1.Quirks in the tax system have left some groups of taxpayers excluded from financial support that other taxpayers received throughout the COVID-19 pandemic. We are concerned that some self-employed taxpayers may have moved onto payrolls because of HMRC’s IR35 rules, but were not employed at the relevant time, and so lost eligibility to COVID-19 support schemes. Some of those who moved onto payrolls, because of the pre-emptive actions of employers, could have benefited through the Self-Employment Income Support Scheme had they remained self-employed. Similarly, some other freelancers, with verifiable employment and tax records visible to HMRC, may also have been excluded from the Coronavirus Job Retention Scheme (CJRS). In some sectors, such as the creative industries, it is common for freelancers to work on a series of short-term employment contracts with gaps in between. HMRC maintains that it has been as flexible as possible, for example, by allowing, for the purpose of eligibility to the COVID-19 support schemes, the extension of short-term contracts and rehiring of employees who were made redundant. Meanwhile, some large companies that have received support from government during the COVID-19 crisis have continued to pay out dividends and high executive salaries.
Recommendation: HMRC should, within six weeks of this report:
2.A lack of certainty about the COVID-19 support schemes has undermined businesses’ ability to plan effectively. We recognise that it is not easy to provide support to everyone considering the unique circumstances of each individual and business. However, the uncertainties around the timings and details of schemes have made a difficult situation more uncertain for those in need of urgent support. For example, HMRC could not provide clarity on whether the Job Retention Bonus scheme had been delayed or scrapped. Such lack of clarity may lead to unnecessary hardships for some businesses, who in good faith were relying on the payments from the scheme to meet some of their needs. HMRC’s lack of timely evaluation of schemes, such as the Eat Out to Help Out (EOTHO) scheme, to inform possible future iterations of the initiatives may also result in delays to their reintroduction and hinder their effectiveness.
Recommendation: HMRC should, within six weeks of publication of this report, write to us to set out what lessons have been learned from the timing and content of its communications, such as about the future of the Job Retention Bonus scheme, and how those lessons might have improved the outcomes of the support schemes.
3.HMRC’s estate strategy risks becoming woefully out of date. Our long-standing concerns about HMRC’s non-breakable long-term property leases have become all the more relevant, and prescient, given the COVID-19 pandemic. In April 2017, long before COVID-19, we raised our concerns about HMRC locking government into holding larger properties for longer than needed. We raised similar concerns again in January and April 2018. Yet HMRC persevered. HMRC’s view is that its regional centres are located in prime sites and it can, therefore, lease them out to the private sector and other government departments if they have spare capacity. We strongly believe this is an out of date assumption that needs urgent revision in light of changing economic conditions. It is commonly accepted that some significant changes in working practices, with more staff working flexibly and less need for traditional office space, are likely to be here to stay.
Recommendation: In its Treasury Minute response, we expect HMRC to set out its future plans on how it will review its estate strategy in light of the impact of COVID-19 on the demand for commercial properties, to ensure it can demonstrate value for money from its considerable investment should demand remain suppressed.
4.The pandemic has significantly increased HMRC’s workload and made the organisation more complex. HMRC has had to reallocate a significant number of its staff to work in COVID-19-related roles. At its peak, in May 2020, HMRC reallocated more than 9,000 (16%) of its staff. HMRC is facing a huge operational challenge. It is responsible for tackling a growing debt balance (while being sensitive to the hardships faced by taxpayers due to COVID-19), error and fraud in the COVID-19 employment support schemes, restoring its usual level of enforcement and compliance activities and pursuing its transformation plans. This is on top of dealing with the demands of EU Exit, on which more than 6,000 HMRC staff worked in 2019–20. HMRC also has to maintain and improve its customer services performance while facing increasing demand for its limited resources from other parts of its business. To achieve its objectives HMRC has published a 10-year strategy for modernising the tax administration system. However, short-term Spending Reviews, like the one in November 2020, may not provide HMRC with the opportunity to achieve a financial settlement commensurate with its long-term responsibilities, needs and ambitions.
Recommendation: HMRC should review its priorities and work with HM Treasury to ensure it has sufficient capacity and resources to effectively manage its workload. HMRC should, following the November 2020 Spending Review, write to us, setting out the findings of its review and explaining what it might need to deprioritise if it has not secured sufficient additional resources.
5.HMRC has spent too much of its IT budget on patching up legacy systems rather than modernising them. The COVID-19 pandemic has shown the importance of an effective tax administration system. There is a strong case for investment in a modern IT system. Of the additional costs incurred by HMRC as a consequence of the pandemic, the largest element, as of 11 September 2020, was the cost of IT at £53.2 million (80%). HMRC says that it has made some progress in its ambitious digital transformation but is looking for opportunities to reduce the risks facing its IT systems so that they are kept up to date and safe from cyber-attacks and catastrophic losses. The Department accepts it should redress the balance between spending too much on legacy systems and not enough on investing for the future. Since we took evidence, HMRC secured £268 million in the November 2020 Spending Review to fix its outdated IT, to ensure its core systems are secure and support better administration. It remains to be seen whether this is sufficient to urgently address the long-standing issues the Department has identified.
Recommendation: HMRC should write to us, by the end of March 2021, setting out what it is doing, and has planned, to refocus IT investment on modernisation for the future, while retaining resilience, so it can move on from the need to simply keep patching up legacy systems.
6.HMRC too often struggles to provide reliable and timely financial estimates upon which good financial and operational planning depends. HMRC is responsible for dealing with vast sums of public money, both revenue and expenditure. Reliable and timely financial estimates are vital if it is to manage and allocate resources effectively, assess and report on its progress, judge how much it can afford to do, and consider where it needs to adjust its focus and interventions. Yet we have seen numerous examples where it has struggled: for example, its estimates of Corporation Tax revenues needed to be retrospectively amended by £6.6 billion in 2019–20; it exceeded its cash requirement control total by more than £700 million because of basic errors in financial forecasting; it is uncertain what its estimate of fraud and error from tax credits should be; and there has been a delay in producing a more rigorous estimate of the level of fraud and error associated with the Research & Development relief. On understanding the impact of COVID-19, HMRC is falling behind where it needs to be. For example, it is some way off being in a position to better assess the actual level of error and fraud from the employment support schemes, with planning estimates ranging from 5% to 10% on the Coronavirus Job Retention Scheme; and it has no estimates of error and fraud from the Eat Out To Help Out scheme, despite the scheme having ended in August.
Recommendation: HMRC should, in its Treasury Minute response, set out: