Conclusions and recommendations
1. HMRC collects around £500 billion a year
from UK taxpayers. Since the 2010 spending review, it has been
specifically funded to do more compliance work to secure more
tax revenues. HMRC measures the impact of its compliance work
by estimating 'compliance yield'—the additional revenue
it generates through its activities to identify and prevent tax
losses, arising from avoidance, evasion and criminal attack. In
2013-14, it exceeded the target it had agreed with the Treasury,
reporting compliance yield of £23.9 billion, £5.3 billion
more than in 2011-12.
2. HMRC made a £1.9 billion error when
it established its baseline and set targets for its compliance
work. This meant it presented misleading information to Parliament
about the improvement in its performance. HMRC made an error
of £1.9 billion in calculating the baseline it used to agree
targets for its compliance work over the 2010 spending review
period. The error led to HMRC overstating the improvement in its
performance, for example in its 2011-12 and 2012-13 Annual Reports,
and in its Fast Facts publication of May 2014. HMRC reported
it had exceeded its targets significantly when in fact it had
only just achieved the anticipated level of performance. Astonishingly,
this significant error in a key performance measure went undetected
by HMRC's own system of governance and internal audit for three
years. Despite this, HMRC does not intend to change any of its
internal quality assurance systems or governance around performance
information. We are pleased that HMRC has invited the NAO to provide
independent assurance in future about the quality of compliance
data it reports, but it must not rely on such assurance as a substitute
for effective internal checks.
Recommendation: HMRC should ensure the governance
arrangements around its key performance indicators are sufficiently
robust, and subject to adequate internal and external challenge,
before they are reported publicly.
3. HMRC is not properly transparent and clear
about the different levels of certainty around compliance yield
that it reports. HMRC's measure of compliance yield is complex
and includes four categories that carry different levels of certainty
and precision. For example, £5.5 billion of the £23.9
billion yield reported in 2013-14 relates solely to revenues HMRC
expects to benefit from in future years. This is harder to estimate
and more susceptible to errors but HMRC has not made this uncertainty
clear when reporting publicly. It has improved its reporting in
this year's Annual Report in light of the NAO's findings. However,
it still has not done enough to explain the level of uncertainty
in its estimates or to make clear that not all the £23.9
billion compliance yield reported in 2013-14 provides a real additional
cash revenue benefit in that year.
Recommendation: HMRC should be more transparent
about its compliance yield estimates by publishing more detail
about how it calculates compliance yield, being clearer about
how much it has actually collected in cash terms and explaining
how uncertainty affects its estimates.
4. There has not been consistency in the way
HMRC has measured compliance yield which makes it hard to hold
HMRC to account for its performance over time. Compliance
yield is one of HMRC's key performance measures. It shows how
much additional revenue HMRC generates from compliance work. HMRC
has changed how it calculates compliance yield over time. For
example, from 2011-12 HMRC introduced a new measure which estimated
the revenue benefit from disrupting organised crime, and significantly
expanded the measurement of "future revenue benefits"
(a measure of how HMRC expects companies' and individuals' behaviour
to change following a compliance investigation). These changes
mean we cannot compare HMRC's compliance performance in 2010-11
and before with what it has reported since. However HMRC produced
a Fast Facts document comparing performance over time without
being clear about the measurement changes. HMRC now accepts that
it had been comparing "apples with pears" and that it
had not made the impact of these changes clear. HMRC expects to
make further changes to its measurement of compliance yield as
its approach to compliance work continues to evolve.
Recommendation: HMRC should maintain a comparable
measure of compliance yield over time and report clearly the impact
of any changes it makes to its methodology in its key accountability
statements to Parliament.
5. HMRC's action against tax avoiders continues
to be unacceptably slow, putting tax revenues at risk. The
Liberty scheme began in 2005 and was closed down in 2009, but
it has taken until 2014 for HMRC to take this case to a tax tribunal.
We are also concerned about HMRC's slow progress in acting on
information from the Falciani list, which identified 3,600 UK
individuals potentially avoiding tax using Swiss bank accounts.
HMRC accepts there have been delays in recovering the tax withheld
by those participating in tax avoidance schemes, partly due to
delaying tactics and obstacles put in their way by scheme promoters.
HMRC is introducing an accelerated payment scheme, which it described
as a "game changer" because it requires those in marketed
avoidance schemes to pay their tax bill up front if they want
to dispute HMRC's assessment of what they owe.
Recommendation: Parliament has granted HMRC
new powers to tackle tax avoidance. HMRC should report on the
progress it has achieved by using these new powers (for example,
in its Annual Report) and demonstrate to Parliament that it is
using its existing powers with sufficient urgency.
6. HMRC does not do enough to tackle companies
which exploit international tax structures to minimise UK tax
liabilities. HMRC reported that it was playing an important
role in the OECD's BEPS (Base Erosion and Profit Shifting) project,
and had led the way on improving international transparency over
the 'beneficial ownership' of businesses. But recent changes to
the UK tax regime, such as those for controlled foreign companies,
have been challenged by international bodies like the OECD and
European Commission as constituting 'harmful tax practices' by
making it easier for global companies to avoid paying tax in the
jurisdictions where they make a profit. International tax experts
believe that the UK's tests for companies to gain tax residency
are less rigorous than in other EU jurisdictions and research
into seven companies who have recently relocated to the UK for
tax purposes suggests that the economic benefits for the UK are
minimal.
Recommendation: HM Treasury and HMRC should
provide the Committee with details of progress in identifying
and addressing the ways that international tax structures are
exploited, and set out the actual costs and benefits of recent
changes to the UK's tax regime.
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