Administration and effectiveness of HMRC – written evidence

Written evidence submitted by the Low Incomes Tax Reform Group

Executive summary

HMRC’s performance

1.1 From the perspective of unrepresented taxpayers on low and modest incomes (probably the majority), HMRC is now too often seen as an organisation that is unable to collect the right amount of tax, increasingly difficult to contact by phone, letter or in person, yet unforgiving of customer error and relentless in its pursuit of small debts. This image may have been exaggerated by parts of the press, but failings occur too frequently to be dismissed as ‘isolated instances’.

1.2 HMRC has had constant demands placed upon it in recent years through changes in the tax and tax credits systems while having to deliver year on year cuts in headcount. As a result, there is a clear need for the sort of transformation that is envisaged in the Spending Review and Departmental business plan. We have seen transformation plans year after year that promise better ‘customer service’. HMRC now needs commitment and leadership to carry through those plans.

HMRC’s spending review settlement

1.3 The plan to reinvest £900 million in combating evasion and avoidance is welcome if it achieves its goal of bringing in £7 billion additional annual revenue by 2014/15. We note, however, that part of that strategy is a joint initiative by HMRC and the DWP to target ‘fraud and error’ in tax credits and benefits. Our reservations about this are twofold:

· Conflating the two very different concepts of fraud and error is prejudicial to the unrepresented taxpayer who will inevitably make mistakes in dealing with such complex systems, however careful they are.

· The contribution made by HMRC official error to the alleged £5.2 billion lost annually in benefits and tax credits fraud and error is materially underestimated.

1.4 The 15% net reduction in HMRC’s resource budget will undoubtedly cause front line services to deteriorate even more sharply than they have done in recent years – at least in the short term. Accordingly, the reinvestment of £900 million in combating evasion and avoidance should be partly matched by adequate and long-term grant-in-aid to charities and other voluntary sector bodies to help carry out the front line functions that HMRC can no longer afford.

1.5 If unrepresented taxpayers were enabled to get their tax affairs right first time, that would lead to a material decline in the fraud and error figures, rendering much compliance activity redundant.

Tax compliance

1.6 To a significant but unquantified extent, where unrepresented taxpayers are concerned, compliance activity is a consequence of the failure to educate. If information coming from HMRC to unrepresented taxpayers (who rely on it) is inaccurate, misleading, incomplete, incomprehensible or inaccessible, the taxpayers will make mistakes in discharging their obligations. This leads to higher error levels, and more compliance activity, than is necessary.

1.7 If (as sometimes happens) HMRC’s compliance interventions are based on misunderstandings by the Department, individuals who are wrongly charged to tax or denied tax credits may thereby lose money which they can ill afford, and may never recover. This can only be countered by investment in training of compliance staff.

PAYE reform

1.8 PAYE is a means of collecting as close as possible to a taxpayer’s actual tax liability during the course of a tax year. But it can only be approximate, and is as good as the design of the system and the source of the data used within it.

1.9 Yet most PAYE taxpayers genuinely believe that what comes to them from the Government in a brown envelope must be right, and will sometimes trust it against their own better judgment. For those people in particular, any reform that can deliver greater accuracy in a more timely way is beneficial, even necessary. So we look forward with hope to the next generation of PAYE systems, but from very first principles what is to be delivered must aim to be 100% accurate or 100% comprehensible to the customer, preferably both.

HMRC’s priorities for the future

1.10 HMRC’s priorities are simple. They should collect the tax (or pay out the benefits) due in accordance with the law in the most efficient and effective way whilst generating respect from their ‘customers’ in the way that they behave in completing this task.

1.11 We list ways in which HMRC can achieve that.

Introduction

2.1 The Low Incomes Tax Reform Group (LITRG) is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. The CIOT is a charity and the leading professional body in the United Kingdom concerned solely with taxation.

2.2 The focus of this submission is the administration and effectiveness of HMRC in its dealings with low-income, unrepresented taxpayers and tax credit claimants. In the remainder of this paper we use the term ‘taxpayers’ to represent all HMRC’s customers, whether taxpayers or tax credit claimants.

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

3.1 HMRC’s key aims as expressed in its recently published business plan [1] - to ‘deliver a more focused and effective tax administration’, and to use its ‘customer-centric approach’ to ‘transform the way we deliver services, manage contact and conduct interventions’ – are largely aspirational at present.

3.2 From the perspective of unrepresented taxpayers on low and modest incomes (probably the majority), HMRC now is too often seen as an organisation that is unable to collect the right amount of tax (witness the recent PAYE reconciliation). It is increasingly difficult to contact by phone (it is not uncommon to have to phone several times just to make any contact), letter (replies to letters often take weeks or months) or in person (closures result in increasing numbers having no access), yet unforgiving of customer error and relentless in its pursuit of small debts.

3.3 HMRC demands placed upon vulnerable customers to contact HMRC or reply within x days (or suffer awful consequences) are in stark contrast to the standards HMRC sets itself.

3.4 HMRC has had constant demands placed upon it in recent years through changes in the tax and tax credits systems while having to deliver year on year cuts in headcount. Consequently, there is now a clear need for the sort of transformation that is envisaged in the Spending Review and Departmental business plan. Yet we have seen transformation plans year after year promising better ‘customer service’. In February 2009 we published a telling analysis comparing the Inland Revenue plans of 1994 with the current strategy [2] . In 1994, the Inland Revenue was able to say:

· ‘The department again achieved very satisfactory results. All key operational targets for the throughput of work were met.

· Collection offices similarly met all their key operational targets despite the continuing difficult economic conditions for all organisations involved in debt collection.

· We want to focus on all aspects of the quality of work: not just speed, also the accuracy and effectiveness, of work being done.

· Taxpayer surgeries and mobile enquiry centres will not only maintain face to face customer service in towns in which an office has been closed, but also bring an Inland Revenue presence to areas formerly without such a service.’

3.5 What is needed in 2010 is the commitment and leadership to carry through the plans now being announced.

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

4.1 The plan to reinvest £900 million in combating evasion and avoidance is welcome if it achieves its goal of bringing in £7 billion additional annual revenue by 2014/15. We note, however, that part of that strategy is a joint initiative by HMRC and the DWP to target ‘fraud and error’ in tax credits and benefits. About this we have two major reservations, on which we expand in our evidence to the Treasury Committee’s Inquiry on the Spending Review:

· Conflating the two very different concepts of fraud and error is prejudicial to the unrepresented taxpayer who will inevitably make mistakes in dealing with such complex systems, however careful they are.

· The contribution made by HMRC official error to the alleged £5.2 billion lost annually in benefits and tax credits fraud and error is materially underestimated [3] .

4.2 The 15% net reduction in HMRC’s resource budget will undoubtedly cause front line services to deteriorate even more sharply than they have done in recent years – at least in the short term. This is evidenced by the gradual closure of some enquiry centres, reductions in the opening hours of others, and similar reductions in opening hours of contact centres despite a steady decline in the volume of calls being handled [4] .

4.3 The reinvestment of £900 million in combating evasion and avoidance should be partly matched by adequate and long-term grant-in-aid to charities and other voluntary sector bodies to help carry out the front line functions that HMRC can no longer afford. Then, unrepresented taxpayers would be enabled to do what the vast majority wish to do anyway – get their affairs right first time. This in turn would lead to a material decline in the fraud and error figures, rendering much compliance activity redundant.

Is HMRC able to deliver the Government’s aims on tax compliance?

5.1 To a significant but unquantified extent, where unrepresented taxpayers are concerned, compliance activity is a consequence of the failure to educate.

5.2 Unrepresented taxpayers rely on HMRC to give them accurate and comprehensive information in a way they can understand and in a format accessible to them. If the information coming from HMRC is inaccurate or misleading, or incomplete, or is incomprehensible (for example, written in technical language or simply using too much jargon) or inaccessible (for instance, information held only on HMRC’s website is inaccessible to people who lack access to the internet or the skills to use it), the taxpayers will make mistakes in discharging their obligations.

5.3 This leads to expensive compliance activity later on. In addition, where the taxpayer’s mistake gives rise to an overpayment of tax credits or an underpayment of tax, higher levels of error and fraud, or an increase in the tax gap, ensue. Targeting cutbacks on information to taxpayers is therefore counter-productive.

5.4 Finally, where HMRC’s compliance interventions are based on a misunderstanding by HMRC, two things happen:

· Individuals are overcharged to tax, or denied their entitlement to tax credits, by wrong executive action; they thereby lose money which they can ill afford, and may never recover;

· Consequently, the figures for the tax gap, or fraud and error in tax credits, are increased inappropriately.

Example

A lone parent separated from her abusive husband and began a single claim for tax credits. She consulted a solicitor but did not actually take the step of starting divorce proceedings. Despite the involvement of the police and various other agencies, and the physical evidence of separation, HMRC decided that the separation was insufficiently permanent to constitute ‘separation’ within the meaning of the Tax Credits Act 2002. They cancelled her single claim and demanded repayment of an alleged overpayment in excess of £50,000. When we intervened we drew HMRC’s attention to evidence which in our view they should have investigated from the outset. The result was the reinstatement of her single claim and cancellation of the £50,000 plus overpayment.

5.5 More reinvestment in training is essential to minimise the incidence of official error of this nature.

Is PAYE reform necessary?

6.1 PAYE is a means of collecting as close as possible to a taxpayer’s actual tax liability during the course of a tax year. But it can only be approximate, and is as good as the design of the system and the source of the data used within it. The new PAYE service (NPS) is fundamentally a good idea spoiled in its implementation by the lack of a deep understanding of employer and customer behaviour.

6.2 The failings of the previous system have created a vast backlog of unmatched data (largely for the unrepresented population) which would tie up HMRC resources to no good effect if attempts were made to deal with it case by case. Many unrepresented taxpayers would have good arguments for writing off their underpayments, and those who did not would most likely have difficulty in paying them. The repayments due should be made as soon as possible.

6.3 NPS needs some urgent fixes to make it stable and understandable by the unrepresented taxpayer. Then every effort should be made to avoid all past mistakes in the design of the proposed Real Time PAYE system where, as with past systems, the potential for success or failure will lie in the detail.

6.4 Most PAYE taxpayers genuinely believe that what comes to them from the Government in a brown envelope must be right, and will sometimes trust it against their own better judgment. For those people in particular, any reform that can deliver greater accuracy in a more timely way is beneficial, even necessary. So we look forward with hope to the next generation of PAYE systems, but from very first principles what is to be delivered must aim to be 100% accurate or 100% comprehensible to the customer, preferably both.

6.5 But it should not be assumed that real-time information will suffice for tax credits, let alone benefits, unless the very different measurements of income in PAYE and tax credits/benefits are aligned, and – even more importantly – the units of assessment (couple or individual) are harmonised. Without those major changes, using real-time PAYE income information to compute tax credit income will inevitably result in inaccurate awards.

What should HMRC’s priorities be for the future?

7.1 HMRC’s priorities are simple. They should collect the tax (or pay out the benefits) due in accordance with the law in the most efficient and effective way whilst generating respect from their ‘customers’ in the way that they behave in completing this task.

7.2 A radical culture shift driven from the top is needed to ‘go back to basics’. This would mean:

· Designing processes that are as simple as possible for the customer, whilst minimizing the potential for error and fraud. Too often the customer perspective has been an afterthought.

· When dealing with unrepresented customers making a sensible choice between educating them in ways that they can understand so that they can be empowered to do things for themselves, or hiding the complexity and aiming for 100% accuracy so that it will not matter whether the customer understands or not. Too often HMRC accept complexity together with processes which aim for (or achieve) 70-80% accuracy.

· Such customer education should make use of the different media which customers feel comfortable using. There is no point, for instance, in insisting on the use of the HMRC website and contact centres if there are people who, for good reason, are able to use neither.

· Understanding why things happen by analysing customer behaviour and instead of treating the symptoms going back to the root causes. Enormous waste is generated by misunderstanding the nature of the problems.

· Investing in the training and motivation of staff. It is a false economy to produce staff who directly interact with customers, but who can only read from computer scripts and cannot analyse the needs of the customers with whom they deal and how the tax system impacts upon them. It is important also that staff in customer contact roles liaise efficiently and seamlessly with those in customer operations (indeed for the pensioner population we would like to see a merger between the two).

November 2010