HMRC's progress in improving tax compliance and preventing tax avoidance - Public Accounts Committee Contents

1  HMRC's measurement of tax compliance

1. On the basis of a report from the Comptroller and Auditor General on HM Revenue & Customs' (HMRC's) 2013-14 Annual Report and Accounts, we took evidence from HMRC on the effectiveness of its compliance work to increase tax revenue and tackle tax avoidance.[1]

2. HMRC brought in £506 billion tax revenues in 2013-14, 7% more than 2012-13. The taxes that contributed most to this increase were income tax and national insurance which increased by £16.2 billion (6.4%), VAT which increased by £7.2 billion (7.1%), and stamp taxes which increased by £3.4 billion (35.8%).[2]

3. Since the 2010 spending review, HMRC has been funded to do more compliance work to secure additional revenues. Its 2010 spending review settlement with HM Treasury (the Treasury) included a £917 million reinvestment in compliance work to generate additional revenues of £7 billion a year by 2014-15.[3] HMRC agreed to measure the impact of its compliance work by estimating 'compliance yield'—the additional revenue it generates through its activities to deter and prevent tax losses, such as from avoidance, evasion and criminal attack.[4]

4. HMRC estimated that its compliance work in 2013-14 generated additional revenue of £23.9 billion—the highest level ever reported. Of this sum, £9.2 billion is additional cash that HMRC expects to collect as a result of settlements reached. The remainder is an estimate of losses prevented (£8.0 billion), an estimate of future revenue benefits over the next 5 years as a result of changing taxpayers' behaviour (£5.5 billion), and an estimate of the impact of changes to tax law or HMRC's processes which reduce opportunities to avoid or evade tax (£1.2 billion). HMRC has reported exceeding the targets for compliance yield it agreed with the Treasury each year during this spending review period.[5]

5. The C&AG's report identified that HMRC made a mistake when calculating the baseline against which to measure increases in compliance yield over the 2010 spending review period.[6] The error meant that HMRC had set its baseline £1.9 billion too low, which then made the targets HMRC agreed with the Treasury easier to achieve.[7] HMRC apologised to us for the mistake. It admitted its baseline estimates were wrong and that the error had not been spotted; and told us that until the error was identified in the course of the NAO's audit, it had believed it was over-delivering against its targets. During this time, HMRC's briefing to Ministers and information it presented to Parliament about its compliance performance, such as in its Annual Reports or its Fast Facts publication in May 2014, had inadvertently overstated the improvement in its performance.[8]

6. Taking the error into account, HMRC did not exceed its anticipated level of performance in 2011-12 or 2012-13 as it had previously reported. For example, it reported in 2011-12 that it had exceeded its performance targets by £1.9 billion when in fact it had only just achieved the level of performance anticipated.[9] HMRC told us that it had still performed well, achieving 44% more yield in 2013-14 than its baseline at the start of the spending review period, even allowing for the error. It reiterated that it did not lose its focus and that HMRC staff did not stop when they thought they had achieved the target's requirements, but had "strived to go beyond what was asked of them".[10] HMRC consider that staff bonus payments made during the period before the error was uncovered were deserved and do not need to be reviewed as staff had continued to deliver improved year-on-year compliance yield.[11]

7. We queried why HMRC's internal processes had not uncovered such a large error in a key performance measure for three years. HMRC explained it missed the error because it had not revisited the baseline calculation and had instead focused on measuring its performance each year. It acknowledged it needs to take more care when producing baselines in future, but insisted that no improvements to its internal processes were needed as the error did not show anything wrong with its management information systems.[12] HMRC told us it would expose its performance data to greater critical challenge in future, and has invited the NAO to provide external scrutiny of its compliance performance data.[13]

8. HMRC's measure of compliance yield is complex. It includes four different types of yield to cover different types of impact over different time periods. For example, the measure includes cash HMRC has collected or expects to collect as a result of tax settlements in 2013-14, losses it has prevented, and revenue benefits it projects in future years. HMRC told us that while not all compliance yield is "literally in the bank at the end of the year", it believes that including a broad range of impact from its preventative work is important.[14]

9. HMRC told us it must use estimates to calculate the value of some types of compliance yield. These include all of the future revenue benefits it predicts (£5.5 billion of the £23.9 billion yield reported in 2013-14) and some elements of revenue losses it has prevented (a proportion of the £8.0 billion of revenue loss prevented it claimed). HMRC explained that it makes estimates based on available evidence when more certain or accurate calculations are not possible. We note that an increasing proportion of HMRC's compliance yield is calculated using estimates and that these types of calculation are more subjective, more susceptible to errors and less certain. [15]

10. We think it is reasonable that HMRC should base some of the figures making up total compliance yield on estimates. But it has not been clear enough about the nature of the estimates or the inherent uncertainties when reporting its performance publicly. It improved its reporting in this year's Annual Report, reporting its performance in each of the four yield types separately for the first time.[16] However, it has still not done enough to explain that it has not collected all the £23.9 billion compliance yield it reported in 2013-14, or explain the level of uncertainty attached to some of its estimates. Performance data has therefore been open to misinterpretation: for example, the media reported that HMRC's compliance work brought in £23.9 billion extra cash this year, when the real picture is much more complex. [17]

11. HMRC has changed how it measures compliance yield significantly since 2010-11. It made changes both because it had new evidence about its estimates and to reflect a wider range of the impacts of its compliance work.[18] From 2011-12 HMRC has included yield 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 have increased the amount of yield HMRC reports: for example, the effect of broadening the range of interventions for which future revenue benefits are estimated was to increase HMRC's yield in 2011-12 by £1.9 billion.[19]

12. HMRC now acknowledges that its compliance yield data are not comparable over the longer term because of the changes it made to measurement in 2011-12. The baseline error showed that the changes HMRC made to compliance yield in 2011-12 were more significant than previously thought and that it should not have made longer term comparisons with older data. It had therefore inadvertently presented misleading information that compared "apples with pears".[20] For example, HMRC's Fast Facts publication, published in May 2014 before the error was uncovered, showed compliance yield data from 2005-06 to 2013-14 on a single graph with no explanation that the measurement methodology had changed. In July 2014, HMRC reissued this document with new data which took account of the error.[21]

13. We accept that HMRC has improved how it publicly reports improvements in compliance yield. But when it reissued Fast Facts in July 2014 it again presented in one graph compliance yield data from 2005-06 to 2013-14 that was not comparable. HMRC caveated the graph to explain that data were not comparable over time, but we consider any presentation that shows compliance data before and after 2011-12 together to be misleading.[22]

14. HMRC explained that it aims for its public reporting about compliance yield to provide both simple and accessible information despite the inherent complexity of the underlying data. However, it accepted that prior to the NAO's audit it had not been sufficiently clear about the differences between compliance data reported before and after 2011-12, and that caveats it had provided when it published this data were insufficient. It recognises the need to be clear about the impact of making any changes in methodology to take account of changes in the nature of compliance work or better evidence of its impact.[23]

1   C&AG's Report, HMRC's Annual Report and Accounts 2013-14, HC 19 Session 2013-14, 3 July 2014 Back

2   C&AG's Report, paragraph 1.2 Back

3   C&AG's Report, paragraph 11 Back

4   C&AG's Report, paragraphs 2.5 to 2.7 Back

5   C&AG's Report, paragraphs 13, 15 Back

6   C&AG's Report, paragraphs 2.38 Back

7   C&AG's Report, paragraphs 2.9 Back

8   Qq 1-2 Back

9   Q 1, C&AG's Report, paragraph 2.10  Back

10   Qq 2, 18 Back

11   Q 7 Back

12   Qq 6, 7 Back

13   Qq 1, 7 Back

14   Qq 13-16 Back

15   Qq 18, 20 Back

16   C&AGs Report paragraph 2.41 Back

17   Qq 17-19 Back

18   C&AG's Report, paragraph 14 Back

19   C&AG's Report, paragraphs 2.13 and 2.36 Back

20   Qq 11, 14; C&AG's Report paragraph 2.38 Back

21   Qq 8, 9 Back

22   Q 10. The revised caveat added in July 2014 is: "Our methodology for measuring compliance yield is updated to reflect the latest evidence of the impact of our compliance work - targets are adjusted in line with this. Previous outturns are therefore not directly comparable with figures from 2011-12 onwards, where we have been using an improved methodology - see HMRC Annual Report for full details." Back

23   Qq 14, 16 Back

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© Parliamentary copyright 2014
Prepared 18 November 2014