The administration and effectiveness of HM Revenue and Customs

Supplementary written evidence submitted by HM Revenue & Customs

Additional questions from TSC on 9 February 2011

1. The Spending Review document says that HMRC will raise £7 billion by investing £900 million in targeting tax avoidance and evasion. The Sub-Committee would like to see the computations on which the £7 billion figure is based.

HMRC will invest in compliance skills and resources with more specialist compliance staff deployed to tackle the ‘harder’ end of the spectrum of customer behaviour - avoidance, evasion and criminal attacks on the tax system. Looking ahead our plans are, wherever possible, to address error and failure to take reasonable care by redesigning processes to reduce the opportunity and likelihood of error, rather than through compliance work. However, enquiries seeking evidence of evasion will often identify losses from failure to take reasonable care and error.

The tax gap is the gap between the amount of tax collected and the amount we estimate is theoretically due. We analyse the tax gap by head of duty, customer segment and behaviour. The biggest share of tax gap, around 50% of the total, is in the Small and Medium Enterprise Sector (turnover of up to £30 million); 25% is from large businesses (companies with a turnover in excess of £30 million); and 12.5% each from individuals and losses from criminal attack on the tax system, e.g. through large scale excise smuggling or repayment frauds. By comparison, of the total tax receipts in 2009-10, around 60% was paid by large businesses (including PAYE and NICs paid as employers), 35% by Small and Medium Enterprises (including PAYE and NICs paid as employers) and 2% by individuals.

We are using our knowledge of the tax gap and our understanding of the customer behaviours which drive it to design and target the right interventions over the SR period to manage and change behaviour and secure the largest amount of additional revenue taking into account HMRC capabilities and capacity, longer term effects on behaviour, and immediate return on investment.

Around 65% of the £917m investment funding will be focussed on the mass market and tax evasion. This reflects the need to significantly increase coverage of the 4.8 million customers in this sector. We are looking for a return on investment of around £4 billion a year by 2014-15.

Around 5% will be focussed on large businesses and wealthy individuals. This builds on the existing one-to-one client relationship model in this sector that has contributed over half of the estimated current year £13 billion intervention yield. The expected return is around £1 billion a year in additional revenue by 2014-15.

Around 10% of the investment funding will be focused on tackling organised crime. The level of funding reflects the need to recruit and train highly skilled specialists and to develop our upstream capability in detecting and preventing fraud losses. We expect a return of around £1 billion a year by 2014-15 in revenue loss prevented and deterrent effect.

The remaining funding will be spent on a range of interventions designed to collect more debt. Together, these measures will deliver the additional £7bn by 2014-15.

2. At its last meeting the Sub-Committee also discussed the KPMG report on administrative burdens arising out of the tax system. We would be interested to see any updated figures that have been produced by HMRC on the administration burden since then.

The total administrative burden of tax legislation on UK business, calculated in 2005 by KPMG was approximately £5.1 billion a year. Since 2006, HMRC has reduced the administrative burden for business by over half a billion pounds (£564 million at 31 March 2010 against a target of £510 million).

The existing KPMG model for administrative burdens maps the UK tax legislation to the activities that business need to do to meet their tax obligations. The model does not measure costs where there are errors or queries, referred to as "operational grit" nor does it capture consequential costs to business in relation to HMRC compliance activity.

The KPMG research involved close working and consultation with business at all stages, enlisting the help of an Advisory Board comprising key members of business organisations as well as people with hands-on experience of running businesses in the UK to bring a business perspective to the project. This substantial piece of work was groundbreaking across Government and provides very detailed information used to target particular drivers of administrative cost.

Additionally the Administrative Burdens Advisory Board (ABAB) has supported this work by bringing a sharp external focus and providing a challenge function and ensuring that HMRC concentrates on issues that make a noticeable difference to businesses.

The KPMG model does not include any costs on non-business customers in meeting their tax obligations. However, HMRC is committed to improving its service for all customers and our aim for the next SR period is to improve customer experience and reduce costs for customers meeting their tax obligations. This will be achieved through simplification and streamlining of processes delivered via the HMRC customer centric strategy and business plan.

HMRC is in the process of updating the KPMG research to reflect 2011 costs and up to date business populations.

Annex A

Succession Planning

1. What plans do HMRC have in place to ensure smooth succession into board-level posts?

A full organisation design review of HMRC was initiated in 2010. Consequently, in the summer of 2010, HMRC’s Executive Committee (ExCom) undertook a review of its succession cadre (predominately at SCS2 Director level) using the Cabinet office guidance on performance and potential. This revealed a number of succession gaps/issues. In addition, last autumn ExCom confirmed a new operating model to support the Department’s customer-centric business strategy, which is all about delivering services and interventions built from a deep understanding of our customers’ needs and behaviours. Through this we have established the future senior level roles that HMRC needs in order to meet the challenges of SR10.

The initial phase of populating the top 3 tiers (Chief Executive, Director General and Director level) of our new operating model is now substantially complete and involved a rigorous leadership selection process. The data produced through this assessment process will form the foundation for individual development plans and will enable us to identify and grow talent from within. Through this same review, HMRC is also building a robust succession planning strategy to include systematic reviews at board level to identify critical roles and likely successors in each business area. This will enable us to build a stronger talent pipeline and identify those who are ready now, and those who will be ready in two and five years. We have also mapped the likely tenure of the existing Directors General. This will enable us to plan well in advance for future moves – this includes triggering a proactive individual succession strategy 12 months from the expiry of a fixed term contract or potential retirement.

This overall approach will culminate in building a consolidated, comprehensive and cross-business validated picture of our Director cadre in order to identify people with potential and lines of succession to individual Director General posts. Succession planning for Director General positions is overseen by the Whitehall-wide Senior Leadership Committee, chaired by the Cabinet Secretary.

2. How has succession planning changed since the resignation of Paul Gray?

There has been significant business and organisational change within the Department and we have heightened the sophistication and rigour of our succession planning at Senior Civil Service (SCS) level. HMRC has put in place a number of initiatives to both strengthen the calibre and management of the Department’s talent pipelines, and at the same time boost the competency of our senior leaders.

The most significant developments during this time have been HMRC’s early and full adoption of an industry tested succession planning methodology recommended by Cabinet Office, and the Department’s new Leadership Framework which re-defines the leadership skills and behaviours we need and expect in HMRC and provides the basis for assessing and benchmarking our leadership capability at SCS.

Debt Management

1. What HMRC’s policy is in relation to debts of less than £10,000.

2. Whether HMRC is actively undertaking activity to work debts of less than £10,000.

3. Whether HMRC’s strategy in relation to low- value debts has changed.

HMRC policy is to pursue all debts. Indeed we have faced some criticism about our "relentless pursuit" of small debts. As would be expected however we prioritise our resources and collection methods. It continues to be the position, as it always has been, that every day, across our whole organisation and across a range of different debt management activities, debts of all ages and sizes, including debts below £10,000 are being actively pursued.

During 2009-10 the Department began to implement a revised debt management strategy based on the segmentation of debtors according to risk and previous behaviours rather than by value. We are now increasingly tailoring and targeting our collection activities to increase the likelihood of recovery, improving the speed of collection, and reducing costs through the use of specific debt management campaigns. These campaigns have included debts of all values. Our initial analysis shows that the campaigns approach has been cost effective, and we now apply this approach to around 90% of our debt portfolio. The move to risk based prioritisation follows recommendations by the Committee of Public Accounts and the Comptroller and Auditor General and is in line with best industry practice. In addition, HMRC is also currently using private sector debt collection agencies (DCAs) to provide additional capacity and capability and their work so far has been particularly focussed on lower value and less complex debts. In 2010-11 the DCA process is expected to generate an additional £140m that may otherwise have been written off.

4. Whether HMRC is able to identify individuals whose individual debts each comprise less than £10,000, but whose total debts exceed that amount.

5. Whether that identification is dependent on the debt being worked.

There are IT constraints which limit the extent to which the Department can view all the debts of a taxpayer at the same time or automatically and routinely link debts across different tax regimes.

In the absence of IT functionality for the automatic linking of debts, the Department has put in place processes enabling debts for the same taxpayer to be linked clerically at key stages of the debt pursuit process, such as when considering time to pay proposals from debtors or when considering action to enforce payment or institute insolvency proceedings. The Department expects it will have made the necessary IT system changes to import VAT debts into its main debt management computer system from April 2011 and this will further increase the scope for automatic linking of debt and, where appropriate, for the joint pursuit of linked debts for the same taxpayer. VAT is currently the only major tax type not already included in the debt management system.

Additionally the Department plans to bring enhanced debt analytics capabilities on stream during 2011-12 as part of its debt segmentation and risk profiling work and to be able to use this capability to improve the design of specific debt pursuit campaigns.

6. If an identification is made, would those debts have a higher priority than an individual debt of less than £10,000.

The value of a single debt or a series of linked debts for the same debtor may well be a consideration in determining the degree of risk and priority for pursuit but will not necessarily be the deciding factor.

7. Whether HMRC management is aware of incidents of zeros being entered into computer systems in order to clear tax credit and other debts; and

8. If so, what assessment has been made of how widespread the practice is.

The Department does not recognise the scenario put forward as a way of clearing tax and tax credit debts from its accounting systems. Such systems normally require specific contra entries in order to clear an established debt. We will gladly explore the situation further if the Committee are able to expand on the type of scenario it envisages.

March 2011