1.The way HMRC measures the tax gap and the impact of its efforts to close it remain unclear. There has been a downward trend in the difference between the amount of tax that should, in theory, be collected by HMRC, and what is actually collected (the tax gap) over the last 10 years. While HMRC’s tax gap estimates fluctuate year to year the figure has fallen from 8.3% in 2005–06 to 6.5% (£36 billion) in 2014–15. But we are concerned that HMRC may be painting too rosy a picture of its success in reducing the tax gap. HMRC’s Annual Report does not set out clearly what impact its compliance work (tackling those who seek to avoid or evade their tax liabilities), which yielded an estimated £26.6 billion in 2015–16, has on reducing the tax gap. HMRC’s measure of compliance yield also contains a high degree of estimation and projection and it is not clear whether these estimates are realised in terms of extra tax being collected.
Recommendation: HMRC should report each year on the effect its work to generate compliance yield is having on its efforts to reduce the tax gap. As part of this, HMRC should assess how accurate its compliance estimates turn out to be in practice.
2.Despite our repeated recommendations, HMRC still does not make tax reliefs sufficiently visible to support parliamentary scrutiny and public debate about areas where the UK chooses not to collect tax. We welcome HMRC’s agreement to improve the accessibility of the information it currently publishes on tax reliefs, which is scattered over a number of different publications but not included in its annual report. However, HMRC needs to do more. It should monitor whether the use and cost of tax reliefs is in line with Parliament’s intentions when the reliefs were enacted. While HMRC publishes cost data for 180 tax reliefs, more than many other countries, this only accounts for some 15% of existing UK tax reliefs. HMRC does publish cost data where it has them, but it is not clear how it decides which reliefs to collect data on from taxpayers through their tax returns. HMRC still does not provide sufficient information to explain the impact that tax reliefs are having on behaviour. The need to review the impact of tax reliefs was illustrated by the National Audit Office’s analysis of entrepreneurs’ relief which showed that this was costing three times more than expected.
Recommendation: HMRC should include an analysis of tax reliefs and their costs in its annual report to improve accountability about the areas where government has chosen not to collect tax. HMRC should make clear why it has decided to collect data only for a small minority of tax reliefs.
3.HMRC is staking a great deal on the success of its plans to digitise the tax system, but once again it lacks an adequate plan if demand for its call centres does not reduce as quickly as it hopes. HMRC faces an enormous challenge to maintain services, while delivering spending cuts, restructuring its business, replacing the Aspire contract (through which it has procured almost all its IT), at the same time as re-locating almost all its staff and dealing with the implications of Brexit. HMRC has lost its Chief Digital and Information Officer as a result of market pressures and losing further key staff would damage HMRC’s capability to deliver transformation and manage the risks when its IT contract ends. HMRC has committed to reducing staff in its personal tax service by a third in the next three years. When HMRC made some 5,600 staff reductions in 2014–15 customer service for personal taxpayers collapsed and HMRC had to recruit 2,400 additional staff in the following year to stabilise services. We note HMRC’s assurances that it will seek additional resources if digital services do not reduce demand for personal tax services in line with its expectations, but we are concerned that it has not agreed a contingency plan for this eventuality with HM Treasury.
Recommendation: By March 2017, HMRC should demonstrate to the Committee that it has a credible plan to make savings without damaging customer service, and that it has agreed a contingency plan with HM Treasury should its projections prove to be inaccurate in practice.
4.HMRC receives too many complaints and the vast majority of those referred to the tax adjudicator are upheld in part or in full. Our recent report on quality of service to personal taxpayers highlighted that taxpayers spent more than 4 million hours waiting for HMRC to answer the telephone in 2015–16. We welcome HMRC’s statement that it has reduced average call waiting time to less than five minutes and that it aims to get it below three minutes. However, while the speed of telephone answering appears to have improved, the number of complaints has increased. In 2015–16, HMRC received 80,400 customer complaints, compared to 74,400 in 2014–15. Furthermore, 85% of the 1,808 complaints referred to the tax adjudicator in 2014–15 were upheld in part or in full. HMRC accepts that there is something wrong with the way it currently handles complaints and is reviewing its procedures.
Recommendation: HMRC should review the complaints it receives, to identify what action it can take to reduce the number raised, and its complaints procedures to minimise the number referred to and upheld by the tax adjudicator.
5.The poor quality of service received by tax credit claimants under the Concentrix contract resulted in unnecessary hardship and suffering. In 2014, HMRC signed a contract with Concentrix to provide additional capacity to tackle fraud and error in the tax credit system on a payments-by-results basis. We raised concerns about the contract and the treatment of claimants in June 2016 and were given assurances by HMRC in July that things were improving. However, in August 2016 customer service levels for tax credit claimants collapsed. HMRC told us that Concentrix had failed to cope with an increase in call numbers following a letter it had sent to a large number of claimants about their claims. For example, in the third week of August the basic levels of customer service provided by Concentrix deteriorated to the point that less than 10% of phone calls were being answered within five minutes. HMRC considered that such an increase in call volumes had been entirely predictable. HMRC told us that it would not renew the contract and was dealing with all claimants directly. Subsequently HMRC announced that it had cancelled the contract, cleared all of the 181,000 incomplete cases that it took over from Concentrix and had completed around 28,500 of the roughly 32,500 requests for review of Concentrix decisions (known as mandatory reconsiderations). HMRC also noted that as a result of the contract ending, around 250 Concentrix staff had transferred to HMRC. We expect to return to this subject in the New Year when the results of an investigation into this matter being undertaken by the National Audit Office are available.
Recommendation: HMRC must ensure it has clear customer service standards whether a service is delivered by HMRC or one of its contractors. HMRC should identify quickly the lessons to be learned from this episode and act upon them, particularly given the concerns raised months before HMRC chose to act.
6.HMRC and HM Treasury need to make the tax affairs of large multinational companies more transparent to increase the pressure on them to pay their fair share of tax. This Committee has repeatedly called for the tax affairs of multinational companies to be made more transparent. We therefore welcome the fact that HMRC will soon receive automatically information on the global activities of large multinational companies that do business in the UK (through what is known as country-by-country reports). However, these country-by-country reports will be supplied on a confidential basis and will thus not contribute to increasing transparency over the tax affairs of these companies. We also welcome the cross-party consensus that now exists on the need for public country-by-country reporting, which will require international agreement to make a reality. The power to require public country-by-country reporting was set out in UK law following work by members of the Committee to promote an amendment to the Finance Bill 2016.
Recommendation: HMRC and HM Treasury should lead the global debate for public country-by-country reporting and push for international agreement on its introduction.
1 Committee of Public Accounts, , Thirteenth Report of Session 2016–17, HC 78, July 2016, Part 1, paragraph 13
30 November 2016