Administration and effectiveness of HMRC – written evidence

Written evidence submitted by ACCA

About ACCA

ACCA is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people around the world who seek a rewarding career in accountancy, finance and management.

ACCA has 140,000 members and 404,000 students in 170 countries, and works to help them to develop successful careers in accounting and business, with the skills required by employers. We work through a network of over 80 offices and centres and more than 8,000 Approved Employers worldwide, who provide high standards of employee learning and development. Through our public interest remit, we promote appropriate regulation of accounting and conduct relevant research to ensure accountancy continues to grow in reputation and influence.

The expertise of our senior members and in-house technical experts allows ACCA to provide informed opinion on a range of financial, regulatory, public sector and business areas, including: taxation (business and personal); small business; pensions; education; and corporate governance and corporate social responsibility.

Executive summary

1. HMRC is at a crossroads. The attractions of technological automation of much of the tax system beckon, along with the promise of a simpler legislative and policy framework. However, the Department has been restructured and downsized at such a rate that its ability to perform the key function of making sure that the money is available to fund the UK’s public services is being compromised.

2. HMRC urgently needs an injection of funding and support to enable it to stabilise its condition. Morale in the department is low. The available resources will struggle to implement the major changes envisaged for the next four years.

3. The move to greater online operations and automated operations is irresistible, but for systems as crucial to the economy and our worldwide reputation as PAYE failure is not acceptable. The department must have the resources and support to both maintain its existing operations and implement the desired improvements.

4. Taxpayers and their agents need to be confident that HMRC is targeting all the factors which contribute to the tax gap. There is a growing perception that enforcement activity tend to focus greatly on the taxpayers HMRC can easily target, alienating the section of the tax paying community who might otherwise most readily be their allies.

5. HMRC's performance as an organisation and whether it is delivering its key aims;

6. ACCA has concerns about HMRC’s performance as an organisation, whether it is delivering its aims, and whether its approach to delivering those aims is best aligned with the long term needs of the tax system.

7. HMRC’s Departmental Strategic Objectives under the 2007 Comprehensive Spending Review were to:

· Improve the extent to which individuals and businesses pay the tax due and receive the credits and benefits to which they are entitled; and

· Improve customers’ experience of HMRC and contribute to improving the UK business environment

8. HMRC’s Vision Statement of 2008 states that their vision is that the department 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. It goes on to describe HMRC’s "Way" is to "make it easy for our customers to get things right [and] drive continuous improvement in everything we do"

9. The points above may be a statement of HMRC’s vision, but that is sadly not a view shared by many.

10. Since 2007, customers’ experience of HMRC has become worse. Research by the Institute of Chartered Accountants of Scotland, carried out in 2007, 2009 and 2010, shows a consistent decline in customer satisfaction levels, with the most recent report revealing that communications have "deteriorated drastically during the past year" and that PAYE "matters have become worse over the past year".

11. Since 2007/08, the tax gap (as calculated by HMRC) has risen in both absolute and percentage terms (from £38bn to £42bn, 7.8% to 8.6%). By far the largest single component, and the fastest growing is VAT at £15.2bn in 2008/09.

12. Losses due to fraud and error in the benefit system administered by HMRC are estimated at £2.1bn or 8.9% of the expenditure under their control for 2008/09, an absolute increase from the 2007/08 value of £1.8bn but a proportional fall of 0.1%. from 9%. Error and fraud in relation to tax credits remains at a level such that the NAO has qualified its audit report in the accounts of HMRC every year since the introduction of tax credits.

13. What the implications are of HMRC's spending review settlement;

14. Every year there is more tax legislation to interpret, more taxpayers’ affairs to administer and more revenue to collect. Every year, HMRC is allocated less funds and has to reduce the number of people available to invest those funds. It is hard to imagine any commercial environment where a department would be expected to increase output of an ever more complicated product while being forced to cut staff numbers, operate on reduced funds and implement relentless restructuring of its business model. There may be individuals in the world of business who could manage such a challenge successfully. We should not be in the least bit surprised that those in charge at HMRC have not been able to deliver.

15. Regardless of the high profile allocation of an extra £900m to tackle tax evasion, fraud, debt and avoidance over the next 4 years, HMRC’s overall budget has been cut by 15% in absolute terms.

16. The Department is expected to deliver efficiency savings of 25% through "enhanced use of new technology". It is not clear whether the technology is new to HMRC, or simply current. Enhanced use suggests doing more with the same resource.

17. Rationalising the HMC estate means a reduction in the number of HMRC offices. Quite apart from the job losses that this will entail, if these are local offices which taxpayers can visit to speak to HMRC staff then service will suffer. If they are "back office" functions then the work performed will need to be relocated, and with it the staff. At best this will involve relocation expenses, and at worst the loss (from among those whose jobs would not otherwise be lost) of experienced staff who are unable or unwilling to relocate.

18. ACCA simply cannot see how HMRC can hope to even maintain current service levels, with reduced staff and budget. The aim of reducing the tax gap is worthy, but if reduced funding leaves HMRC unable to address the basics of maintaining a service for compliant taxpayers the potential damage to the economy and reputation of the United Kingdom is immense.

19. Whether HMRC is able to deliver the Government's aims on tax compliance;

20. The Government’s aims on tax compliance according to the Spending Review are to raise an extra £7bn of tax annually by 2014/15, based on an investment of £900m in new staff and processes, including technology.

21. Estimates of the tax gap vary considerably, but are generally reckoned to be in the range of £25-40bn pa. A reduction of £7bn per annum simply cannot be maintained. It is not clear which areas of shortfall are expected to make up the target, but most mainstream commentators do not believe it to be realistically attainable.

22. The types of enquiry work needed to catch evaders and frustrate avoiders need trained and experienced Inspectors who are at a premium right now. Experience cannot be bought off the shelf (although it can be hired if the salary is right – that is, higher than in the private sector) so HMRC must ensure that it retains its best staff and uses them effectively.

23. Whether PAYE reform is necessary;

24. The question is not so much whether to reform PAYE as how. In 2008/09 the system handled over £250bn in receipts (ref PAYE reform paper 27 July 2010). The proposed revisions to implement Real Time Information apparently have a budget of £100m, just 0.04% of the annual turnover in the system. Given the track record of public IT procurement we have to query whether these figures are realistic. If, as seems likely, £100m is simply the starting point of costs on this project, what plans does HMRC have for managing the spend, which in any commercial organisation would be considered a significant investment.

25. The proposals for Real Time Information received a cautious welcome from commentators in the recent consultation document. HMRC must now build on that cautious welcome to inspire enthusiasm where possible and at the very least calm the fears of doubters. The payroll industry in particular will need to be kept "on side" to ensure successful roll out of the changes.

26. What HMRC's priorities should be for the future?

27. In the light of the interim Memorandum provided by the NAO during preparation of the October 2010 report "Engaging with Tax Agents" HMRC has started to investigate a new agent strategy. ACCA is closely involved with HMRC’s discussions on the strategy and many of the related developments in technology, such as the OneClick project initiated in the March 2010 budget.

28. HMRC’s reference in the Business Plan 2011-2015 to "our customer-centric approach" is sadly likely to ring hollow for all too many of ACCA’s members in practice. The sense of frustration engendered by the errors and delays which seem endemic to the system can too easily be tipped into disbelief when HMRC discuss plans to monitor tax agents behaviour and discipline them for failures.

29. Proposals to introduce new powers to deal with tax agents who deliberately seek to pervert the system have been widely interpreted as a direct attack on agents’ freedom to advise their clients. This perception was reinforced by the release of poorly worded draft legislation. HMRC’s desire to create effective and proportionate legislation incorporating effective safeguards and workable information powers has been lost along with much of the agents’ trust in HMRC’s desire and ability to work as a partner with the profession.

30. HMRC needs to communicate clearly to agents and taxpayers its twin aims of efficiently collecting the correct amount of tax from the compliant while tackling effectively those who seek to pay less than the amount due under the law. Moreover it needs to reignite in agents and taxpayers a belief that it is capable of carrying out these aims in the manner declaimed in its Vision statement.

31. HMRC’s new agent strategy contains many good ideas. We are however concerned that the execution of them may prove difficult in the current economic circumstances, and would rather they had been implemented some years ago, when first mooted.

32. HMRC’s performance levels lead to it currently being viewed by many as an impediment to good tax compliance. This must change if the UK tax system is to operate efficiently and effectively.

33. Like any large organisation, HMRC has its share of dedicated and talented individuals, and those less so. HMRC must do its best to retain those who are willing and able to make a positive difference in HMRC’s public image.

34. The government must be prepared to invest in HMRC if it is to see returns. A project of the magnitude of RealTime PAYE information cannot be allowed to fail. Funds must be allocated to provide the necessary support to the HMRC staff responsible for the project. Managers with a proven track record of delivering successful systems implementations in industry should be sought out and engaged to assist with the project. The cost of appointing them will be less than the cost of failure.

35. The Hasseldine report ("Best Practice" in Tax Administration, NAO 2007) identified seven characteristics which tend to be associated with good tax administration, and HMRC have put plans in place to implement them.

36. HMRC have made progress in most of these areas, and we are encouraged by the efforts of senior management towards embedding these ideals in the Department. However, progress in all areas has been slow at best. In particular, while cost efficiency has been forced upon HMRC, their effectiveness and engagement with shareholders seem to have gone into reverse.

37. The answer lies perhaps not in HMRC’s administrative skills, but in the underlying system that they have to administer. Hasseldine quotes a 2003 paper by Owens and Hamilton, part of Aaron and Slemrod’s collection "The Crisis in Tax Administration":

38. "In looking at the root causes of problems in tax administration, what needs to be considered is what is being administered: the tax law and how it is interpreted".

39. As noted above, the UK tax system has grown ever more complex over the last 13 years and this has undoubtedly had an impact on both the public’s perception of tax and HMRC’ ability to effectively and fairly enforce the rules. This needs to be reversed. It is largely out of the hands of HMRC, but will nevertheless be fundamental to their success.

40. The recent focus in HMRC compliance work has tended to be on "unacceptable tax avoidance" activity. This poses three risks.

41. Firstly, resources are directed away from dealing with evasion of taxes, which is arguably a more pernicious evil. The belief that their behaviour is not being scrutinised will serve simply to encourage evaders (and prospective evaders).

42. Secondly, tax avoidance is by definition undertaken by taxpayers who engage with the system. Notwithstanding HMRC’s own statements that some level of planning tax liabilities is acceptable, a continued high profile focus on those whose understanding of what is "acceptable" fails to accord with HMRC runs the risk of alienating all tax payers who believe that they are entitled to undertake some degree of tax planning.

43. Thirdly, resources are diverted away from providing a reliable and efficient service to the vast majority of compliant tax payers. This has been exacerbated by recent problems with for example the introduction of the NPS (the new PAYE computer system).

44. We understand that HMRC will want to target the "low hanging fruit", and tax avoiders by definition are easily targeted, as the essence of avoidance is to present in a complete tax return information which supports their view of the law. Tax avoiders are by definition within the system. However, "unacceptable avoidance" is not clearly defined. Moreover, by raising an awareness within its own staff that any tax return may be "fair game", the approach can lead to distrust and an adversarial relationship.

45. This adversarial relationship is made worse by a perception that HMRC is failing to challenge criminal tax evaders or fraudsters. While numbers can be no more than estimates, excluding large businesses the amount of money lost to ghosts and moonlighters (evaders) is greater than that lost to avoiders. Individuals and businesses subject to enquiry by HMRC may well feel aggrieved that more flagrant, and potentially criminal, abusers of the system are ignored while they, the compliant taxpayer, are forced to spend time and money defending a position which may in many cases be upheld either by the facts, or by reference to the courts.

46. Anecdotal experience suggests that HMRC have moved away from their historic position of pursuing every technical understatement of tax, however tiny. Unfortunately, an apparent reduction in business awareness and empathy on the part of Inspectors has offset the benefit. Instead of opening a technically valid but uneconomic enquiry, Inspectors are now seen as opening enquiries or pursuing issues, on the basis of a misunderstanding of the taxpayers’ activities.

47. For years, HMRC have been promising high profile prosecutions of tax evaders, yet the only examples yet brought to court are in the specific field of MTIC VAT fraud. HMRC needs to be seen to carry through on its promises if it is to maintain public trust in them.

48. HMRC’s priority for the future must be to change its public image. It needs to be seen by taxpayers as a partner in operating the essential machinery of funding Government’s operations, rather than an underfunded and inefficient collections body focused too closely on recovering underpaid tax from a small sector of tax payers while struggling with its responsibility to provide an effective service to most and failing to tackle squarely the most serious evaders.

November 2010