Administration and effectiveness of HMRC – written evidence

Written evidence submitted by the Institute of Chartered Accountants of Scotland

The Institute of Chartered Accountants of Scotland welcomes the opportunity to present evidence to the Treasury Sub-Committee which is looking at the administration and effectiveness of HMRC. We have found the constraint of a submission limited to 3,000 words difficult and members of the Institute’s Taxation Committee would welcome the opportunity of supplementing our written submission with oral evidence and perhaps amplifying some of the more difficult areas where HMRC is failing to offer an effective and cost efficient service.

In responding, it is often important to make the point that the perception of something can be different from the reality. HMRC does a difficult job and in many instances does it well and to a high quality. Human error inevitably leads to mistakes and deserved criticism of HMRC. Nobody likes to pay tax and people who are inconvenienced by HMRC errors often react or comment in a way which is disproportionate to the underlying error or failing.

The Institute of Chartered Accountants of Scotland has always supported the principle that everyone should pay the right tax at the right time. No one should condone evasion and we support the Government and HMRC in making tax compliance a priority. HMRC correctly identifies that taxpayers form a spectrum ranging from those who can and do comply, to those who deliberately evade tax taking advantage of their perception that HMRC will not be able to identify the evaders or ever collect the tax which is being evaded.

We have a great deal of sympathy for the position in which HMRC finds itself. Tax legislation in the UK has become excessively complex and is quite inappropriate for a self assessment regime. Research has shown that the more complex the fiscal regime the higher the level of non-compliance. Non-compliance can occur because of mistake and misunderstanding but it is not helped by a feeling that the system is too complex and therefore unfair. As complexity grows the confidence that there is horizontal equity between taxpayers is lost and this is a disadvantageous attitude to compliant taxpayers who may feel that others are getting away with things that they ought not.

As an organisation, the merger of what was the Inland Revenue and Customs & Excise to form HMRC has earned criticism. The changes within the procedures adopted by the organisation have meant that some experienced staff have felt uncomfortable and unhappy. During a period of change this is almost inevitable and it has had adverse effects on staff morale and staff performance. There is evidence of a culture of fire fighting indicative of management redeploying staff to deal with immediate crises without there being in place a coherent plan and understanding of the staffing compliments necessary to achieve the organisation’s business outcomes.

The invitation to present evidence poses the following questions to which we would answer as follows:

1. Is HMRC’s performance as an organisation acceptable and is it delivering its key aims?

HMRC is a large and diverse organisation. It is a political decision that it deals with so many different business streams including the collection of tax and the payment of tax credits to claimants. The job of HMRC is to enforce the tax laws which have been enacted and it faces a Herculean task. Parliament deserves considerable criticism for enacting so many complex and unnecessary pieces of tax legislation. Over the last two decades, the level of Parliamentary debate and scrutiny on Finance Bill clauses has been poor. As a result, a great deal of poorly drafted bad legislation has been enacted yet never repealed even though most people recognise the deficiencies.

For example, IR35 when it was enacted was predicted to produce a yield of £200 million a year yet in total since it was enacted, a recent Parliamentary question revealed it has only produced a yield of £9 million. It is bad legislation which does not achieve its purpose. HMRC are faced with the impossible task of trying to enforce legislation which should never have been enacted but, having mistakenly been enacted, should have been repealed immediately its deficiencies became apparent.

There are many deficiencies within our fiscal legislation. At one extreme, we have Blind Person’s Allowance which is available to all UK resident individuals who are registered as blind, and the allowance can be transferred to spouses or civil partners if the blind person’s income cannot use the allowance. This requires nearly a whole page of detailed legislation at Sections 38 and 39 ITA 2007. In practice, many deserving people fail to claim the allowance to which they are entitled or fail to transfer the unused allowance to their spouse as the law intended.

HMRC’s vision is to close the tax gap and make ordinary citizens feel that the tax system is simple for them and even handed. To that extent, they face an impossible task as Parliament is responsible for having drafted complex and voluminous legislation that makes taxpayers feel it is unfair and difficult and often results in deserving claimants not claiming the reliefs to which they are entitled.

HMRC aims to be seen as a highly professional and efficient organisation. Individual experiences will vary across the spectrum, with those who have a good interaction with HMRC believing that that vision has been achieved and those who have a poor interaction believing otherwise. Unfortunately, in the case of HMRC, it is difficult even to have such interaction because HMRC deserves the criticism which it receives for being difficult to contact and even harder to communicate with. HMRC has lost many of its experienced staff but many new staff have been recruited and, as is common in any large organisation, the staff have a spectrum of abilities ranging from appallingly poor to being seen as highly professional and highly efficient. The current perception is that there are too many poorly trained, inefficient and inexperienced staff within HMRC for them to be seen in the way that they wish.

HMRC’s inefficiency and poor performance actually creates difficulties. It is well known that HMRC has serious arrears of post and that staff are redeployed to deal with post at crisis levels, sorting the particular problem but creating another one elsewhere as a result of the staff being redeployed from their first task. Communicating with HMRC is a difficult task and HMRC deserve criticism for the arrears of post, the length of time which they take to respond to simple requests and the difficulty in contacting them by other methods such as the phone. The number of calls which go unanswered is unacceptable. Dealing with a call centre is a very variable experience. People can be fortunate in getting good service, but far too many experience appallingly poor service dealing with call centre staff who seem to lack an understanding of their customer or the customer’s needs and who are unable to help the customer resolve things and get it right.

HMRC needs to improve its communication with its customers in a massive step change. Its current performance is not acceptable and it needs to move towards ways of improving performance by making use of email and by improving the knowledge and experience and judgement of its call centre staff but allowing an efficient escalation process where knowledge at a higher level is required. Some staff within HMRC are excellent and do a very good job in often very difficult circumstances. Other staff need to improve their performance by a step change.

As a society, the UK is perceived as being comparatively compliant. Taxation works by being acceptable to the vast majority of the population and it is important that politicians remember that taxation is effective where it is acceptable. Other jurisdictions admire the way in which HMRC achieves its level of compliance and the UK citizenship’s cultural attitude is something to be preserved and valued. It would not be in anyone’s interest to move to a different cultural attitude such as seen in some Soviet bloc countries and others where tax is enforced by officers being required to carry arms and sanctions include (as in China) the death penalty for tax evasion.

For this reason, HMRC’s purpose is to make sure that money is available to fund UK public services and the general feeling is that it achieves that purpose with reasonable efficiency and effectiveness. There is however little doubt that HMRC could do more to do it better. HMRC makes too many mistakes and is responsible for too many burdensome failures in respect of its database which is often full of dirty data which should have been cleansed. HMRC also has a long history of implementing new IT projects and systems in a manner which leads to criticism because it was not done following best practice. Often this is as a result of cost cutting and the need to make efficiencies and savings. In the short term this may be achieved but in the longer term the damage to HMRC’s reputation and the measure of its professionalism is considerable.

2. What are the implications of HMRC’s spending review settlement?

Over the years, HMRC has announced a number of initiatives to close the tax gap including spend to save with the promise that by investing more the tax yield would increase. These were laudable objectives to be supported. Unfortunately, there is a strong suspicion that HMRC fails to deliver. Following the merger, there was a perception that many experienced officers who could have contributed their knowledge and experience towards closing the tax gap were actually encouraged to leave or take early retirement with the result that the overall skill set within HMRC was perceived to have reduced.

The head count of HMRC has fallen consistently over the last five years since the merger occurred. The problem is that losing ten experienced and knowledgeable officers to be replaced by five new call centre staff does not really measure the change which has occurred within the organisation. HMRC always had the scope to improve its effectiveness and performance. In many areas a failure to invest in new technology and new training meant that old inefficient processes were retained. HMRC is undergoing considerable change and it is inevitable that there is some pain associated with that change. Commenting at this instant in time of 2010, HMRC would be criticised for having lost too many experienced and knowledgeable officers and criticised for those new recruits lacking training and lacking the ethos of HMRC so that they do their job inefficiently, ineffectively and with a great deal of apathy.

Our understanding of the spending review settlement is that HMRC will lose 13,500 staff but will recruit a number of new staff leading to a net overall reduction of 10,000 staff. The new staff recruited and the investment in IT systems should lead to improved compliance helping to close the tax gap and by improving PAYE and benefits reporting, helping to better match income with claims to tax credits.

Measuring income is a difficult process, especially for the self employed. The tax credit system also seems to have been designed without proper regard to the day-to-day needs of people and the measurement of income which is generally on an annual basis. As a result the two systems do not sit well together. That is the fault of the politicians who enacted such poor legislation which does not seem to have taken proper account of self employed claimants’ needs.

The result is that HMRC is often faced with a difficult task of looking at the family unit in respect of entitlement to benefits but looking at issues of confidentiality in relation to income declarations by individuals. It could have been done better but it is not HMRC which deserves the criticism, it is politicians for enacting such poor rules.

We support HMRC in trying to close the tax gap and trying to administer the tax credit system and entitlement to various benefits better. In the short term we anticipate that this will require considerable investment by HMRC in new IT systems and training and that there will be a further deterioration in HMRC’s performance before it begins to get better.

Comparisons with other fiscs on an international basis would suggest that further economies within HMRC and further efficiencies of process are there to be harvested but perhaps now is a good time to take stock in the UK. The cost of compliance for individual taxpayers and for employers is increasing even though the cost of the collection of tax incurred by HMRC is decreasing. The real measure of what might be a success is to reduce the overall cost of compliance by looking at the process from end-to-end. Instead in recent years much of the change has been driven by the process within HMRC aiming to achieve savings there without regard to the additional cost that this imposes on taxpayers. There are many areas where HMRC could make economies, and equally it is unfortunate that HMRC has made economies when it ought not to have done so if it had considered the overall impact of the changes proposed.

3. Whether HMRC is able to deliver to Government’s aims on tax compliance?

No one should condone evasion and we support the Government and HMRC in their efforts to close the tax gap and counter evasion and fraud. There can be little doubt that targeting resource at those areas where the risk of non compliance is greatest is a sensible use of those resources. However taxation is excessively complex and the level of compliance could be improved if there was simplification of the system. In the short term with the current complex fiscal regime, it takes time to train an officer properly to be an effective investigator able to challenge non-compliance in an effective and efficient way. So in the short term we doubt that HMRC is able to deliver the additional yield with which it has been targeted. In the longer term, with recruitment of the right staff and the right training supported by the right systems and good risk assessment methods, we think that this is possible.

We are concerned however at the cultural attitude to taxation within the UK. We believe that within the UK the level of tax compliance is high in comparison to other jurisdictions and that the level of voluntary compliance is comparatively good. It is important that HMRC does not change the perception that it has. HMRC should be sensitive to the criticism it earns when it takes inappropriate action. All too often, HMRC does take inappropriate action as a result of failures within its system to identify that tax has actually been paid when HMRC adopts an aggressive collection policy threatening or forcing bankruptcy in inappropriate cases.

HMRC could improve its communications better and, when mistakes occur, could improve its means of dealing with these mistakes, correcting them quickly and efficiently. HMRC’s complaints and redress procedure needs to be improved considerably.

4. Whether PAYE reform is necessary?

The UK PAYE system still works remarkably well. Recent changes including making it mandatory to file electronically have merits and demerits. For large employers, using technology has many advantages but for small employers imposing a mandatory requirement to use electronic filing and processing when it is probably simpler and more efficient to do it manually is wrong in principle. The defect is that one size was never going to fit everyone and at some point it is appropriate to consider whether it is desirable to reform PAYE rather than leave till when it becomes necessary to reform PAYE.

Looking at the fundamental, the PAYE system is being imposed in situations where it is probably not appropriate and it might be better to consider making individuals more responsible for their taxation affairs. This could be the case in very small employer situations including domestic employment where it is believed there is a very high degree of non-compliance.

There is growing concern that the burden which PAYE can impose on some employers is excessively onerous. Especially in cases where there are frequent changes in the workforce, part-time working and fluctuations in pay, it might be desirable to look at PAYE and consider whether a fundamental reform might be appropriate. We have a self-assessment regime as well as independent taxation and it might be appropriate to require more people to self-assess, removing the responsibility of deducting tax at source or simplifying the requirement.

Our response to this question would therefore be that we doubt if the reform of PAYE is necessary at this stage but it might be desirable, and we recommend that a high level working party be formed to consider the technicalities and desirability of a constructive reform of the PAYE system.

5. What HMRC’s priority should be for the future?

We began this submission by commenting that HMRC does a difficult job and in many instances does it in a very professional manner achieving high standards of efficiency, effectiveness and performance.

The HMRC Vision launched on 3 November 2008 sets out a series of visions covering purpose and methodology which are aspirational but would be a good outline for the future of HMRC. It is in everyone’s interest that the HMRC vision of closing the tax gap and making ordinary taxpayers feel the tax system is simple for them and even handed is achieved. It is even more important that HMRC be seen as a highly professional and efficient organisation.

HMRC needs to improve its performance and in the short term this is not achievable. In the longer term with appropriate training, examination of processes with a view to reducing the overall cost of compliance and hopefully reducing the excessive complexity of the UK system, HMRC can move towards being seen as a highly professional and efficient organisation.

A copy of the Institute’s recent research paper commenting on HMRC errors can be downloaded as a pdf file at:

http://www.icas.org.uk/site/cms/download/TAX/hmrc_errors_survey_report_20101013.pdf

November 2010