House of Commons - Administration and effectiveness of HM Revenue and Customs

Administration and effectiveness of HM Revenue and Customs - Treasury Contents

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 witnesses—including the HMRC unions, accountancy bodies, former employees and business organisations—expressed 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.[3] 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

Year 2005-06 2006-07 2007-08 2008-09 2009-10

RDEL (£m) 4,059 4,228 4,026 4,092 4,002

CDEL (£m) 354 299 244 278 229

DEL (£m) 4,413 4,527 4,270 4,370 4,231

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.

Efficiency savings

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."[4]

Table 2: HM Revenue and Customs value for money savings

Year 2005-06 2006-07 2007-08 2008-09 2009-10 Total

Value for money savings (£m) 131 254 278 182 298 1,143

Source: HMRC written submission to Committee

Revenue

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".[5] 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.[6] 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."[7]

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 factors—including 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 over time.

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 practitioner:

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.[8]

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.[9] 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 we—the taxpayers—pay 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?[10]

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.[11] In the 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 be measured.

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."[12]

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.[13] 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 with stakeholders".[14] 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 delivered:

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.[15]

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".[16]

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 realised—with 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.[17]

24. Dame Lesley rejected Mr Lockhart's suggestion that re-investment in compliance amounted to plugging holes created by previous efficiency savings.[18] 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 the organisation.[19]

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.[20] 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.[21] Dame Lesley told us that the training of contact centre staff had been "fairly ring-fenced" since HMRC's move towards telephone based contact.[22]

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.[23]

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.

Legal complexity

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 regime.[24]

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.[25] The Government, in the 2011 Budget, announced a series of changes to the way the regime will operate.[26] 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.[27]

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.[28] HMRC's 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.

Spending Review

30. Like all Government departments, HMRC will have to make spending reductions over the next spending review period.[29] 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.[30]

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

Year 2010-11 2011-12 2012-13 2013-14 2014-15

RDEL (£m) 3,859 3,817 3,702 3,867 3,543

CDEL (£m) 177 287 144 122 129

DEL (£m) 4,036 4,104 3,846 3,989 3,672

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[31] the cuts in expenditure from the end of 2009-10 until 2014-15 will amount to 24% in real terms, 5.3% per annum.[32] 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,

Committee analysis

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".[33] 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]

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 manually—still 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.[35]

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.[36]

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.[37]

36. HMRC's unions were positive about the reinvestment in compliance work.[38] 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."[39]

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 specific purposes.

3 HC Deb, 17 March 2004, Col 331 Back

4 Ev 97 Back

5 Ev 88 Back

6 HMRC, Annual Report and Accounts 2010-11, HC 981, p. R12 Back

7 Q 252 Back

8 Q 88 Back

9 Q 98 Back

10 Q 94 Back

11 Ev 97 Back

12 HMRC Change Plan, http://www.hmrc.gov.uk/about/change-plan.pdf accessed 7 June 2011 Back

13 Q 82 Back

14 Q 83 Back