Administration and effectiveness of HM Revenue and Customs - Treasury Contents

Conclusions and recommendations

Management of Resource Reductions

1.  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. (Paragraph 13)

2.  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. (Paragraph 16)

3.  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. (Paragraph 18)

4.  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. (Paragraph 19)

5.  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. (Paragraph 20)

6.  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. (Paragraph 22)

7.  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. (Paragraph 27)

8.  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. (Paragraph 29)

9.  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. (Paragraph 37)

10.  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. (Paragraph 38)

11.  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. (Paragraph 39)

Staffing and Management

12.  Staff engagement at HMRC was a major concern of our predecessors throughout the last Parliament. The management team have achieved some small improvements in relation to organisational purpose whilst staff remain dedicated to their work despite the considerable pressures on them and the organisation, some of which originates from outside the Department. However, this cannot conceal the overall picture. Relatively positive staff attitudes towards immediate colleagues and superiors stand in stark contrast with overwhelmingly negative attitudes towards organisational change and the management of the Department. It appears likely that the poor handling of the recent PAYE reconciliations and relentless negative publicity has further harmed engagement and morale. This widespread disengagement is a serious problem for a Department about to undergo further restructuring, and which was described by one witness as "stretched almost to breaking point". (Paragraph 50)

13.  Any organisation facing the constant job losses that HMRC has faced over the last five years would experience problems with staff engagement. The Spending Review settlement means that some areas are likely to experience greater stability, even expansion, whilst other parts of the Department continue to be reduced in size. Ensuring that engagement does not fall still further in these latter areas will be an enormous challenge for HMRC managers. (Paragraph 55)

14.  The evidence we have received about the management culture within HMRC, supported by the staff survey results, is very disturbing. There is a perception that the Department is run on the principles of close control and management scrutiny, with little opportunity for individuals to develop autonomy and exercise their skills. Whilst there is a need for consistency in dealing with people's tax affairs and appropriate performance management, a culture such as the one described to us is likely to harm staff morale and lead to disengagement and poor performance. (Paragraph 64)

15.  It is particularly concerning that staff feel unable to escalate possible problems up the management chain or challenge established practice. In principle one of the benefits of close scrutiny should be that issues are anticipated and responded to. This does not appear to be the case, as the handling of the 2009-10 PAYE reconciliations shows. HMRC intends to reduce its layers of management to improve communication; however this will achieve little unless the underlying culture of the organisation is changed. We recommend that HMRC engage constructively with staff and unions to see how this can be achieved and report back to this Committee within the financial year. (Paragraph 65)

16.  HMRC has been through a period of instability at the top of the organisation that has led to a lack of strategic vision. The current management team has now been in place for two years. It has set out a vision of where they would like the organisation to be, but have yet to demonstrate substantial progress towards achieving those goals and do not yet have the confidence of staff. We intend to monitor progress in these areas closely during the Parliament. (Paragraph 70)

17.  HMRC has gone through significant changes at the top of the organisation since 2008. The new structure needs time before a proper evaluation of its effectiveness can be made, including whether the model of a non-ministerial department remains the appropriate one. The respective roles of the Minister, non-executive Chairman and Permanent Secretaries are something that we intend to return to later in the Parliament. (Paragraph 73)

The Future of PAYE

18.  The National Insurance and PAYE Service should ultimately make PAYE work more effectively and ensure efficiencies across the Department. However, the problems resulting from its flawed implementation have done significant damage to the public perception of HMRC and the tax system more generally. It is crucially important for the credibility of the management team that the 2012 target for clearing open cases is met and that improvements in overall performance follow soon afterwards. (Paragraph 83)

19.  Data quality has been a key weakness in the PAYE system to date. The success of both the National Insurance and PAYE Service and Real-time Information will depend to a large extent on how effectively HMRC can 'cleanse' the data it receives and holds. (Paragraph 88)

20.  We welcome the move to introduce Real-time Information. We agree with the professional bodies that the system must be tested thoroughly before full implementation, with full consultation with users and close co-operation with the Department for Work and Pensions at all stages. We note that large employers will be required to use the new system in January 2013, which is before the system has been tested through one complete tax year. (Paragraph 91)

21.  The transfer of information to HMRC via BACS is only part of the Real-time Information project. HMRC must also be able to process the information in a timely way, deal with the increase in customer contact that will occur with the introduction of a new system and have in place satisfactory arrangements for those who do not pay their employees through BACS. (Paragraph 92)

22.  HMRC has committed to an ambitious timescale to deliver Real-time Information, driven in part by the importance of the project in delivering the Universal Credit. The history of large IT projects subject to policy-driven timescales has been littered with failure. The timetable is made more ambitious by the fact HMRC will still be resolving the legacy of open cases and stabilising the National Insurance and PAYE Service during the project's early stages. Introducing Real-time Information before HMRC and the Government can be sure it will work correctly would run unacceptable risks for the reputation of the Department and the tax system. We recommend that HMRC and DWP have contingency plans in place in case a delay becomes necessary. Given the importance of the project we further recommend that the preparations for Real-time Information in both HMRC and DWP are subject to external audit as implementation proceeds, for example through the National Audit Office, to ensure that they are as robust as possible. We expect arrangements to be put in place for the National Audit Office to report quarterly to Ministers, this Committee, the Public Accounts Committee and other relevant Committees to ensure Ministers in both Departments can be held properly accountable for the progress of the project. (Paragraph 93)

Service Standards

23.  We welcome HMRC senior management's acknowledgement that the Department's customer service performance has been unacceptable. We are not convinced, however, that the problems can solely be accounted for by the problems with PAYE in 2009-10. The evidence received by us and our predecessors suggest that poor service standards have been an issue for many years and have not been fully reflected in HMRC's customer service measures. (Paragraph 99)

24.  We reiterate our predecessor's 2007 recommendation that HMRC work closely with the professional bodies, tax charities and businesses to develop a series of performance indicators that credibly reflect customers' end-to-end experience of dealing with HMRC and that these indicators are regularly published as part of the transparency section of its five-year business plan. We are disappointed that our predecessor's recommendation was not acted upon and expect to see meaningful progress within the next twelve months. (Paragraph 100)

25.  HMRC's performance at responding to telephone calls has been patchy at best and unacceptable at worst. Based on past performance we do not have confidence that the Department will be able to achieve its target of 90% of calls answered in a day by March 2012. We recognise that there had been improvement in performance prior to the recent rise in contact due to the PAYE-related issues in 2010. However, even with that improvement, the Department was falling well short of the target, whilst the fall in performance in 2010-11 suggests there is insufficient capacity to deal with unexpected surges in demand. Given that it has been HMRC's strategy to push so many taxpayers and tax credit claimants into communication by phone it is important that performance in this area improves rapidly. We will return to this issue regularly, and will assess the Department's performance against its target in 2012. (Paragraph 108)

26.  There was significant concern among our witnesses that it has become increasingly difficult to resolve a complex tax issue in a single phone call to HMRC. We recommend that HMRC examine its processes for escalating complex queries to ensure this is done quickly and appropriately. We also understand that the Department is running a pilot aimed at ensuring contact centre staff dealing with tax credits and benefits are better able to answer more complex queries first time around. The pilot is to be reviewed over summer 2011. If this pilot is successful HMRC should look at expanding it to all areas of tax. (Paragraph 111)

27.  We welcome the fact that HMRC is reducing the number of telephone numbers it operates. However, at a time when calls are not being answered quickly, it cannot be acceptable that those without landline telephones—often less well off members of society—may be being charged more as a result of the use of 0845 numbers. We recommend that HMRC investigate alternatives to 0845 numbers, including 0345 and freephone numbers, as part of the process of agreeing its next telephony contract and ask the Department to brief us on its key aims in negotiating that contract. As an interim measure we recommend the Department examine whether a non-0845 number could be provided for tax credit claimants and publicised through tax charities. (Paragraph 113)

28.   the evidence we have received, correspondence from the public and the coverage in the professional press suggest that long delays in responding to post at HMRC are endemic. This is unacceptable. Such delays increase demand elsewhere in the system, as taxpayers and tax credit claimants chase progress, increasing costs for the public and HMRC alike. (Paragraph 118)

29.  We recommend that HMRC draw up minimum service standards for dealing with post in a timely and accurate fashion in consultation with the professional bodies, tax charities and businesses representatives. Such standards should recognise the distinction between simple and complex queries, and look at the progress of correspondence end-to-end rather than in relation to individual items of post. We recommend that the Department publishes an indicative timetable for achieving those standards and keeps us regularly updated on progress towards meeting them. (Paragraph 119)

30.  We urge HMRC to examine how far declining use of Enquiry Centres is due to factors such as inconvenient opening hours or lack of advertising. More broadly, we recommend that the Government examine whether withdrawing its physical presence from an area has a medium—or long-term impact on local compliance. (Paragraph 125)

31.  We welcome the fact that HMRC's Change Plan commits to "providing targeted help for vulnerable customers who most need face-to-face support", but we do not believe face-to-face support should solely be available to the vulnerable. The Department has a strategic approach focused on delivering contact through contact centres and online. Face-to-face contact must be an integral part of that strategy, not an exception. We recognise that savings must be made; the tax charities and other bodies who submitted evidence to us had a number of imaginative suggestions for how face-to-face services could be delivered more cost effectively. We recommend that HMRC look closely at alternative ways of providing wide coverage of face-to-face advice such as co-location with other public offices, convenient part-time opening hours and mobile advice centres. (Paragraph 126)

32.  Ending the production of advice and guidance leaflets may save money in the short term. However, it will force those who do not have access to the internet to turn to the telephone or enquiry centres for advice, and may lead to an increase in mistakes which are costly for HMRC to rectify. HMRC should examine reintroducing selected, well targeted, leaflets aimed at groups such as the elderly who are most likely to lack internet access. (Paragraph 132)

33.  HMRC has been relatively successful at enabling taxpayers to pay many of their taxes online. However, requiring online filing prematurely runs the risks of excluding those without reliable high-speed internet access, dissuading those who are not computer literate from being tax compliant and overloading systems that have not had time to bed in. HMRC should always ensure it has robust, well-advertised alternatives in place for those who cannot submit online and publish a statement of its commitment to continue to provide a robust free filing service for basic tax return filing. (Paragraph 135)

34.  Whilst we would welcome any moves towards greater use of email or secure messaging by HMRC, we accept there are genuine concerns on the grounds of security. Without proper planning, greater use of email may also achieve little more than transferring the bulk of the correspondence backlog from one medium to another. We recommend that the Department make a clear statement of their intent in relation to email and secure messaging. (Paragraph 136)

35.  There was near unanimity among our witnesses that the efficiency savings at HMRC have been partly responsible for the decline in service standards and, therefore, that HMRC's claim to have delivered £1.1 billion of savings "without overall negative impact on performance" lacked credibility. (Paragraph 139)

36.  The features of the Large Business Service that appear to have led to high customer satisfaction ratings are personal contact with an individual responsible for a case and the ability of a single contact point to co-ordinate HMRC activity across departments. Whilst it is not feasible for every individual or small business to have access to that level of service, these are features that HMRC should be trying to replicate as closely as possible in its contact centres through effective channels of escalation and responsibility. (Paragraph 140)

37.  HMRC's focus on customer research is to be welcomed insofar as it leads to a greater responsiveness to customer needs. To be effective this quantitative work needs to be supported by 'on the ground' experience of how taxpayers operate. We reiterate our recommendation that HMRC staff at all levels should spend time in tax practices, charities and businesses better to understand the people they deal with and how changes at HMRC affect them. Examples of how this could be achieved include day visits, short secondments and work shadowing. (Paragraph 142)

38.  HMRC are right to base their customer-service strategy on research into what taxpayers want. However, we question whether a strategy focused around shifting customers' behaviour can truly be described as customer-centric. Where behaviour shifts are achieved voluntarily through the increased attractiveness of (for example) an online alternative the claim is credible. It is not credible, however, where contact options are narrowed down to the one HMRC would prefer customers to use. The evidence we have received suggests that both elements are present in HMRC's current approach. (Paragraph 143)

39.  Effective management of demand will require HMRC to have a good understanding of how changes made in one part of the organisation will impact upon others and, most importantly, the impact such changes will have on the public. The Department accepts that many of its current communications generate more contact and inefficiency. Improvements in external communication therefore have the potential to make savings vastly in excess of their cost. We recommend that the Department look at how it draws up its public communications and establishes links with tax charities and professional bodies to ensure all major communications and guidance are tested at a very early stage on focus groups before being made public. (Paragraph 148)

40.  The service standards provided by HMRC cannot be treated as a separate issue from the collection of tax revenue and the level of tax compliance. Current levels of voluntary compliance should not lead to complacency: any negative change in attitudes regarding paying taxes may take many years to filter through into reduced tax compliance and tax yields, at which stage it may be very hard to reverse. If a view of dealing with HMRC as being a frustrating, costly and time-consuming business were to become entrenched then there is a significant risk of public respect for the institution, and the tax system more generally, being lost. (Paragraph 154)


41.  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. (Paragraph 158)

42.  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. (Paragraph 163)

43.  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. (Paragraph 165)

44.  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. (Paragraph 168)

45.  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. (Paragraph 169)


46.  The evidence we have received in this inquiry has been disturbing. HMRC's delivery of services to the general public has fallen to unacceptable levels in several areas. Many factors have contributed to this process: overly ambitious expectations for IT projects, sustained cuts to resources, a management culture of "command and control", increasingly complex tax legislation and the legacy of the merger. (Paragraph 170)

47.  HMRC performs a crucial role and operates under significant pressures. The Department has faced and will continue to face substantial reductions in resources, tax policy has not always been designed with full consideration of the administrative impact and there will always be a degree of public and media dissatisfaction with a revenue collection agency, even if it is doing its job perfectly. The staff of HMRC face a difficult challenge in responding to these pressures and their continued professionalism and dedication are vital to ensuring that the Department regains the reputation of its predecessors as being among the most effective in Whitehall. (Paragraph 171)

48.  The management team at HMRC has been in place for two years. The broad view from our witnesses was that the team had improved its understanding of the issues facing HMRC and is committed to tackling them. However, the Department's achievements have been obscured by high-profile failings and staff do not have confidence in management. The Department faces a difficult few years as it resolves the legacy of 'open cases' in PAYE and introduces further ambitious IT upgrades. We will monitor HMRC's performance closely during this Parliament and expect the Department to deliver where substantial improvements have been promised. (Paragraph 172)

49.  Whilst genuine efficiencies have been, and will continue to be, made, we are concerned that HMRC's performance will continue to deteriorate if further reductions in resources are badly managed. There was near unanimity among our witnesses that the reductions made so far have had a damaging impact. We are particularly worried as there is no evidence that the methods that management will deploy to find 'efficiencies' and 'cost savings' have changed in any substantial way. We also believe there is a tension between the drive for 'more automation' and 'centralisation' and the desire to empower and boost the morale of staff who must deliver the cost savings. (Paragraph 173)

50.  HMRC collects revenue for the Government of more than a hundred times the amount it costs to run. Given the fiscal position, it would make little sense for the Department to be cut back further if resource reductions in addition to those plans already agreed would have the effect of reducing receipts, displacing disproportionate costs onto the wider economy or further eroding public confidence in the tax system. Great care will be needed before any further savings are planned or implemented. (Paragraph 174)

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Prepared 30 July 2011