Administration and effectiveness of HM Revenue and Customs - Treasury Contents

6  Compliance

155. HMRC's fundamental task is to collect taxes and pay out those benefits it is responsible for. In recent years HMRC has begun to produce estimates of the 'tax gap'—the difference between the tax it brings in and the tax that is theoretically due. The accuracy with which the tax gap can be estimated is inherently limited. Not only is the methodology in its infancy, but it involves estimating the size of illegal activity, for example, the hidden economy, which by definition cannot be known with any certainty.

156. HMRC estimate that the net tax gap was £42 billion in 2008-09—roughly 9% of the UK's total tax liability. HMRC ascribes elements of the tax gap to various "behaviours". 17.5% is ascribed to tax avoidance, whilst a further 17.5% is assigned to tax evasion. Other elements include failure to take reasonable care, error, the hidden economy and non-payment. HMRC's estimate is not without its critics. Taxresearch LLP estimated the tax gap to be substantially higher, around £120 billion.[180] Andy Wells, a tax practitioner, argued HMRC's estimate is inflated through the inclusion of legitimate legal disagreements about the amount of tax to be paid.[181]

157. Whatever the actual figure, reducing the size of the tax gap is a key part of HMRC's aims. The HMRC unions argued in their evidence that the tax take has been diminished by the resource cuts being made at HMRC. They pointed to an increase in the tax gap and declining revenues alongside reductions in the numbers of compliance officers. However, as noted above, intervention yields have risen whilst the numbers working in compliance have fallen and it is difficult to disentangle reductions in the tax take due to HMRC performance from those caused by the recession or changes to the law.

158. As part of the Government's deficit reduction strategy, HMRC is being asked to raise more money through additional compliance activity. This is reflected in the £917 million that the Government is 'reinvesting' in tax compliance. In return for this money HMRC is expected to raise £7 billion a year in additional tax revenues by the end of the spending review period. We intend to examine HMRC's administrative and operational record at ensuring tax compliance in future hearings. In this report we highlight two issues that came to light during our early hearings.

Settlement of large tax cases

159. A particular source of controversy has been HMRC's settlement of large tax cases involving corporations. Allegations have been made in the press that cases have been settled inappropriately for a lower yield than might have otherwise been achieved.[182] We pressed HMRC witnesses and the Minister on whether the appropriate processes had been used in two high-profile cases. Dave Hartnett, the Permanent Secretary for Tax, vigorously defended the procedures that had been used to achieve a settlement with Vodafone and argued that figures cited in the press lacked credibility. HMRC said they were unable to comment in relation to another high-profile case for reasons of taxpayer confidentiality.[183] We also pressed HMRC on their record in litigating against large firms. Again, Dave Hartnett defended HMRC's record, saying that HMRC had protected around £6.25 billion of revenue in 2009-10 through litigation. HMRC also observed that large companies account for "less than a quarter" of their total tax gap estimate.[184]

160. We are not in a position to judge whether individual cases were settled appropriately or not. Nor are we challenging the need for taxpayers' affairs to be kept confidential. However, the sums involved in some of these cases are enormous. Martin Lewis, who worked in tax compliance during his time at HMRC, argued in his evidence that there needed to be more transparency about how these cases are resolved.[185] If an individual taxpayer feels their case has been handled inappropriately they can ultimately take HMRC to court. Taxpayers collectively have no such recourse.

161. The National Audit Office has undertaken work on HMRC's procedures for resolving large tax cases, whilst the Committee of Public Accounts has already recommended that "the Department should consider the scope for increasing transparency in the area of large and complex tax cases and for assuring Parliament and the public that due process in the resolution of these cases is being followed."[186]

162. The Exchequer Secretary did not believe it would be appropriate for politicians to be involved in settling individual tax cases. However, he was concerned that the current process did not allow HMRC to respond to allegations against it:

We have to remember that some of these allegations question the integrity of dedicated public servants on the basis of little or no evidence, and it concerns me that some of these decisions are becoming politicised and it is quite difficult for HMRC to answer back because they are not entitled to put confidential information into the public domain.[187]

163. The public needs to be assured that cases involving large sums of money are being settled correctly. Equally it is unfair on HMRC staff and damaging to public confidence that the Department can be the subject of repeated allegations it cannot refute, even if they are groundless. We agree with the Committee of Public Accounts that HMRC should consider how the accountability and transparency of the settlement of large and complex tax cases might be improved. We are taking further evidence on how this might be achieved.

Debt management

164. HMRC's approach to handling debts owed to it was a matter of concern to some of our witnesses. The Committee regularly receives correspondence from individuals and other Members on behalf of their constituents who feel that they have been treated in a heavy handed way by HMRC. We recognise the fact that any revenue collection agency will face claims of this nature. Similarly, we accept Dame Lesley's observation that no organisation dealing with a billion transactions a year will be able to do so perfectly in every case.[188] However, the scale of the complaints that reached us and have appeared in the press give us cause for concern. This section examines a few such cases.

165. We have already noted the difficulties that can arise when collectors seeking to follow-up a debt do so on the basis of out-of-date information because relevant post has not been processed. More widely, the Association of Tax Technicians was concerned about wider failures of communication between Debt Management and other areas of the Department.[189] Andy Wells even suggested that there is no means for debt collection to communicate with those who initially assessed the debt, raising the alarming prospect that, when a debt is challenged, debt collectors cannot easily check whether they are attempting to recover the right amount.[190] We seek confirmation from HMRC that effective real-time lines of communication exist between Debt Management and other areas of the Department. Effective communication is especially important where private debt collectors are involved.

166. Accountancy Age recently reported that HMRC had sent out letters to businesses who had failed to submit a declaration that they owed nothing to the Department stating that "outstanding tax debts" have been transferred to the HMRC's Distraint Department "to list your goods so that they may be sold at a public auction".[191] With no indication in the letter that the amount owed was zero, such letters are likely to cause unnecessary distress and confusion and put further burdens on HMRC's already over-stretched customer contact teams.

167. Similarly, we pressed the Minister on reports in the Mail on Sunday that letters had been sent to taxpayers saying that payment was required "to fund the schools and hospitals we all rely on" and stating "We will do that by taking your possessions and auctioning them publicly."[192] He defended the letters, stating that they had been sent out only after earlier communications had met with no response and "it is not unreasonable to point out some of the potential consequences of not responding" so long as the letters were only sent in a highly selective way.[193] The Department told us it has moved towards an approach to debt management based on an assessment of individual's risk.[194]

168. It is inevitable that HMRC will have to pursue some taxpayers for outstanding debts and it may have to be forceful in doing so. However, the tone of some of the letters being sent out suggest the "potential consequences" are inevitable unless payment is immediately forthcoming. These letters appear to have been widely used without sufficient thought to whom they were sent to, even being sent to people who did not actually owe money. Such language is appropriate only where there is strong evidence of persistent and deliberate non-payment; it is completely inappropriate where the amount owed is in dispute, where the amount may be zero, or where the recipient is vulnerable. We recommend HMRC take steps to ensure such hard-hitting correspondence is used in a more proportionate way, is better tailored to individual case histories and contains information on the specific debt in question.

169. PCS expressed concern about HMRC's use of private debt collectors. A pilot was introduced in 2009 and expanded as part of the 2011 Spring Supplementary Estimate. At the time of the Supplementary Estimate HMRC told us that the "earlier pilot did not provide reliable evidence of relative cost effectiveness of HMRC in-house versus outsourced debt collection".[195] We asked the Minister why, if cost effectiveness had not been proved, private sector recruitment had been preferred to additional HMRC staff. He told us:

There is greater flexibility in making use of private debt collecting agencies as opposed to taking on full, permanent HMRC staff. As a consequence of the work that has already been undertaken with private debt collecting agencies, something like £140 million has been recovered that would otherwise have had to have been written off. [196]

He went on to say that HMRC had no plans to sell debts to private agencies, but did not rule out the possibility.[197] We note the Minister's assurance that HMRC has no existing plans to sell debt and his refusal to rule out the possibility of such plans in future. Any moves in this direction would be a major change and should not be contemplated without widespread consultation at an early stage.

180   Ev w52 Back

181   Ev w43-w44 Back

182   See for example, Private Eye, 21 Jun 2011 Back

183   Q152-Q165, Q402, Ev 126-130 Back

184   Q 160; Ev 125 Back

185   Ev w33  Back

186   Committee of Public Accounts, Eighteenth Report of Session 2010-12, HM Revenue and Customs' 2009-10 Accounts Back

187   Q 432 Back

188   Q 222 Back

189   Ev w28 Back

190   Ev w43 Back

191 accessed 8 June 2011 Back

192   Mail on Sunday, 17 April 2011, Tax with menaces: We'll take your TVs, cars and laptops and sell them for pittance, 'thuggish' Revenue warns late payers in bizarre begging letter"


193   Q 456, Q 460 Back

194   Ev 120 Back

195   Ev 116-117 Back

196   Q 441 Back

197   Q 442-443 Back

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Prepared 30 July 2011