2 Management of Resource Reductions |
8. One of the themes in the evidence we have received
has been the resourcing of HMRC. Many of our witnessesincluding
the HMRC unions, accountancy bodies, former employees and business
organisationsexpressed the view that HMRC's performance
has been damaged by the sustained reductions in its resources
made since the merger of the former Inland Revenue with HM Customs
and Excise in 2005. The purpose of this chapter is to set out
the scale of the resource reductions HMRC has faced, the implications
of its Spending Review settlement and to summarise the concerns
expressed by our witnesses. Later chapters examine HMRC's performance
in more detail.
HMRC resources since formation
9. When the merger of the Inland Revenue and HM Customs
and Excise was announced in March 2004 one of the reasons cited
was the desire to make savings.
Since HM Revenue and Customs was formed in April 2005 there have
been reductions in the resources available to it. In cash terms
both the Resource Departmental Expenditure Limit (RDEL) and Capital
Departmental Expenditure Limit (CDEL) were reduced over the first
5 years of HMRC's operation. The capital budget in particular
was reduced significantly. In 2005-06 the capital budget was £354
million whereas five years later, in 2009-10, it had been cut
to £229 million. Over the same period the resource budget
was broadly flat in cash terms, reducing from £4,059 million
to £4,002 million.
Table 1: HM Revenue and Customs Departmental Expenditure
Source: HMRC written submission to Committee
In real terms Departmental Expenditure was reduced
by 14%, a 3.6% annual cut.
Figure 1: HM Revenue and Customs Departmental
Expenditure (real terms, 2009-10 prices)
Source: HMRC written submission to Committee,
HMT GDP deflator, Committee analysis
10. The reduction in spending at HMRC in its first
five years of existence compared with increases in overall expenditure
within central government departments over the same period. Between
2005-06 and 2009-10 Departmental Expenditure Limit (DEL) of all
central government departments rose from £206bn to £272bn,
a real terms rise of over 4% per annum.
11. HM Revenue and Customs told us in written evidence
that the spending reductions showed that they "have demonstrated
a good track record in delivering efficiency savings" and
that "between 2005 and 2010, HMRC achieved over £1.1bn
value for money savings without overall negative impact on performance."
Table 2: HM Revenue and Customs value for money
|Value for money savings (£m)
Source: HMRC written submission to Committee
12. HMRC is unique among Government departments in
that it generates income far in excess of its outgoings. Its performance
cannot, therefore be measured solely in terms of the costs it
generates. Between 2005-06 and 2009-10 total receipts collected
by HMRC rose from £409.3 billion to £435.1 billion.
However, 2009-10 receipts fell from a high point of £461.6
billion in 2007-08. The Association of Revenue and Customs (ARC),
the union representing senior HMRC officials, suggested "it
is no coincidence that total revenues are falling at a time when
HMRC has suffered significant staffing reductions".
However, it is difficult to disentangle any impact of staffing
reductions from the impact of the recession and changes to tax
legislation over the same period. Indeed, HMRC argued that its
performance in relation to receipts had improved over the period
and receipts subsequently rose again to £468.9 billion in
2010-11. The Permanent
Secretary for Tax, Dave Hartnett, pointed to the Department's
compliance work, where resources had been reduced by "around
20%" since the merger whilst intervention yields have increased
from £7.4 billion to £12.6 billion, as a case where
"we know how to do more with less."
13. The Sub-Committee
is taking further oral evidence on HMRC's compliance record and
we will report on this separately. However, assessing HMRC's operational
performance at ensuring compliance is complex. Tax receipts are
affected by numerous factorsincluding changes to the law,
economic performance, cultural attitudes to compliance and HMRC
enforcement activity. We recommend that the Government commission
a study to attempt to separate out the impact of these factors
Management of cost reductions
DISPLACEMENT OF COSTS
14. One of the most concerning themes in the evidence
we received was that some of these savings were effectively being
made by displacing the costs of tax administration onto individuals,
businesses and tax professionals. In the next Chapter we examine
HMRC's service standards and the impact that poor standards are
having on taxpayers and tax credit claimants. The evidence we
received was very clear that this was passing costs onto taxpayers.
For example, Paul Aplin told us about his experiences as a tax
I have eight colleagues around me. I hear what goes
on when they are on the phones and I see what is on their desks.
Five years ago there might have been half a dozen PAYE coding
notices that they would have had to deal with. Now, I regularly
see a pile this big and I have to listen to my colleagues trying
to get those codings changed over the telephone. It is a hugely
time-consuming process and it is a cost I either have to bear
as an extra cost of my business or I have to pass it on to my
clients [...] Those are tasks that have been effectively outsourced
to us, without us being asked.
15. Richard Baron, of the Institute of Directors,
said that it was difficult to get good figures for the total costs
to taxpayers because of the difficulties of measuring indirect
costs. He cited a KPMG study published in 2006 that estimated
the cost of the tax system at 0.4% of GDP. However, he said that
this only measured the time spent collecting data, filling in
forms and not, for example, the "hassle" of working
out which rules applied and which did not.
He went on to observe that there was a balance to be struck:
One thing I would say, though, which I think we have
to bear in mind, is that wethe taxpayerspay for
the Revenue's work anyway because it is funded out of tax revenues.
Therefore, the question is not exactly how much extra is this
costing us in our private work, but how much extra is it costing
us minus how much we are saving by not spending so much on running
the Revenue. The question then is: is it more efficient to have
more done by the Revenue and less done externally, or to have
less done by the Revenue and more done externally?
16. HMRC told us in its written evidence that it
had exceeded its target to reduce overall administrative costs
to business by 10% from 2005 levels by March 2011. Whilst this
is clearly welcome, the reductions (for example, reducing the
amount of information required by forms) need to be set against
the broader costs that our witnesses were concerned about.
2011 Budget the Government announced that HMRC's existing administrative
burden reduction targets would be expanded to include wider taxpayer
compliance costs. We welcomed this in our report on the Budget,
but would like greater clarity from the Department about how this
work will be done, what the new targets are and how they will
17. Looking ahead, HMRC's strategy is predicated
on making it easier for individuals and tax agents to "self-serve".
The Department will be consulting on "a new approach to give
agents a greater ability to process transactions on a client's
behalf" and will "increase opportunities for customers
to self-serve, reducing the need for them to make contact."
18. The possible
displacing of costs from HMRC onto taxpayers has been a long-running
concern for tax agents, businesses and individuals. Not enough
is known about the impact of resource reductions at HMRC on the
administrative burdens faced by businesses and individuals. It
would be counterproductive if 'efficiencies' achieved at HMRC
resulted in greater costs being placed on the wider economy. Such
a result would impede growth. Government will be reluctant to
take effective measures to address this issue in the absence of
robust evidence about its extent. We urge the representative bodies
who made these claims to us to come forward with quantitative
evidence about the extent of this problem.
19. We welcome
the fact that HMRC is updating the 2006 KPMG study on the burdens
imposed by the tax system to take account of changes over time
and urge it to broaden the study to examine the wider "hassle"
costs imposed by complying with tax law. This work may be costly.
We seek assurances from Government that the findings of the updated
study will be acted upon.
20. It is important
that HMRC staff who are planning or implementing process changes
have some personal understanding of the possible impact on the
wider public. We recommend that HMRC staff, particularly senior
staff, spend time visiting businesses, tax charities and tax practices
to see the impact of process changes on the ground.
CUTS IN ANTICIPATION
21. A number of our witnesses were concerned about
how future reductions and cost savings would be managed. They
considered that previous cost savings at HMRC had not been well
managed. Paul Aplin, of the Institute of Chartered Accountants
England and Wales (ICAEW) tax faculty, agreed with our line of
questioning that problems had in the past been caused by "cuts
in anticipation", explaining that "I think that has
characterised the change programme." He went on to tell us
"headcount reductions have always come first; the change
has followed". He felt that the systems should change first
and only once they had been tested should any headcount reductions
take place. He mentioned
the changes to the NPS and PAYE systems as examples of where "it
does appear that the pace was forced". He considered that
"some of the problems that emerged last autumn could have
been anticipated, with proper scenario testing and with more engagement
Graham Black of ARC concurred with this view. He told us that,
although IT had helped to improve efficiency, the reductions in
staff had come before, rather than after, the improvements were
As to whether it improved things as much as we would
have liked or as was expected, there is always a danger with IT
projects that you expect them to achieve everything, so you make
the savings and you take the staff out accordingly and then when
the actual IT comes in it is not quite as good as that but you
have already lost the staff.
Peter Lockhart, of the Public and Commercial Services
Union (PCS), noted that "a lot of the staff reductions have
been predicated on the ability of IT systems to deliver when quite
clearly they have not".
22. We recommend
that the Government look again at the profiling of the savings
HMRC is expected to make alongside the efficiencies that are expected
to deliver them to ensure the two are commensurate and allow a
degree of contingency in the case of unexpected problems with
implementation. Technological improvements and process changes
within HMRC have and will continue to deliver genuine efficiency
savings. However, there have been credible suggestions that HMRC
has in the past made savings by reducing staff numbers before
the enabling efficiencies have been fully realisedwith
resulting impacts on performance and costs.
LONG-TERM STAFF PLANNING
23. On a similar point, Peter Lockhart was concerned
that job losses had often been made without thought for longer-term,
strategic considerations. As an example he told us that some job
losses, particularly in compliance, were now having to be reversed
to meet the focus on increasing yield from compliance. PCS observed
that it took four years to fully train a compliance officer.
24. Dame Lesley rejected Mr Lockhart's suggestion
that re-investment in compliance amounted to plugging holes created
by previous efficiency savings.
However, concerns that the Department has lost experienced staff
were not confined to the unions. Chas Roy-Chowdhury, of the Association
of Chartered Certified Accountants (ACCA), expressed similar concerns:
we now have the situation where those people who
could leave did leave; the ones who were getting on into their
50s, I guess. They received good pension pay-offs, but they were
the ones with the experience and knowledge in tax. HMRC have divested
themselves of that knowledge base at a local level as well [...]
Lots of the people who knew about tax have now haemorrhaged from
25. ARC said that insufficient effort had been put
into recruiting and training tax professionals who would be able
to take over from departing HMRC staff.
Terry Cook, former President of ARC, told us he thought this issue
was now starting to be addressed, but that training and development
budgets would always be vulnerable in an organisation looking
to make spending reductions.
Dame Lesley told us that the training of contact centre staff
had been "fairly ring-fenced" since HMRC's move towards
telephone based contact.
26. The Minister agreed that the retention of experienced
staff was something that HMRC should look closely at. He told
us that HMRC was looking at retraining staff who were likely to
lose their jobs, with the aim of moving them into other areas
of the organisation.
27. The Department's
effectiveness depends not only on the quality and effectiveness
of its public-facing and processing staff, but also on having
a cadre of staff at all levels who have long experience in tax
matters. There is some evidence that the workforce change programme
may have led to a disproportionate loss of experienced people
at HMRC. We recommend that HMRC examine how it implements job
cuts, with the aim of preserving the professional expertise in
tax it needs to deliver an effective service, and report back
on the changes that have been made as a result of this process.
28. Several of our witnesses expressed a degree of
sympathy with HMRC's position, in having to administer a complex
tax system with diminishing resources. The Institute of Chartered
Accountants of Scotland (ICAS), observed:
We have a great deal of sympathy for the position
in which HMRC finds itself. Tax legislation in the UK has become
excessively complex and is quite inappropriate for a self assessment
They took the example of the IR35 legislation, enacted
to ensure businesses could not avoid paying National Insurance
or Income Tax by using intermediaries. HMRC has received a lot
of criticism over its handling of IR35. PCG, who represent freelance
workers, delivered a damning verdict on HMRC's administration
of the regime in their evidence to us.
The Government, in the 2011 Budget, announced a series of changes
to the way the regime will operate.
However, ICAS told us:
HMRC are faced with the impossible task of trying
to enforce legislation which should never have been enacted but,
having mistakenly been enacted, should have been repealed immediately
its deficiencies became apparent.
29. We have made recommendations elsewhere about
how the tax-policy making process could be improved and have welcomed
the Government's stated intention to move towards simplification
and better consultation in making policy.
task is made harder by the increasing complexity of the tax system
and deficiencies in the underlying legislation. The Government
has already announced a package of reforms to the way tax policy
is made. Following the O'Donnell Review of 2004 HM Treasury has
had lead responsibility for making tax policy, whilst HMRC is
responsible for "policy maintenance". The time has come
to review how those arrangements are operating with a view to
ensuring the practical impact of new tax legislation is adequately
considered even before the consultation stage begins.
30. Like all Government departments, HMRC will have
to make spending reductions over the next spending review period.
These reductions have been offset to some extent by money "reinvested"
in specific areas of HMRC activity:
£900 million of investment to address the tax
gap and tackle tax avoidance and evasion, bringing in an additional
£7 billion per year in tax revenues by 2014-15;
£100 million to improve the operation of Pay
As You Earn (PAYE) for both employers and individuals; and
measures to deliver £8 billion of tax credit
fraud and error savings by 2014-15.
31. The most recent figures for the total resources
that will be available to HMRC are detailed in the table below:
Table 3: HMRC Spending Review settlement
Source: HMRC 2011-12 main estimate
32. As noted earlier, in the first five years of
HMRC's operations total DEL reduced from £4.4bn to £4.2bn.
In cash terms this was a reduction of 1.0% per annum. From 2009-10
until 2014-15, the last year of the spending review period, HMRC
total DEL will have fallen from £4.2bn to £3.7bn, a
fall in cash terms of 2.8% per annum. Using the assumptions about
inflation in HM Treasury's most recent publication of the GDP
deflator the cuts
in expenditure from the end of 2009-10 until 2014-15 will amount
to 24% in real terms, 5.3% per annum.
From when HMRC was formed in 2005-06 up until 2014-15, the end
of the Spending Review period, its Departmental Expenditure Limit
(DEL) will have been reduced by over one third (35%) in real terms,
an annual cut on average of nearly 5% each year.
Figure 2: HM Revenue and Customs Departmental
Expenditure (real terms, 2009-10 prices)
Source: HMRC written submission to Committee,
HMRC 2011-12 Main Estimate, HMT GDP deflator,
Reaction to the Spending Review
33. In written evidence to the Sub-Committee HMRC
explained that they had "developed a customer-centric business
strategy and this will reduce the costs of collecting tax for
HMRC and taxpayers". Specific ways of reducing costs were
highlighted. These included reducing "re-work and delay"
and "the need for many customers to contact us", as
well as "improve and expand the use of our online services
and the degree of automation in key processes".
In oral evidence, HMRC's Chairman told us that he felt they had
a spending settlement and financial plan that "fitted the
direction of travel".
34. The Exchequer Secretary, David Gauke MP, told
us that IT would be a key part of ensuring that the efficiencies
envisaged as part of the spending review would be delivered:
[for example] following the implementation of the
NPS system, it is more in the region of 3 million cases that need
to be dealt with manuallystill a significant demand on
resources but clearly less of a demand than having to deal with
17 million cases. So there are opportunities for efficiency savings,
and some of that can be used to reduce costs, some of that can
be resources that can be redeployed to increase yield.
He stressed that Ministers had invited, and accepted,
proposals from HMRC on how reinvestment could increase the tax
yield, but went on:
We always said to HMRC that they could not be exempt
from the pressures that existed as part of the spending review,
and HMRC always accepted that.
35. A number of witnesses, ranging from professional
bodies through to staff unions, were concerned about the implications
of further reductions in resources at HMRC. In written evidence
the ACCA were pessimistic about the impact of the spending settlement:
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.
They compared the situation to the private sector
and considered that it was:
[...] 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.
36. HMRC's unions were positive about the reinvestment
in compliance work.
However, Graham Black, President of ARC, painted a bleak picture
of the impact of further reductions in resources at HMRC. "I
think management are struggling; I think the Department is struggling."
He told us that the continuous cuts were having a negative impact.
"Every organisation goes through periods where they have
to rationalise and take some cuts, but we will have had 10 years
of nothing but cuts."
37. While for
most departments the Spending Review settlement reversed the increases
which they received in the years leading up to 2009-10, the HMRC
settlement continued and increased the magnitude of the spending
cuts which they had already experienced in the previous five years.
38. HMRC is
in a unique position as the Government's primary collector of
revenue. Its expenditure is dwarfed by the amount of revenue it
collects. Whilst this does not exempt it from the need to make
efficiencies, it means that Government needs to be cautious about
making reductions in resources that might have a negative impact
on the Department's performance and lead to reductions in revenue.
39. We welcome
the fact that the Government has accepted the case for 'reinvestment'
where this will increase the tax yield, but note that in practice
the Spending Review package amounts to an overall reduction of
15% over the Spending Review period, being net of an additional
10% of expenditure which, although allowed, is ring-fenced for
3 HC Deb, 17 March 2004, Col 331 Back
Ev 97 Back
Ev 88 Back
HMRC, Annual Report and Accounts 2010-11, HC 981, p. R12 Back
Q 252 Back
Q 88 Back
Q 98 Back
Q 94 Back
Ev 97 Back
HMRC Change Plan, http://www.hmrc.gov.uk/about/change-plan.pdf
accessed 7 June 2011 Back
Q 82 Back
Q 83 Back
Q 17 Back
Q 33 Back
Ev 82 Back
Q 251 Back
Q 102 Back
Ev 91 Back
Q 61 Back
Q 218 Back
Q 444 Back
Ev w10 [Note: references to 'Ev wXX' are references to written
evidence published in the volume of additional written evidence
published on the Committee's website] Back
Ev w45-w48 Back
Budget 2011, para. 1.78 Back
Ev w11 Back
Treasury Committee, Eighth Report of Session 2010-11, Principles
of Tax Policy, HC 753 Back
HM Treasury, 2010 Spending Review, October 2010 Back
HM Treasury, Spending Review 2010, p. 71, para 2.133 Back
HM Treasury, GDP Deflator, March 2011. Note: The GDP deflator
forecasts inflation to be between 2 and 3% in the coming years.
If inflation is higher the real terms cut will be greater and
if it is lower the real terms cut will be less. Back
If 2010-11 is used as a baseline the annual real terms reduction
is slightly less at 4.9% per annum. Back
Ev 100 Back
Q 134 Back
Q 371 Back
Q 372 Back
Ev 84 Back
Ev 80 Back
Q 58 Back