HM Revenue & Customs: Managing civil tax investigations - Public Accounts Committee Contents

Conclusions and recommendations

1.  Over the last three years, the Department has increased yield while reducing costs through better targeting of its work. We welcome this positive progress. The Department faces a significant challenge over the next four years in reducing its costs while raising additional revenue of around £18 billion from increased efforts to tackle fraud, evasion and debt. A highly motivated workforce is crucial to its success. Strong leadership will, therefore, be needed to boost morale within the Department from its currently low ebb during this period of further change. The recommendations that follow are designed to help the Department strengthen its capability to achieve the higher levels of performance required.

2.  The Department has not had a sufficient understanding of the costs and returns of different enforcement activities. It is preparing detailed plans for achieving the additional tax revenue of £18 billion in its Business Implementation Plan, which will be published in April 2011. We expect the Department to be clear about how it will use the £900 million planned spending on the tax gap and its assessment of risks. The Department should identify the costs and returns of different activities and the point at which it would reach diminishing returns. It should base its decisions on enforcement work on this evidence.

3.  Although its performance has been strong, the Department has not set sufficiently demanding targets for its investigation directorates. To date, the two civil investigation directorates have exceeded their targets each year. Targets were sometimes set below the previous year's outturn. The challenge the Department faces over the next four years will require the directorates to stretch their performance further. The Department should set more stretching operational targets for investigation teams, based on a better understanding of their performance and capability. The Department should also apply learning from the improvements achieved in the Local Compliance directorate, which has almost doubled its yield to cost ratio, to the Specialist Investigations directorate, where the return has remained broadly constant.

4.  Only 20% of cases referred to dedicated investigation teams were adopted, creating disillusionment among caseworkers. In part, this low level of take-up by the investigation teams reflects capacity, in part it reflects the quality of the referrals. It is, however, demotivating to front line staff to have so many cases rejected. The Department plans to re-launch the system with revised criteria to better identify serious fraud and evasion cases. It should set an expected adoption rate and monitor the system closely. The Department should also review what happens to cases which are rejected.

5.  Only one quarter of civil investigation of fraud cases were completed within the Department's 18 month target, and 15% took over three years. The length of investigations will be influenced by the nature and complexity of the case but the Department should analyse the reasons for variation and set an objective to reduce the time taken to conclude civil investigations. It should consider setting target times for completing individual investigations and identify ways to streamline its approach.

6.  Over one quarter of civil investigations of fraud resulted in a penalty of less than 10% of the tax due, and one in seven did not impose any penalty. The Department expects the new penalty regime to result in higher penalties as the minimum penalty for deliberate evasion and concealment is 50%. The Department should track the level of penalties imposed to ensure that it is applying the new regime rigorously.

7.  The Department does not have adequate systems for ensuring that the outstanding tax, interest and penalties due from civil investigations are paid. Not ensuring debts are collected is unacceptable. The Department is working to achieve a collection rate of at least 95% in future, from a base of 90%. The Department should vigorously pursue the collection of debt and improve its systems so that it can track whether debts are paid. It should set a target date for achieving a 95% collection rate.

8.  The tax gap provides an important measure of the Department's long-term performance in tackling non-compliance, but a range of measures are needed to assess the impact of enforcement activities in the short term. The Department intends to introduce a new set of performance measures in 2011. Among them will be a measure of the amount of extra tax actually collected as a result of compliance work, not simply the amount identified as owing. In assessing its performance, it should also improve its understanding of the impact of its work on taxpayer behaviours and levels of non-compliance, while keeping in view the broader objective to reduce the tax gap.

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Prepared 17 March 2011