department should set targets for implementing these recovery methods, and should aim to have them in place in time for the annual renewal of awards for 2010-11. It should extend the recovery of overpayments against ongoing awards to include any debts the claimant may have from previous awards.

13.  The Department has implemented changes to improve the quality of its support to tax credit claimants, but its ability to improve its service is constrained by weaknesses in its computer system. While the Department requires claimants to report changes in their circumstances as they occur, limitations in the computer system prevent the Department from telling the claimants when they contact the Department what the effect on their award will be. The Department should assess the costs and benefits of investing in an enhanced tax credits computer system that offers the flexibility to introduce service improvements promptly and to update claimant records in real time.


 
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Prepared 10 December 2009