Conclusions and recommendations
1.HMRC does not report on the scale of aggressive tax avoidance, which means Parliament cannot assess whether tax law is working as intended. HMRC defines avoidance as exploiting the tax rules to gain a tax advantage that Parliament never intended. It involves operating within the letter but not the spirit of the law. HMRC’s estimate of the tax gap includes an element for tax avoidance, but only for those cases which are being contested by HMRC. The tax gap excludes aggressive tax avoidance schemes whose legality has been proven in the courts, even when they are contrary to the spirit of the law. We remain concerned that HMRC has failed to act on the previous Committee’s recommendation from December 2013 that it should gather intelligence about the value of tax lost through aggressive tax avoidance schemes. The International Monetary Fund has also recommended that HMRC should record the amount of tax that is lost through avoidance activity that exploits loopholes in the law in ways not intended by Parliament. We do not accept HMRC’s argument that tracking such avoidance activity is impossible. Based on HMRC’s own definition of what constitutes avoidance, it would be relatively straightforward for this information to be produced to Parliament; there is no reason why it should not be; and in future it should be.
2.Recommendation: HMRC should identify and report the value of all tax avoidance schemes. It should include an estimate of the value of those schemes it has challenged but which have been judged to be legal by the courts, both so that Parliament can see the scale of avoidance and ensure improvements are made to tax law.
3.The number of tax reliefs continues to grow but the scale and nature of the tax foregone is invisible to Parliament because HMRC refuses either to define them or list them comprehensively. We see no case, other than to avoid accountability, for HM Treasury and HMRC to reject the previous Committee’s recommendations to improve the transparency of the cost of tax reliefs to Parliament. The Office of Tax Simplification (OTS) has identified 1,140 tax reliefs, whereas HMRC lists about 400. We agree with the previous Committee’s recommendation that HMRC publish and maintain an up to date list of tax reliefs using a definition agreed with the OTS that sets out each relief’s purpose and its cost to the Exchequer. However, HMRC is not prepared to provide a comprehensive list of tax reliefs or to provide a definition of tax reliefs including those designed to encourage behavioural change (tax expenditures). HMRC believes some OTS-listed tax reliefs, such as zero rating for VAT, are so well established that they do not merit an evaluation of their costs and objectives. We note that other countries, such as Australia, France, Germany and New Zealand, publish more comprehensive information about tax reliefs and categorise them according to their objectives to enable more effective parliamentary scrutiny and accountability. HMRC told us that it focusses on the most important tax reliefs but has not identified which these are.
4.Recommendation: HMRC should define the different types of tax relief, including those it considers to be tax expenditures. It should identify which reliefs it considers require monitoring and evaluation and publish this information to enable Parliament to decide which reliefs may require further scrutiny or legislative change.
5.HMRC is still failing to provide an acceptable service to customers and could not tell us when it would be able to do so. In March 2013, the previous Committee concluded that HMRC had “an abysmal record on customer service”, having only answered 74% of telephone calls received by its contact centres during 2011-12. In 2014-15, HMRC responded to just 72.5% of calls and over the first half of 2015 this had fallen to 50%. The previous Committee considered that HMRC’s target of answering 80% of telephone calls within five minutes was “woefully inadequate and unambitious” and recommended that HMRC should set a more challenging short-term target for call-waiting times and a long-term target that is much closer to industry standards. HMRC has consistently refused to set more demanding targets, however, and in 2014-15 it answered only 39% of calls within five minutes. HMRC did not provide us with any indication of when or by how much its customer service would improve, beyond a vague aim to improve year on year. It acknowledged that people are more likely to pay the right tax when they find HMRC easy to deal with, but, in the words of its own Chief Executive and Permanent Secretary, “we are still struggling”. We are concerned that customer service levels are so bad that they are having an adverse impact on the collection of tax revenues.
6.Recommendation: HMRC should identify what impact its poor level of service is having on tax revenues and produce a detailed plan setting out how and when it will provide an acceptable standard of customer service. This should include a clear plan for the efficient management of its change programme and introduction of new IT systems.
7.HMRC’s performance measures do not cover delivering a consistent level of customer service throughout the year. In response to our concerns about the poor customer service levels achieved, HMRC maintained that its main focus was on providing a consistent level of customer service throughout the year, rather than meeting annual targets. However, the consistency of the service is not measured by HMRC’s current performance indicators. HMRC aims to ensure through the introduction of its “once and done” system that taxpayers’ calls are resolved first time by skilled call handlers, thereby reducing the number of calls received. However, one consequence of the introduction of this new system has been a need for longer phone calls.
8.Recommendation: HMRC should report its performance against measures which reflect all its aims, including providing a consistent level of service and ensuring that accurate and complete advice is provided first-time.
9.The number of criminal prosecutions for offshore tax evasion is still woefully inadequate. HMRC’s investigations do not lead to sufficient prosecutions to provide an effective deterrent, particularly for wealthy individuals who hide their assets offshore. In December 2013, we argued that HMRC needed to demonstrate that it deals robustly with individuals and companies who deliberately mislead it and that HMRC should be more willing to pursue prosecutions against both individuals and businesses. Regrettably, since then HMRC appears either to have ignored our recommendation or to have made little progress. Incredibly, there have been only 11 prosecutions in relation to offshore tax evasion since 2010, and only one individual from the Falciani list (of some 3,600 potential UK tax evaders whose Swiss bank account details were leaked by a former employee of HSBC) has been prosecuted. HMRC told us that it had now exhausted its use of the Falciani data, which did not meet the standards required for UK evidence. It said that offshore tax evasion is one of the toughest areas to prosecute, with people deliberately disguising their activities, while those who facilitate this form of tax evasion were careful not to enter the United Kingdom. HMRC has offered disclosure facilities with reduced penalties for people who come forward and provide information on assets held offshore. We are in no doubt that the use of these disclosure facilities is not an adequate substitute for the deterrent effect of prosecution. That is particularly so given that by 2017, HMRC will receive tax data from 94 countries and will be able to detect evaders more easily, so these disclosure facilities will no longer be necessary. The vast majority of UK individuals pay what is due from them in tax. Those who do not must in future know that they could face prosecution if they deliberately seek to evade paying what is due.
10.Recommendation: As previously recommended, HMRC should strengthen its capability to investigate offshore tax evasion and make tougher the criminal and civil sanctions it can apply. It should make clear that those who persist in their attempts to hide assets offshore will face the threat of prosecution, and should in future demonstrate the significance of this threat through its actions.
11.HMRC’s public reporting of the additional tax revenue it generates from its compliance work (compliance yield) remains unnecessarily complicated and confusing. HMRC has not made it sufficiently clear in its Annual Report that its estimate of compliance yield is not the amount of cash it has actually collected. It is a combination of measures, calculated in different ways and covering different time periods. It includes some cash that is owed, estimates of tax losses prevented and estimates of the impact of its work on tax revenue in future years. Most readers of HMRC’s Annual Report would assume that the type of compliance yield it calls “cash collected” is cash actually received, but even this is not the case. “Cash collected” includes cash not yet received, not all of which will be collected. In addition, HMRC’s approach of counting revenue it expects to collect in future years in this year’s compliance figures is questionable and may well mislead people into believing that HMRC has recovered more tax than it really has.
12.Recommendation: HMRC should report its compliance yield in much clearer and simpler terms. It should state how much cash its compliance activity has recovered each year, alongside its estimates of future revenue and losses prevented. It should also report the range of uncertainty around its estimates.
© Parliamentary copyright 2015
Prepared 03 November 2015