Conclusions and recommendations
1. HMRC
is responsible for collecting UK taxes and duties from businesses
and individuals and providing financial support to taxpayers through
tax credits. It aims to deliver three strategic priorities: to
improve customer service; to reduce operating costs; and to reinvest
money from its efficiency savings to generate increased tax revenue.
In 2012-13, HMRC reported that it had brought in £475.6 billion
of revenue, an increase of £1.4 billion or 0.3% in cash terms
compared to 2011-12. Tax revenue therefore fell in real terms
in 2012/13 as compared to 2011/12.
2. The tax gap is a theoretical concept to
assess tax revenues lost to the Exchequer.
It does not cover the full amount lost through tax avoidance.
It sets out to measure the difference between the amount collected
and the amount that should be collected. The stated tax gap underestimates
the amount of money lost to the Exchequer. Despite the Department's
increased efforts on reducing the tax gap, the latest figures
for 2011-12 shows an increase of £1 billion to £35 billion
compared to the previous year. Furthermore, HMRC has not attempted
to gather intelligence about how much tax revenue is lost through
aggressive tax avoidance schemes, so this is not included in its
figures. HMRC is not explicit about this limitation to its current
measure.
Recommendation:
HMRC should be explicit about the limitations of its current
measure of the tax gap and gather intelligence about the value
of tax lost through aggressive tax avoidance schemes. When there
are firm plans to change international tax laws to tackle avoidance,
HMRC should use this intelligence to assess how much additional
tax revenue the changes would generate within the UK.
3. HMRC needs to demonstrate that it deals
robustly with individuals and companies who deliberately mislead
it. While HMRC told
us that it is committed to collecting the tax that the law provides
for, the lack of prosecutions against multinational corporations
seems at odds with HMRC's stance on pursuing tax debt from small
and medium-sized businesses in the UK. HMRC has yet to test how
existing tax law impacts on global internet-based companies. Despite
assurances given to us by HMRC a year ago, it remains the case
that only one of 16 cases subject to criminal investigations arising
from the Lagarde list of Swiss bank account holders has resulted
in a prosecution.
Recommendation:
HMRC should be more willing to pursue prosecutions against
individuals and large businesses to test the boundaries of the
law and to demonstrate firm action against those who have knowingly
misled or withheld information.
4. HMRC massively over-estimated how much
it could collect from UK holders of Swiss bank accounts and has
not been sufficiently vigorous in pursuing outstanding liabilities.
The 2012 Autumn Statement estimated that in 2013-14 HMRC would
recover £3.12 billion unpaid tax from the Swiss bank accounts
of UK taxpayers and this figure was built into budget estimates.
So far it has collected just £440 million.[1]
We were astonished that HMRC could not explain the reasons for
such a huge shortfall, or what it was doing to gather the data
it needs from the Swiss authorities to assess and collect the
tax due, despite it having met with the Swiss authorities to discuss
these issues.
Recommendation:
HMRC must continue to press the Swiss authorities to provide
accurate and complete information about amounts held there by
UK taxpayers, and pursue more vigorously the amounts owed in unpaid
tax.
5. In seeking to make the UK more attractive
to business, HMRC has not considered adequately the impact that
changes to the tax regime will have on the behaviour of large
businesses. UK-based
companies may reduce their tax liability by borrowing money in
the UK to invest in an offshore subsidiary and then offsetting
the borrowing cost against their UK profits. The UK's Controlled
Foreign Companies rules have been weakened and incentivise UK
companies to move finance operations offshore. Multinational companies
are also using the Eurobond rules to lend money to their UK subsidiaries
via low-tax jurisdictions and offset the interest payments against
their UK profits, thereby reducing their corporation tax liability.
Recommendation:
HMRC needs to better understand how companies and their
advisers will react to new tax rules and legislation, and prevent
unintended consequences. If the department is creating new incentives
that may also enable international corporations to avoid tax,
then it should be open about any such consequences.
6. HMRC's implementation of its Real Time
Information system has been encouraging overall, although some
smaller businesses continue to struggle with the transition.
HMRC's gradual approach to implementing RTI has gone well so
far, and has been characterised by a willingness to learn lessons
and adapt as it goes along. It has extended its implementation
deadline for smaller businesses, and increasing numbers of employers
have signed up to it. HMRC has had responses from 24,000 businesses
to its survey of RTI but it has yet to analyse these. We are concerned
that, while HMRC is planning to introduce fines for non-compliance
with RTI from April 2014, some small businesses face continuing
challenges to adopt it.
Recommendation:
HMRC should analyse the information it has from its customers
to help it understand the problems faced by smaller businesses
struggling to adopt RTI, so that it can continue to provide them
with effective support.
7. The lack of full disaster recovery arrangements
in the RTI system means there is a risk that any system failure
will delay or introduce errors in payments to Universal Credit
claimants. The successful
implementation of Universal Credit depends on HMRC working effectively
with the Department for Work & Pensions, both because Universal
Credit uses information transferred to it from RTI to calculate
payments to claimants and because it will eventually replace tax
credits. However, delays in receiving information from RTI, or
any system failures, are likely to affect payments to individual
claimants, and RTI currently lacks full disaster recovery arrangements.
Recommendation:
HMRC must undertake work necessary to improve the provision
for disaster recovery within the RTI system to ensure that correct
payments to claimants will continue in the event of a system failure.
8. Personal tax credit debt has increased
since 2011-12, and HMRC has reduced markedly the amount it expects
to recover. Personal
tax credit debt increased from £4 billion at the end of 2011-12
to £4.8 billion in 2012-13. HMRC estimates it could increase
to £5.5 billion by 2014-15. It reduced its estimate of recoverable
tax debt in 2012-13 from 43% to 31% and increased the provision
in its accounts for "irrecoverable" debt by £985
million to £3.3 billion. While it is unlikely that these
amounts will be fully recovered, HMRC has not actually written-off
these debts.
Recommendation:
HMRC should undertake a thorough analysis to identify which
tax credit debt is recoverable and write off that which is not,
to provide a more accurate assessment of the position before tax
credits are transferred to Universal Credit.
9. HMRC has not done enough to identify potential
tax credit error and fraud, prosecute offenders and pursue overpayments.
HMRC has had some success
in identifying losses from tax credit error and fraud through
a pilot programme using a private sector provider to identify
potential fraud cases. However, it could make far greater use
of information from organisations, including banks, to help it
identify potential fraud risks, for example to identify bank accounts
which receive tax credits but from which withdrawals are consistently
made outside the EU.
Recommendation:
HMRC must analyse the cost-effectiveness of the various
measures it uses to counter tax credits error and fraud, to establish
which provide the best return on its investment.
1 On 5 December 2013, the Autumn Statement also stated
that "The UK's tax agreement with Liechtenstein, forecast
to bring in a total of £630 million by 2013-14, has so far
yielded over £800 million with over two and a half years
left to run". Back
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