Conclusions and recommendations
1.The ‘Paradise Papers’ leak suggests potentially serious and extensive allegations of tax evasion and avoidance. The ‘Paradise Papers’ leak of a large volume of financial documents has highlighted the potentially dubious practices of many high-profile individuals and corporations in their use of offshore tax havens. HM Revenue and Customs (HMRC) has requested the leaked documents but it has not yet received a response. HMRC tells us that if the information is not forthcoming it can then use its network of exchange of information agreements with other countries to obtain the data. The ‘Panama Papers’ were published in April 2016, and have to date resulted in 66 criminal or civil investigations, and expected additional tax revenues of £100 million. HMRC now claims to be better equipped to deal promptly with any large-scale leak of data. However, the speed with which cases can be investigated depends on whether they are civil or criminal, as criminal cases will take longer to prepare. We are far from confident that HMRC has sufficient resources to deal with the full scale of the recent allegations.
Recommendation: HMRC should obtain the information from the ‘Paradise Papers’ as soon as possible, and report back to the Committee by March 2018 to set out its response, including any additional revenue likely to be at stake.
2.HMRC is unclear how far it can close the tax gap with existing resources. Over the past decade, there has been a downward trend in the tax gap from 7.9% (£35 billion) in 2005−06 to 6.0% (£34 billion) in 2015−16. HMRC’s intention is to close the tax gap as far as possible. However, while HMRC says that with more powers, people, interventions and data it would be able to reduce the tax gap, it is not able to estimate how far the gap can realistically fall. Almost half of the tax gap can be attributed to small and medium-sized enterprises (SMEs), of which there are a large number, with each one often involving relatively small amounts of tax revenue. HMRC recognises it needs to change its approach and believes several measures will address the tax gap risks of the SME sector: the introduction of the Making Tax Digital for Business programme; working closely with intermediaries, such as Amazon and eBay; and using tax agents working with small businesses to encourage increased compliance.
Recommendation: HMRC should set target levels for reduction of the tax gap, including for the SME sector, and set out how HMRC will be more responsive to emerging risks.
3.HMRC’s transformation programme is not deliverable as planned due to unrealistic assumptions, and increased pressure from the additional workload caused by Brexit. HMRC again told us that it is not credible to continue with its transformation programme as it is. The aggressive assumptions, most significantly around reduced customer demand, meant that HMRC failed to achieve expected sustainable efficiency savings in the first year of its transformation programme. It had to review its programme plans and defer some expenditure. Its current estimate is that it will deliver £707 million by 2020 against a target of £717 million. HMRC admits the programme would have been lower risk if it had not tried to do everything at the same time and also points to the potential 15% extra workload from projects relating to Brexit. HMRC plans to reprioritise its programme plan by the end of the current financial year, mid-way through its four year efficiency programme, and subsequently to advise ministers on what will need to be delayed or stopped.
Recommendation: In our recent report ‘Brexit and the future of Customs’ we recommended that HMRC should report back to the Committee by March 2018 with clear plans on how it will manage the many challenges it faces due to Brexit and its ongoing transformation programmes. Building on this, HMRC should: update its original assumptions and amend its forecasts for its transformation programme, particularly those concerning customer demand for its various services; and set out the financial implications of this for the Committee by April 2018.
4.We are not convinced that HMRC will obtain value for money from long-term leases, without break clauses, for its new estate of 13 large regional centres. HMRC is closing its national network of offices and intends to operate from 13 large regional centres. It expects to have moved out of almost all the offices provided under the current STEPS contract by the time that contract expires in March 2021. HMRC has already signed seven 25 year leases and one 20 year lease, all without any break clauses, for regional centres. This suggests poor negotiating to us, and we are concerned that HMRC does not intend to seek any break clauses in the leases for the remaining four regional centres. HMRC may face massive changes over the next quarter of a century, such as from a revolution in business technology, and from large scale developments in the nature of its business. Its long-term property deals restrict its ability to transform or relocate in the future, to support new responsibilities and new ways of working.
Recommendation: HMRC and the Government Property Unit should use their strong negotiating position to ensure they gain sufficient flexibility in the terms for the four regional centre leases yet to be signed, and should examine ways to build in greater flexibility from the eight regional centre leases already signed.
5.We recognise the improvements in customer service since the unacceptable levels of 2015−16, but are concerned about HMRC’s ability to maintain this level of performance. In 2016−17, HMRC improved customer service significantly, achieving its best performance in the past five years against its key targets. This was mainly due to additional investment in this period. However, as we have noted in the past, HMRC’s plans to cut budgets will depend on reducing levels of customer demand as new digital services are introduced. HMRC’s original assumptions on the extent to which customer demand could be reduced were too aggressive, and HMRC’s call centre advisers had to deal with eight million more calls in 2016−17 than forecast. HMRC says it will support vulnerable and digitally excluded customers by continuing to provide phone services seven days a week and face-to-face ‘surgeries’ in 300 locations. However, we remain sceptical that this will be enough to help more vulnerable people, and are concerned about the disparity of service between how HMRC deals with high-net-worth customers compared with the ordinary customer. HMRC could not give a guarantee that it would wait for demand to fall before cutting its headcount, and warned of a potential risk to customer service performance in future years.
Recommendation: HMRC should ensure it continues to deliver a consistent and reasonable level of service to all its customers. We will be monitoring performance and will return to this issue.
6.The average time it takes for customers to speak to an adviser when they call is longer than HMRC claims. The average speed to answer calls, from when a caller enters a queue to speak to an adviser, is one of HMRC’s key telephony performance measures. HMRC improved its average speed to answer calls from approximately 12 minutes in 2015−16 to under four minutes in 2016–17. HMRC’s target, which it has the necessary funds to meet, is for its customers to spend not more than five minutes waiting to speak to an adviser. However, this measure excludes the time customers are in HMRC’s automated telephony system before entering the queue. HMRC considers 5 minutes a reasonable average speed to answer, and says that typically customers spend an additional two to four minutes listening to automated messages before entering a queue for an adviser, so the total time spent waiting could often be more like nine minutes. Some of HMRC’s other performance measures also provide a misleading picture of the reality of customers’ experiences. For example, HMRC counts most calls terminated in its automated telephony system as successfully handled. In many cases, though, the customer simply hangs up because they are having difficulty navigating through the automated message system and are frustrated by how long this is taking.
Recommendation: HMRC should introduce a new set of measures that better reflect the actual experience of customers. Automated telephony time should be included within the 5 minute speed to answer target.
7.Vulnerable people receiving Tax Credits are at increased risk of financial problems as they transfer to Universal Credit. People receiving Tax Credits from HMRC are in the process of transferring to Universal Credit, which is administered by the Department for Work and Pensions (DWP). So far, HMRC has transferred 110,000 people. Tax Credits are complex and many of the people transferring have not been receiving the right amount of award, and HMRC is seeking to recover any overpayment. The responsibility for collecting these overpayments will transfer to DWP. DWP has greater powers to recover debt than HMRC, including the ability to deduct amounts directly from earnings. We are concerned that vulnerable people could therefore be subjected to more aggressive attempts to recover any Tax Credits overpayments, potentially placing people into greater poverty.
Recommendation: HMRC should report back to us by March 2018 to explain how it will take care of the interests of vulnerable people receiving Tax Credits. This should include how it will work with DWP to manage claimants’ transition to Universal Credit, and protect them against aggressive departmental activity to reclaim overpayments due to error and fraud.
8.We are alarmed to hear that the level of Tax Credits error and fraud has risen and is only going to get worse. HMRC estimates that the overall level of error and fraud resulted in overpayments of 5.5% of total spending on Tax Credits in 2015–16, up from 4.8% in 2014–15. HMRC expects this rate to rise and peak in future years between 7% and 8%, well above its target of 5%. HMRC thinks that 1% of this increase will be due to a reduction in staff tackling error and fraud following the end of HMRC’s contract with Concentrix. HMRC also expects a further 1% increase due to the impact of introducing the “Commercial with a view to a profit” test for people who are claiming Tax Credits, and who are self-employed. Error and fraud is likely to get worse still as people with more straightforward Tax Credits claims, who are the most likely to be receiving the correct amount, transfer to Universal Credit. HMRC will be left to cope with the people still receiving Tax Credits whose claims are more complicated.
Recommendation: HMRC should set out its strategy for tackling Tax Credits error and fraud, given the additional risks posed by transfer to Universal Credit, including a cost-benefit analysis of its approach.
10 January 2017