Administration and effectiveness of HMRC – written evidence

Written evidence submitted by the Forum of Private Business

Summary

This is a collection of evidence gathered by the Forum of Private Business to be presented to the inquiry into ‘The Administration and Effectiveness of HMRC’. We represent over 20,000 small and medium-sized businesses throughout the UK. In this submission we have collected together information and evidence from our members which highlight the problems with HMRC. From the evidence provided by our members it is clear that HMRC is not fulfilling its aims as an organisation. It is slow and inefficient, with many of its online systems too complicated for our members to use. In the following pages we explore the key issues and provide examples from small business owners that illustrate HMRC’s failings. We argue that the organisation needs to make major changes, such as reforming the PAYE system, significantly increasing the speed of its procedural systems, improving its treatment of customers and generally simplifying the tax system. These issues must be addressed before HMRC is awarded the extra funds to tackle tax avoidance, as granted by the Chancellor in the spending review. If HMRC cannot undertake its current duties effectively then any funds given to the organisation to achieve new aims will be wasted; it must deliver its main functions before any other extra duties are undertaken.

HMRC’s performance as an organisation and whether it is delivering its key aims

The Forum believes that HMRC is failing in many of its key aims, particularly when it comes to ensuring the tax system is simple and efficient. HMRC also states in its customer charter that it will adhere to certain principles when dealing with customers, such as treating them as honest. Our members report they are not treated well by HMRC and much of the evidence we have collected reveals that HMRC does not adhere to the principles set out in the customer charter. In the following section we explore HMRCs treatment of customers and its attempts at delivering a simple and efficient tax system.

Delivering a simple and efficient tax system

HMRC states that its main aim, under the title heading ‘our vision’, is to deliver a simple and efficient tax system:

"We will close the tax gap, our customers will feel that the tax system is simple for them and even handed, and we will be seen as a highly professional and efficient organisation"

(HMRC website [1] ).

The general consensus that has emerged from our members’ feedback is that HMRC is not an efficient organisation. In fact, although HMRC would like to be seen as ‘highly professional and efficient’, this is far from how it is perceived by business owners. Members frequently report problems with communication, such as struggling to get through to the helpline, as well as long delays in receiving information or decisions, such as VAT numbers. In order to provide clarity for the Committee on the issues and problems raised by our members, we collated the evidence into themes and have presented them as examples below.

Example 1 VAT investigation

Due to concerns over fraud, HMRC often selects certain cases for more thorough investigation, from the list of businesses that have applied to register as a company in England and are waiting for their VAT number (known as extended verification). While we agree with the principle of further investigations, we are concerned about how this is being carried out in practice. There does not seem to be a great deal of clarity surrounding the criteria used to mark a case out for selection. Recently, after fraud was uncovered in the mobile phone and technologies industry, HMRC decided that any businesses with the words ‘mobile’ or ‘chip’ in its name would be investigated. This led to one business, a mobile fish and chip shop, being selected for investigation. The business’s application therefore sat on a pile waiting for someone to go through it in more detail. The business owner was unable to get through to anybody at HMRC that could tell him how long it would take until he was investigated. When his file was looked at it was immediately apparent that his business was not relevant to the current fraud investigation, as it was not a mobile technology business. A great deal of time could have been saved if these investigations were filtered out an earlier stage once they had been initially been selected, rather than a business having to wait weeks for a VAT number when their case did not really merit investigation.

Example 2 - slow and inefficient internal systems

There have been several instances where HMRC systems have been shown to be slow and inefficient. At a recent meeting of the Joint VAT Consultative Committee (JVCC), attended by a Forum representative, the change in deadline for the acceptance of cheques to pay VAT was discussed. In the meeting it was suggested that business owners needed to be made more aware of this change and it was felt that this could be achieved by attaching a flashing message to the online VAT forms. However, HMRC representatives said this change would take around six months (which would be too late to inform the public of the date change) as the IT system could not make the change quickly, due to the procedures that had to be undertaken. The JVCC meeting notes were then viewed by a minister who demanded that the change be made. Subsequently the flash message was added, but had it not been for the intervention of the minister, the bureaucracy of HMRC’s systems would have prevented the change from being made.

Another problem with HMRC’s IT systems is their failure to update online application forms. For example, HMRC conducted a consultation on how to improve their VAT application forms. As a result of this consultation, the paper application form was altered, but they failed to alter the online application forms before the paper versions were sent out, because it was apparently not possible to make the changes. Some of our members find it easier to fill out the hard copies first and then submit the information online by copying the information on the paper copy. However, subsequently in this instance, the paper copy forms were filled in, but when members logged in online they found the online form was in a different format. HMRC should be trying to make the internet as easy as possible for business owners, particularly those who find it difficult to use computers. Members are keen to improve their use of online systems, but are often put off by the complexity of the forms. One member reported that the HMRC system kept logging out their session whilst they were trying to complete a VAT form. HMRC must focus on improving their IT systems and making online procedures as easy as possible for business owners, particularly as they intended to phase out all paper forms by 2012.

Members have also reported problems with the letters they have received from HMRC. One member had an issue that was being considered by HMRC, and they were informed on the telephone that they would be able to contact somebody to discuss their issue while they were waiting for their case to be investigated. However, later that week they received a letter from HMRC which stated at the bottom that they must not contact HMRC under any circumstances. When this letter was later presented to their accountant, it was pointed out that the business owner is entitled to contact HMRC and that the letter is simply months out of date as the ‘please do not contact’ line from the letter has yet to be removed. Both of these cases provide examples of the inefficiencies of the HMRC systems. With such systems the organisation will be unable to deliver its vision of a simple and efficient tax system.

These examples highlight specific instances where the organisation has proved itself to be complex and inefficient. We have also received more general complaints about HMRC, with members pointing out that it is hard to deal with, as issues take a long time to resolve and it is often hard to get in contact with anybody with whom issues can be discussed. In the past, one expert would deal with one case and make decisions based on the circumstances of the business, which is particularly important when dealing with small and medium-sized businesses. This is no longer the way the organisation works - currently business owners feel they are constantly being transferred from one call centre operator to another, none of whom understand their business or are able to make decisions.

Treatment of customers

In its customer charter [2] and vision, HMRC promises the following, amongst other things, when it comes to the treatment of customers:

· To treat you as honest

· Do all we can to keep the cost of dealing with us as low as possible

· Make it easy for our customers to get things right

Our members feel that they are not treated fairly by HMRC and we have evidence that they are not adhering to their promised treatment of customers.

Example 3 - Time To Pay From our members’ feedback it is clear that HMRC is not fulfilling the promises outlined above. Members feel that HMRC treats them as tax avoiders rather than honest individuals, and any contact with HMRC is difficult and time consuming; far from an easy process for customers. This is illustrated by members’ experiences of the Time To Pay (TTP) scheme. Since its creation in 2008, TTP has allowed struggling businesses to defer their tax payments until a later date. The Forum welcomed the scheme, as did our members, many of whom were initially complimentary about HMRC’s operation of the scheme. However, many members have felt that as the scheme has gone on, particularly in the last few months, HMRC have become a lot tougher with small businesses that use the scheme. These experiences are backed up by the research findings of Syscap [3] , a finance provider, which found that in the third quarter of 2009, the total amount of TTP deals stood at £830 million but by the corresponding period this year that figure had dropped to £460 million. The value of TTP arrangements dropped by 16% in the last quarter alone, which shows HMRC are making it harder for businesses to defer their tax liabilities.

There has also been a great deal of confusion surrounding TTP and members have found it hard to communicate with HMRC in order to come to any TTP arrangements. One member had previously accessed TTP and had repaid the amount owed. A period of time passed and she wanted to access the scheme for a second time. She contacted the helpline at HMRC and they informed her she was not eligible for the scheme as she had already previously accessed it. She was unsure whether the information was correct, so contacted the Forum, who found out from a senior HMRC contact that the member had been misinformed and that firms could access the scheme more than once, providing they met the qualifying criteria. It took another series of enquiries and discussions with HMRC for the Forum to learn what steps the member would have to take if she wanted to initiate discussions with HMRC over TTP arrangements. This highlights how time consuming and unclear the TTP scheme is. In addition, while we realise that struggling businesses should not be able to keep deferring their tax payments indefinitely, this member is law abiding and had previously paid back the full amount owed. She should have been able to easily access the scheme, provided her business met the criteria; instead she frequently received incorrect information and was made to feel that HMRC was not interested in helping to support her business. Another business owner managed to access TTP, but had problems agreeing terms with HMRC once she was in the scheme. She was eager to pay the money owed from TTP back to HMRC. However, although her business was experiencing a period of growth, she was unable to pay back the full amount at that time. Therefore she made an offer to HMRC which would involve her paying some, but not all, of the money back straight away. A HMRC representative assured her this arrangement would be accepted; however a few days later the arrangement was rejected by HMRC. This case led to insolvency and HMRC has received none of the money owed.As the issue of TTP illustrates, small businesses owners do not feel they are treated as honest by HMRC and do not find their dealings with HMRC simple and cost-effective. Many members cannot get through to HMRC in the first place - which is backed up by the National Audit Office figures that revealed 40 million phone calls were missed into 2009 [4] - and even when members do get through they find their queries are not dealt with swiftly or efficiently.

What the implications are of HMRC’s spending review settlement and will it be able to deliver the Government’s aims on tax compliance

In the spending review it was announced that HMRC’s budget would be cut, yet it has been given extra funds to tackle tax evasion and avoidance. While we welcome the additional funds for tax evasion, we are concerned about the cuts to the HMRC budget, given that the organisation is struggling to deliver its current services efficiently and effectively.

In light of the evidence presented in previous sections it is clear that HMRC may struggle to deliver the Government’s aims on tax compliance, given that previous aims (i.e. delivering an efficient tax system) have not yet been achieved. Currently the system makes it difficult for our members to understand how to comply with the tax system. HMRC issues guidance on how to comply with the rules, yet it cannot guarantee that the information presented in these guides is correct and instead states that it is only their opinion rather than law. Therefore confusion exists as to how to comply with the tax system, with many of our members complaining that the system is too complicated. The system also seems too complicated for HMRC to fully understand (due to their inability to guarantee the advice in its guides is correct) which will make it hard for the organisation to police. Also, due to the number of loopholes that exist (a recent survey revealed there are over 1,000 [5] ), it makes it difficult to see who is cheating the system and who is behaving in an honest manner. Our members, for instance, are eager to comply with the system, but many struggle to get to grips with the rules. While we welcome the Government’s efforts to tackle tax evasion, until the system is simplified, it will remain difficult to police, regardless of the money invested. Therefore we feel that HMRC must address some of the problems already discussed before any extra funds are spent on tax evasion.

Whether PAYE reform is necessary

In light of the recent well publicised PAYE problems, it seems that reform of the system is needed. Members whose businesses provide financial services are particularly vocal about the problems with the PAYE system. HMRC’s charter clearly states that it will ‘accept that someone else can represent you’. However, accountants are finding it increasingly difficult to act on behalf of their clients. One of the main complaints at the moment is with the computer system which runs PAYE. Accountants have had difficulty accessing the codes they need to process clients information, with many receiving out of date codes. This is making it hard for them to do their jobs, despite HMRC’s assurances that it will aid those who represent its customers.

Another member – an accountant - complained that Government departments do not work together to ensure the smooth running of the system. She gave the example of incapacity benefit, as HMRC often fails to tax this and allows arrears to build up. A client was not properly taxed by HMRC as it allowed arrears to build up for two years. HMRC said it had not been informed by the Department for Work and Pensions (DWP) that the client was receiving incapacity benefit, while the DWP claimed that HMRC had been informed. This resulted in HMRC eventually admitting its mistake and writing a letter to the client, a copy of which is held by the Forum, in which it admitted "We have not dealt with your tax affairs very well.". This highlights that the system is failing to collect the necessary taxes and reveals that there is a lack of communication between departments, resulting in serious errors.

What HMRC’s priorities should be for the future?

HMRCs main priority for the future must be to ensure that its vision (as outlined on page 2) becomes a reality. In order to achieve this it must address the following:

· Simplify the tax system. It needs to be clear to business owners how to comply with the system and it must also be easier for HMRC to identify those who are breaking the rules. HMRC should be able to provide guidance that businesses can rely on and follow, rather than providing guidance that is only advisory and has been shown to be incorrect in the past.

· Improve communication, both with customers and with other departments. HMRC’s helpline is missing too many phone calls and the figures must improve. When customers do reach the helpline, HMRC needs to make sure they receive the correct information, as the TTP evidence proves this is not currently the case. PAYE problems also highlight that there are communication problems between HMRC and other departments, such as the DWP. This needs to be addressed in order to prevent errors in future.

· Improve the general treatment of customers. The TTP scheme highlights that HMRC is becoming increasingly heavy handed in its treatment of business owners. HMRC must treat customers as honest and must work with them to help businesses achieve their goals.

· Ensure that as few individuals as possible deal with a business’s case, rather than referring a business owner from one HMRC representative to another. This would improve the standard of customer service.

· Ensure VAT extended verification cases are sifted through at an earlier stage to ensure that the correct businesses are investigated.

· Improve the IT systems and simplify procedures to enable alterations i.e. to online forms, so any alterations can be completed quickly, thereby enhancing the efficiency of the organisation.

Sources

1. Business Credit Management "Businesses should no longer rely on HMRC for ‘time to pay’"
http://www.creditman.biz/uk/members/news-view.asp?newsviewID=12589&id=1&mylocation=News & chksrc=NNow4251

2. HMRC ‘Our Vision’ http://www.hm r c.gov.uk/about/hmrc-vision.htm

3. HMRC ‘Customer Charter’ http://w w w.hmrc.gov.uk/charter/index.htm

4. Management Today ‘Osborne to get heavy on tax relief’ http://www.managementtoday.co.uk/news/1040085/osborne-heav y -tax-relief/

5. This is London ‘HMRC 'unacceptable' as taxman ignores 44 million calls’ http://www.thisislondon.co.uk/ s tandard/article-23795466-hmrc-unacceptable-as-taxman-ignores-44-million-calls.do

About the Forum of Private Business

The Forum of Private Business is a proactive, not-for-profit organisation, providing comprehensive support, protection and r eassurance to small businesses.

The organisation aims to deliver an exceptional service to its members, adding value through the provision of practical, tailored solutions that promote business success, and by being their voice in government.

November 2010