HMRC performance 2019–20 Contents

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3IT modernisation and financial estimates

HMRC’s IT infrastructure

21.As HMRC moves towards a fully digital tax system, the capability of its IT systems, including in terms of cyber security, will become increasingly important to HMRC’s ability to operate effectively. HMRC has recognised that, due to the need in the past to forgo operational maintenance and upgrades to its systems to secure cost savings, its IT systems now constitute a significant risk to the Department.58 We asked HMRC about the impact of the relatively poor state of its IT infrastructure on the cost-effectiveness of its administration of the tax system. HMRC told us that it is important that it has sufficient investment to modernise its IT estate as well as continue to maintain its legacy systems to ensure they are kept up to date and are safe from cyber-attacks and catastrophic losses. In the case of its legacy systems, ‘patching’ is a never-ending process.59

22.HMRC told us that it spends too much of its IT budget on maintaining its legacy estate and not enough on investment for the future and modernisation. The Department will seek funding opportunities, such as Spending Reviews, to modernise its systems. HMRC’s experience of implementing the COVID-19 schemes showed the importance of having up-to-date technology and data in overcoming any constraints in supporting those in need.60 Of the extra costs incurred by HMRC on COVID-19-related work, as of 11 September 2020, the largest element was the cost of IT at £53.2 million (80%).61 HMRC highlighted self-employed taxes as an area where data and technology infrastructures had not kept pace with developments since they were put in place in the mid-1990s.62

23.We asked about the success of the Department’s transformation plans following the ambition it set itself in 2015 to “become one of the most digitally advanced tax administrations in the world”. HMRC considers that, although it is not the most digitally advanced tax administration in the world, it has made significant digital advances since 2015. For example, 22 million people have an online personal tax account.63 HMRC, in July 2020, published a 10-year strategy for modernising its tax administration. The Department told us that the government has already agreed to provide HMRC with about half a billion pounds of funding for its plans to modernise income taxes through the Making Tax Digital initiative.64 HMRC, in dialogue with HM Treasury, will continue to present the case for further investments to achieve the vision set out in its strategy while acknowledging that for the foreseeable future it will have to continue maintaining its legacy systems, for example in its administration of tax credits.65 HMRC believes its strategy will ensure that it has more resilient and agile technology and database platforms to support its administration of the tax system and enable it to better support society at times of crisis, such as the COVID-19 pandemic.66 Since we took evidence, HMRC secured £268 million in the November 2020 Spending Review to bring its technology up to date.67

HMRC’s financial estimates

24.HMRC handles large sums of money, both collecting and paying out.68 It relies on financial estimates in various different contexts to help achieve its objectives. Yet we have recently seen several examples where there have been mistakes in those estimates. We asked the Department about the circumstances of its breach by £726 million, in 2019–20, of its net cash requirement total, an important parliamentary control over public spending. The Comptroller and Auditor General had to qualify his opinion on HMRC’s accounts because of this breach. HMRC recognised the seriousness of its breach. It explained that it had made an error in calculating its cash requirement which meant that it used more cash than it had predicted. The Department noted that it had not exceeded its budget and that in its view “there was no real-world impact from this error”. As a result of the breach, HMRC commissioned a review by its internal audit function to understand what had gone wrong and identify improvements to its processes for estimating its cash requirements.69 In a separate example, HMRC, as explained in its own Annual Report and Accounts, also had to correct its estimates of Corporation Tax revenues by some £6.6 billion in 2019–20, as a result of errors it made in its estimates in previous years.70

25.HMRC’s latest estimate of the level of error and fraud in tax credits indicates that overpayments by HMRC decreased from 5.5% (£1.41 billion) of expenditure on tax credits in 2017–18 to 4.9% (£1.11 billion) in 2018–19. The estimated 2018–19 overpayment rate of 4.9% is lower than HMRC’s forecast of 6.2%.71 HMRC told us that fraud and error will continue to be a feature of tax credits and that getting the fraud and error level significantly below 5%, its ministerial target, will be “extremely challenging”.72 We asked the Department whether it is able to provide us with more rigorous estimates of the level of fraud and error in tax reliefs, particularly the Research & Development (R&D) tax relief, which cost £8.8 billion in 2019–20. HMRC told us that for some reliefs, such as the R&D relief, it is able to quantify the level of non-compliance because taxpayers have to claim the relief. In contrast, for tax reliefs that are not claimed but simply granted to those eligible, HMRC needs to make estimates based on indirect data. HMRC estimates the level of fraud and error associated with the R&D tax reliefs to be 3.6% (£311 million in 2019–20) of the tax relief expenditure. However, as highlighted by the Comptroller and Auditor General, HMRC’s current estimate of error and fraud in R&D reliefs is based upon a series of judgements about how likely it is that cases of detected error and fraud are likely to occur within the larger population of unreviewed cases. HMRC does not yet have a sufficiently developed understanding of the error and fraud risks arising from the R&D schemes.73 Next year, HMRC plans to publish a list of all reliefs, with significant detail on each one, including the objectives of those reliefs that are aimed at changing behaviours.74

26.Regarding the COVID-19 support schemes, we asked HMRC whether it had estimated the level of fraud and error in the Eat Out to Help Out scheme considering the scheme had ended at the end of August. HMRC confirmed to us that it did not yet have an estimate of the level of fraud and error.75 It explained to us that, while it had made three arrests so far for fraud, its compliance work had been affected by the fact that restaurants had to go back into a lockdown. It has identified high-risk cases, for investigation, where the amounts of the received claims have not been in proportion to the information the Department holds on the businesses.76 In the case of the CJRS measure, HMRC has made a planning assumption for its compliance work that there could be 5% to 10% of fraud and error. It has yet to determine the actual level of fraud and error.77