Administration and effectiveness of HMRC – written evidence

Written evidence submitted by TaxAid

HMRC performance and capability to deliver the Government’s aims on tax compliance

TaxAid is a charity providing free, independent advice across the entire range of tax issues that impact on the most disadvantaged taxpayers on low incomes. Service provision includes a crisis advice helpline and face-to-face advice. TaxAid’s website provides information to taxpayers in an accessible format which generates email and correspondence queries. We also train front-line generalist advice agencies (e.g. Citizens Advice Bureaux) to operate as a triage service by recognizing the tax issues, dealing with the first step and appropriately referring. These services give us insight into the capabilities and needs of the unrepresented taxpayer in meeting their responsibilities under the tax system. Consequently, we work with HMRC at appropriate consultations to represent their perspective on the impact of tax on the unrepresented.

Summary

TaxAid considers that HMRC should be encouraged by the Government to take some bolder steps to help low income workers out of the informal economy, by

· Improving and promoting the Tax and Benefits Confidential Helpline (TBCH)

· Streamlining the disclosure procedures to support the role played by the Voluntary and Community Sector

As it currently operates access to come forward from the informal economy has severe limitations, including:

· TCBH refuses to help anyone who is already reflected anywhere on HMRC’s systems

· The service is completely unpublicised and is difficult to find on HMRC’s website

· The scripts used by operators on the TBCH can be unhelpful

· Procedures operated by HMRC make it extremely cumbersome and time-consuming process for the voluntary sector to support anyone wishing to disclose untaxed income.

For such reasons, it is hardly surprising that the TBCH has had limited success as a bridge into the formal economy; a 2008 report on Tackling the Hidden Economy by the NAO stated that just 65 taxpayers registered with HMRC through the TBCH in 2006/07.

Background

A general point we have experienced is that HMRC skills of front-line staff are probably about the same, or possibly a bit worse, than 5 years ago - and definitely worse than 10-15 years ago when staff facing the public had much more hands on knowledge and experience of tax. Since processing and customer contact have been separated, the decline has been marked.

However, for HMRC itself the goalposts have shifted. Practicalities of implementing new areas of legislation that impact on unrepresented taxpayers do not always appear to be considered. Our experience at TaxAid is that the unrepresented taxpayer is in recent years compounding the challenges faced by HMRC. For example, a survey of clients referred to TaxAid from Citizens Advice Bureaux in need of help with a crisis are likely to be within a range of 50% -95% functionally illiterate. Minority groups such as migrants, those with mental illness, many of the elderly, the homeless and prisoners are other groups who are not capable of meeting their responsibilities without a more skilled support structure in HMRC’s staff.

TaxAid – and presumably other paid agents when serving represented taxpayers – can and does compensate for poor skills and lack of knowledge since we frame the questions to HMRC officers appropriately and point to the "rules" that they should be following, even those in their own manuals. This of course increases the costs to us (and to the paid agents) to compensate for poor HMRC service to these more costly-to-serve taxpayer groups. This is not of course a possible route for the unrepresented taxpayer, of whom there are 3.8 million in HMRC’s own estimate of the "Willing But Needs Help" group.

1. We are focusing our submission on a single area of our work in advising taxpayers with undisclosed income. The Government and HMRC have long been concerned about ‘ghosts’ and ‘moonlighters’ (workers who fail to declare all or part of their earnings). Currently, HMRC is running a series of campaigns, through which it has recovered unpaid taxes from doctors and dentists, with future campaigns aimed at other industry sectors. This runs alongside ongoing work, such as Self Assessment enquiries.

Understandably HMRC focuses its resources on those with average and above average incomes, who are more likely to owe larger amounts, and to have funds to settle what is due.

1.1 Informal workers on low incomes

Relatively little resource is directed at those at the lower end of the income scale, many of whom seek advice from TaxAid (which offers free advice to those on incomes below £16,000 per annum).

1.2 Such individuals may be outside the tax net for a variety of reasons, for example:

1.2.1 Some will have started up self-employment in a small way, with any profits falling within their tax allowances. Gradually this has grown, but they are then nervous about contacting HMRC in case they owe a large amount which they cannot afford to pay.

1.2.2 Some have been working for an organisation where it is unclear who is responsible for their taxes, and they discover after some years that no tax has been paid.

1.2.3 Others have started some casual work while claiming benefits and this has grown to a situation where there is clear wrongdoing, but they are fearful of trying to regularise their situation for fear of prosecution.

1.2.4 Some were trying to comply with their tax obligations but found it too difficult and drifted out of HMRC’s sights on a change of residence.

1.2.5 Quite often their non-compliance will be linked with other personal problems, mental illness or domestic breakdown.

1.3 In our experience such individuals may trade untaxed for decades – or indeed a lifetime – without coming to the attention of the tax authorities and, although the average contribution lost to the Exchequer in each case is quite small:

1.3.1 The total amount involved could be up to £½bn per annum.

1.3.2 Illegal benefit claims are continuing.

1.3.3 Families with children are not receiving child tax credit due to them, as the parents seek to avoid HMRC’s radar.

1.3.4 There are neighbourhoods where large numbers of individuals are working untaxed and undetected, which may promote negative attitudes towards tax compliance in the minds of their wider communities.

2. Moving such individuals into the formal economy

2.1 There are clearly sound reasons for promoting tax compliance in this low income group, and in TaxAid’s experience many of the workers involved would like to ‘join the club of taxpayers’ but are deterred by fears of prosecution (usually unfounded) or unaffordable tax debts (often exaggerated).

2.2 It would be difficult and costly for the Revenue authorities to track down such people individually, and bring them into the system. Each case would require individual pursuit, and the staff costs incurred in assessing unpaid taxes in any one case may exceed the amounts owed.

2.3 It is interesting to note that HMRC seeks to rely more on the carrot than the stick. For example:

2.3.1 It operates the Tax and Benefits Confidential Helpline, which offers a route into tax compliance, whereby the individual can be told what sanctions they will face before choosing to reveal their identity.

2.3.2 It partly funds advice offered by the voluntary sector – e.g. TaxAid receives grant-in-aid each year towards the operating costs of its ‘Non-disclosure Helpline’, whereby callers may receive free, independent and confidential advice to help them decide how to proceed. This may be followed by further help in completing the necessary forms and negotiating payment.

2.4 TaxAid supports these HMRC initiatives but believes that – with support from the Government – HMRC could go much further.

2.5 We should mention that we greatly welcomed the launch of the Hidden Economy Advisory Group in Autumn 2009, and have had a meeting with the HMRC officials involved. We have raised most of the ideas in this paper with them, but have been disappointed to note that the Group has not been particularly active in recent months.

3. Improving and promoting the Tax and Benefits Confidential Helpline (TBCH)

3.1 The TBCH was launched in 2000, following recommendations in Lord Grabiner’s Report on the Informal Economy. It allows an individual to disclose their past earnings to HMRC on an anonymous basis, and to be told what taxes they owe, before deciding whether to reveal their identity. It has the power to forgive small amounts of unpaid taxes and NIC (up to £2,000 in total). In some cases it is a very welcome facility, and many of TaxAid’s clients – especially those on very low incomes - have used it as a ‘safe’ route into the formal economy.

3.2 However, it has severe limitations, including:

3.2.1 The TCBH refuses to help anyone who is already reflected anywhere on HMRC’s systems. So a caller who has been self-employed for several years cannot enter the formal economy through the TBCH if they have had any earnings taxed within PAYE during that period (even for just one week)!

3.2.2 The service offered by TBCH is completely unpublicised, and is difficult to find on HMRC’s website. It cannot be found on a ‘search’ of the HMRC website.

3.2.3 The scripts used by operators on the TBCH can be unhelpful. The calls are answered simply "HM Revenue and Customs", and the terminology is not always user-friendly (for example, callers have been told they need to have "business accounts", when it might be better to ask if they have "worked out their income").

3.3 For such reasons, it is hardly surprising that the TBCH has had limited success as a bridge into the formal economy; a 2008 report on Tackling the Hidden Economy by the NAO stated that just 65 taxpayers registered with HMRC through the TBCH in 2006/07. This is a shame as the facility was launched with some fanfare back in 2000, and if HMRC were given a clear mandate to promote it, we believe that it could be considerably more effective.

4. Recommendations specific to undisclosed income:

4.1 HMRC to be encouraged to promote and improve the TBCH. This could be done by prominent advertisement on its website and elsewhere, by improving the ‘scripts’ used on the TBCH, and by other procedural improvements. To maximise the scope for success, this should be done in consultation with TaxAid and other VCS organisations.

4.2 The TBCH should be allowed to write off tax that would have been covered by working tax credit (WTC). Many low income workers in the informal economy are evading less in tax and NIC than they are losing out by failing to claim Working Tax Credit (WTC). But the HMRC cannot give any credit for WTC which the worker has failed to claim (beyond the last 3 months). Such an offset would enable greater numbers of low income workers to enter the system without unaffordable tax debts, without any real cost to HMRC, and we would urge that the rules be changed to allow it.

5. Streamlining the disclosure procedures to support the role played by the Voluntary and Community Sector (VCS)

5.1 The majority of those who approach VCS organisations for help in moving into the formal economy face tax arrears above the waiver limits operated by the TBCH. They may have been working untaxed for several years, and have reached the point where they cannot carry on worrying about ‘a knock on the door’ or prosecution for tax evasion, or their spouse/partner has threatened to leave unless they get their tax affairs in order.

5.2 In such cases TaxAid will advise on their legal obligations and the benefits of registering with HMRC, which will invariably require the completion of tax returns covering a number of years. It will also be necessary to deal with HMRC’s Debt Management and Banking (DMB).

5.3 In most cases, the worker is unable to manage this alone. They may lack the necessary understanding, they may be overwhelmed by stress at the enormity of their situation, and many of them have diagnosed mental health conditions.

5.4 So in most cases potential taxpayers need

5.4.1 help to prepare a number of tax returns and anticipate and understand the outstanding liability (including interest, surcharges and penalties)

5.4.2 assistance in explaining their personal circumstances, reasons for their non-compliance, and any assumptions or estimates that have had to be made in completing the forms

5.4.3 help interpreting the computer-generated statements and correspondence that is received from HMRC

5.4.4 help in any arrangement needed with DMB

5.5 This support should be immediately accessible, as the "taxpayer" is likely to walk away from the disclosure process if it drags on for any length of time.

5.6 Potential taxpayers evidently do not seek out HMRC for help in coming forward to declare undisclosed income. TaxAid has been funded in previous years to assist as a bridge, but we are concerned that the procedures operated by HMRC make this an unnecessarily cumbersome and time-consuming process, and we could help considerably more people if the rules were streamlined.

5.7 In particular we make the following recommendations:

5.7.1 There should be a clear ‘gateway’: At present, there is no clear gateway to register a long-existing non-compliant business. It is often unclear to which processing office returns should be sent, and time is wasted getting the forms to the right office, or sending duplicates when forms go missing within HMRC.

5.7.2 There should be clearer agreed guidelines about tax returns required: There are no published rules on how many years’ returns will be required. HMRC will rarely go beyond 6 years, but it could do if it wished. Nor is it clear whether returns should be made for the years when profits fell below the tax and NIC thresholds – there seems little point in producing such forms, but in theory they could be required by HMRC. At present TaxAid has to rely upon its professional ‘feel’ as to how many years’ returns are needed, but this is unsatisfactory. And time is inevitably wasted because, to protect the client, we will err on the side of caution producing forms that may not be needed.

5.7.3 HMRC should share information more willingly: Quite often HMRC will hold some information that is needed to complete the required returns (but which is no longer held by the client, or was never given to them), e.g. income earned under the construction industry scheme or casual work taxed under PAYE. HMRC contact centres are reluctant to give this information out ("the customer is expected by law to have records") and, even where they do agree, insist this must be done by post. All of this slows down the process and adds to the time devoted to each case.

5.7.4 HMRC should review and explain its policy on ‘enquiries’: Quite often the client will have incomplete business records and so it is necessary to help them to make estimates, which means there is the risk that the amounts declared will be challenged by HMRC, and the tax liability increased. Until recently, we found that HMRC was willing to accept returns prepared by TaxAid without enquiry, if we provided a good explanation of our review of the client’s income and circumstances in a covering letter (and it was clear that the client would not have the funds to pay additional taxes anyway). In effect HMRC would generally be content to accept the tax and NIC shown, plus late filing penalties, interest and a 10% surcharge. But in recent months we have had cases where such returns have been referred to compliance teams for enquiry, increasing the uncertainty for the client and the burden on TaxAid in providing support and advice. We understand HMRC’s right to make such enquiries, but it does have an impact on the number of clients the VCS can help. It also reduces our ability to reassure a person, who is unsure about ‘coming clean’, that we can predict the likely demands they will face, and so increases the risk they will opt not to register.

5.7.5 A clearer procedure is needed for those who have worked while on benefits: Although this is not a problem created by HMRC, some of our clients are worried about joining the formal economy because this risks admitting that they were working while on benefits. It would be very helpful if HMRC could collaborate with the DWP to establish a set of ground-rules, so that there is greater clarity about the DWP’s prosecution policy and a ‘safe passage’ into the formal economy for a worker guilty of a minor infraction.

5.7.6 HMRC should provide an effective channel to resolve ‘disguised employment’ cases: Some of the workers who approach TaxAid for help in joining the formal economy are not self-employed, but appear to be employed by an organisation that is simply failing to account for PAYE (and indeed, in many such cases there is/has been some uncertainty over whether tax was being deducted). In such cases, HMRC’s published policy is to seek to recover any taxes due from the organisation first, rather than the worker. However we have not found any channel for referring such cases to the appropriate part of HMRC (Employer compliance). Often it is simply impossible to get anyone within HMRC to tackle the employer’s non-compliance. This makes it very difficult to help such a person regularise their situation.

November 2010