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

1  Management of enforcement resources

1. In 2009-10, HM Revenue & Customs (the Department) collected £435 billion in tax. Most taxpayers try to comply with the law but a minority deliberately evade their obligations.[2] The Department estimated that the tax gap in 2008-09 - the difference between the tax payable if all obligations were met and the tax actually collected - was £42 billion (9% of theoretical tax receipts). Some £15 billion was due to fraud, evasion and criminal attack. The tax recovered by the Department's compliance activities is not included in this estimate.[3] The Department uses various methods to obtain the tax due, from helping those who want to comply through to identifying those who evade, and imposing civil penalties or criminal prosecutions.[4]

2. Civil investigations are designed to recover tax due and impose financial penalties for non-compliance. Two Enforcement and Compliance directorates do civil investigations -Specialist Investigations for higher value, more complex investigations, and Local Compliance for the lower value cases.[5] The two directorates have substantially increased the return on their work since 2007-08. In 2009-10 they delivered £8.5 billion in yield - the estimated additional tax arising from compliance work - an increase of 49 % in real terms since 2007-08. They spent £567 million on all of their work in 2009-10, having reduced expenditure by 10 % over the three years. The yield to cost ratio had increased from 9:1 to 15:1. As both directorates also carry out other compliance work, the costs of, and yield from, civil investigations are not separately identifiable.[6]

3. The Department attributed the improvement to better selection of cases across all of its enforcement work, not just civil investigations. It has made greater use of analytical tools to assess the information it holds about taxpayers and has identified more possible cases of evasion as a result. It has also improved its processes for case management to increase productivity.[7]

4. Over the last three years, Local Compliance increased its yield to cost ratio from 8:1 to 14:1, whereas Specialist Investigations' ratio increased from 18:1 to 19:1. The two directorates were set yield targets by the Department, but have generally outperformed these by over 10% (Figure 1).[8] Targets have sometimes been set below the previous year's outturn. The Department told us that the directorates were also on course to achieve the much higher targets it had set them for 2010-11.[9] These higher targets represented the progress it had to make during the final year of its three-year goal of reducing tax losses by £7 billion by 2010-11.[10]

5. Directorates translated their high level targets into annual operational ones for their teams. They did so largely on the basis of the teams' ongoing investigations and planned work. However, the performance and the workload of different teams varied widely, and the Department did not have sufficient understanding of why this was.[11] We are therefore concerned whether the Directorates' targets have been sufficiently challenging and whether the improvements in yield: cost ratios could have been even greater. The Department is now introducing a case management system that will give better information about the comparative performance of teams. It is also developing an economic model so it can test the likely results of undertaking different mixes of activities in future. It expects both systems to help optimise its use of resources. [12]Figure 1 Performance against targets

Note 1 Only yield that contributes to a reduction in the tax gap counts towards the Department's Strategic Objective. In 2009-10, Local Compliance generated £2.1 billion of yield that related to the prevention of overpayments of VAT claims.

Note 2 The 2010-11 targets were set as a range.

Source: C&AG's Report Figure 3

2   C&AG's Report para 1 Back

3   C&AG's Report para 1.3; Measuring tax gaps 2010, HM Revenue & Customs 2010 Back

4   C&AG's Report para 2  Back

5   Q21, C&AG's Report para 2 Back

6   C&AG's Report paras 5, 1.11 Back

7   Qq 6-7 Back

8   C&AG's Report para 1.14, Figure 2 Back

9   Q68 Back

10   C&AG's Report para 1.14 Back

11   C&AG's Report paras 1.15, 1.20 and 3.9 Back

12   Qq 22, 37-39, 68 Back

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Prepared 17 March 2011