Some £15 billion of tax a year is lost through evasion, fraud and criminal attack. Civil investigations are an important element of HM Revenue & Customs' (the Department's) work to tackle this serious non-compliance. They are targeted on the minority of taxpayers who deliberately seek to evade their obligations. Effective investigations bring in revenue both from tax recovered and financial penalties imposed.
The Department has performed well and significantly increased the tax yield it generates on compliance and enforcement work in recent years. It has two directorates that do civil investigations alongside other work - Specialist Investigations for higher value, more complex cases, and Local Compliance for lower value cases. Together they brought in £8.5 billion in 2009-10, an increase of 49 % in real terms since 2007-08, while reducing expenditure by 10 % in real terms. This represents a strong performance and our findings and recommendations are designed to support further improvements in performance and value.
The level of penalties the Department has imposed in some cases has been low. Over one quarter of civil investigations of fraud resulted in a penalty of less than 10 % of the tax due, and in one in seven cases no penalty was imposed at all. Furthermore, the Department has not monitored whether agreements secured have translated into money collected, and the full value of outstanding debts has not been realised.
The Department recognises that it has lacked detailed information on the costs and returns of different types of enforcement activity. At present, it does not know, for instance, the costs and returns on civil investigations or the point at which further investment in a particular type of activity would produce diminishing returns. Similarly, it has only a limited understanding of the performance and capability of its various investigation teams.
Without this information, the Department cannot decide how best to deploy its resources. Yet, under the Government's latest spending plans, that is exactly what it must do. In the Spending Review, it has been set a stretching goal of bringing in an additional £18 billion of tax revenue from its work on evasion, avoidance and debt over the next four years. At the same time, it must make further efficiency savings across the Department, although around £900 million of these savings can be spent on additional compliance and enforcement work.
The Department's senior officials will need to show strong leadership to achieve the new target. They will need to pay close attention to the morale of staff during what will be a time of significant change, and also to provide them with the best tools possible to do their job. The proposed re-design of the referrals system should help with this, as should the new tougher penalty regime for those who make deliberate errors.
The Department is committed to increasing its collection rate for debts from civil investigations to at least 95 % which could help to convince potential fraudsters that evasion and fraud are not worthwhile. It has not yet set a timetable for achieving this improvement.
On the basis of a report by the Comptroller and Auditor General, we took evidence from the Department on its management of enforcement resources; the potential to increase the tax collected through civil investigations; and how it plans to meet future commitments.