Public Accounts Committee – MPs press HMRC boss over taxpayer penalties and confidentiality

Answering questions at the PAC’s session on tax compliance following the pandemic, HMRC officials also told the MPs that:

• Calls to the self-assessment helpline are at present about a third higher than they would normally be at this time
• The level of tax non-payment by small businesses is running at a much higher rate than pre-pandemic
• HMRC don’t expect to go back to the 2016-17 level of prosecutions because they now use those powers only on the most serious, complex cases
• HMRC are aiming for a compliance yield of £36bn which would be a record level, but think this will be challenging

Witnesses at the session were:

• Jim Harra, Chief Executive and First Permanent Secretary at HMRC
• Penny Ciniewicz, Director General of the Customer Compliance Group at HMRC
• Alison Bexfield, Director for Customer Compliance Finance & Planning at HMRC

The session was opened by PAC chair Dame Meg Hillier (Lab), who said the impact of COVID-19 on HMRC, including moving staff from their usual work to activities focused around the pandemic, “had an impact on the ability to draw in the tax that is so vitally necessary to make sure we are paying for the public services we so desperately need, especially in the current climate”.

Nadhim Zahawi tax dispute

Though the committee was unable to directly discuss the tax affairs of former Chancellor Nadhim Zahawi, publicity around the dispute over his taxes prompted several questions at the start of the debate. Jim Harra said it was “not normal” for HMRC to comment on an individual’s tax affairs but it had in the past provided more extensive information than usual when given consent by the taxpayer, such as providing details of Google’s taxes to the PAC itself, or during court proceedings.

He added that penalties will only be issued to those who are “careless” in their tax returns, including those who deliberately misled HMRC. Harra told the committee: “There are no penalties for innocent errors in your tax affairs. If you take reasonable care, but nevertheless make a mistake, whilst you will be liable for the tax, and for interest … you would not be liable for a penalty. But if you if your error was as a result of carelessness, then legislation says that a penalty could apply in those circumstances.”

Hillier asked whether HMRC would make a statement to correct the record if a “prominent politician” said something about their tax affairs they knew to be “categorically false”, with Harra replying that the “default” is not to disclose information on tax affairs but every issue was looked at on a case-by-case basis. He added that there was often a “sense of frustration” within the department if they felt the public was not getting the “full story”.

Harra told MPs that HMRC is not routinely contacted by the Cabinet Office or Downing Street regarding ministerial appointments. This differs from the approach taken around nominations for honours, the committee noted. It was also compared unfavourably to the requirement on councillors to assent to their council tax payment record being made public.

Could ministers be required to sign consent forms for the Cabinet Office to see their tax records, Hillier asked. If that's something they wanted we could look into it, said Harra.

Peter Grant (SNP) asked if it would be “reasonable to expect” that a person fit to hold an office such as Chancellor “would have a higher expectation of competence” to file their own tax returns. Harra replied: “The level of care we expect someone to take is not flat across all taxpayers. It will vary according to capability, the nature of their tax affairs and how complex they are.”

Hillier said the dispute over Zahawi’s taxes seemed to be resolved quicker than others in the past and questioned whether there was a “two-way track” for settling cases. Harra said, when determining tax liability, all taxpayers were treated equally. He said: “We want to settle every case as quickly as we possibly can, and many compliance cases are settled quickly, but that depends on the nature of the matter, our investigation work and the attitude of the taxpayer towards cooperating with us.”

He added that around 2,000 of the biggest and wealthiest companies and individuals in the UK are “man marked” by customer compliance managers to ensure HMRC are aware of their tax affairs and “foster a cooperative relationship with them so that we can deal with affairs quickly and often know about risks approaching before they crystallise”.

Changes during Covid

Harra said the pandemic had changed HMRC’s priorities, so that work on Covid schemes “trumped” other things. He added that the second impact of the pandemic was that customers and agents found it more difficult to contact HMRC as their working arrangements also changed, leading to them “pausing” some activity “if these people could not meet our needs and engage with us effectively”.

Despite this, Harra said HMRC “kept the tax system running” and continued to take action on the promotion of tax avoidance or cases deemed critical, though he admitted the compliance yield was “impacted”.

There was a high level of indebtedness among small businesses, said Harra, with non-payment running at a much higher rate than pre-pandemic. HMRC thought this was more likely due to the “distress” many businesses were facing due to the pandemic and current economic situation than an “attitudinal change in their approach to tax compliance”. He added: “We haven’t seen a significant downturn in customers filing their returns on time but many more of them are then unable to pay it all.”

Harra said HMRC had to “be realistic” about the situation many taxpayers find themselves in and that the pandemic made it clear some taxpayers would not be able to pay on time, so it extended the deadline to file tax returns. He said: “That wasn’t because we wanted to be nice to people, that was because we thought that, despite taking reasonable care, many people would not be able to comply with the deadline.”

Despite the difficulty faced by taxpayers, the tax gap was not “materially different” from pre-pandemic years, said Harra, while there was a “very high” clearance rate for debts built up as a result of government measures. This includes just £700 million of deferred VAT left to collect, a relatively small proportion. Harra said: The vast majority of taxpayers want to be compliant and don’t want to get in trouble with HMRC.”

He admitted tax debt was likely to continue to rise as a result of the pandemic. “While we have cleared debt at record productivity levels, that’s not keeping up with the rate of creation of debt. That’s not going to come back down again.”

On the issue of staffing, Penny Ciniewicz said many staff were reallocated as the pandemic began, in order to speedily roll out policies such as the Coronavirus Job Retention Scheme. Funding later allocated for the Taxpayer Protection Taskforce, which investigates fraud in pandemic schemes, “formalised” this process, though as the taskforce is wound down later this year, staff will be “gradually reintegrated” back into their previous roles.

Ciniewicz added that 4,200 new compliance staff had been recruited in two years to help keep the tax gap stable, with a proportion of those to replace “experienced staff” moved to the taskforce. Harra said that 500 additional staff had also been recruited in debt management services.

Prosecutions

Jonathan Djanogly (Conservative) highlighted that the number of criminal prosecutions for non-compliance had “decreased markedly” during the pandemic, from 887 in 2016/17 to just 163 in 2020/21, and questioned whether this impacted deterrents for those avoiding tax.

Delays in the court system during the pandemic had an “inevitable” impact on criminal prosecutions, said Ciniewicz, but those that did make it to court were still an effective deterrent. She added that HMRC has a “broad range of highly effective civil powers”, namely fines, it can use and the majority of cases are resolved using these powers.

She said: “We really want to make sure we reserve our criminal investigations for very particular purposes, for areas of tax evasion where we can’t use our civil powers or a particularly high profile case with a demonstrative deterrent effect.

“The deterrent effect we think is important, it helps send a message that no-one is beyond HMRC’s reach and we will tackle any form of serious wrongdoing in the most effective way.”

Ciniewicz added HMRC was moving away from “high volume” prosecutions, instead preferring to focus on a smaller number of more complicated cases and using civil powers to address the majority of cases. She said: “I don’t think we will go back to the level of 2016/17. We think these powers are best used to tackle the most serious, most complex, most difficult cases.”

Overcharging

Asked by Sarah Olney (Lib Dem) how overcharging happen, Alison Bexfield responded that HMRC does not intend to overcharge anyone, and when they do identify such cases, they investigate immediately to figure out what has caused the error. Administrative and User (HMRC customer manager) errors have been identified as the main reasons. When the errors have been made due to incorrect yield calculations, the majority of customers were not charged as HMRC rectified the mistake before the payment was made. Only on one occasion did HMRC refund around £200 to a customer.

On the frequency of errors, Bexfield added that overall HMRC is seeing an improvement in the quality of work as a result of reviewing cases (for instance, contacting customers in a timely manner), and that they are hoping to reduce errors further in future. She mentioned that there are two ways that HMRC check the quality of work, firstly, through line-managers and secondly via sample testing, in which a variety of cases are examined for quality and professionalism.

Meg Hillier highlighted a constituency case she had had where a nurse had done some agency work and her tax affairs had consequently got very confused. HMRC’s letters were confusing. There was no meeting of minds between the constituent and HMRC over a manageable timescale for paying the tax debt.

Responding, Jim Harra indicated that when a person cannot afford to pay their debt in one go, they need to speak with a Debt Officer who will be able to guide them further. HMRC does not have a time limit in which a payment must be paid but instead it is based on what taxpayers can afford. The only rule is that the debt must be paid over an agreed time period and should not be allowed to accumulate.

HMRC errors

Penny Ciniewicz said that HMRC constantly look to improve their system and will take forward NAO recommendations. In relation to the Tax Settlements Assurance Programme HMRC had looked at 400 cases and found 80 of them problematic.

Andy Morrison, Director, National Audit Office, was brought in by Hillier. He said that an error rate of about 1 in 5 cases is very high, and therefore the system requires further testing.

Bexfield, responding to Morrison’s comment, said it is important to look at where an error falls. For instance around 30% of HMRC’s yield comes from large businesses and HMRC’s testing in the large business space does not have the degree of error rate quoted in the report. The large business error rate is below 2%.

Bexfield said there had been seven overpayment cases totalling £32 million but the vast majority of that was a single case of £32 million caused by a caseworker inadvertently raising a charge. It was cancelled before it was collected.

Compliance yield and personnel

Asked about the impact on yield of the pandemic in relation to debt recovery, Harra stated that there are a number of external factors impacting the growth of debt which are not in HMRC’s control, so from their point of view, they need to take the correct action to clear them in the right way. There is also a separate issue when it comes to the measurement of compliance yield. They understand that they need to refresh their approach as they cannot predict what the debt balance will be as a result of their measures. They will however monitor the impact.

On recruiting of new personnel, Penny Ciniewicz said HMRC’s aim is for all staff to be fully productive and trained. Training takes about 18 months but becoming fully productive takes around four years. She added that absorbing new staff is a challenge for HMRC and has an impact on productivity, as HMRC need to spend time recruiting people, training and supporting them.

Anne Marie Morris (Conservative) asked what level of compliance yield HMRC can commit to for the next three years. Harra said that this year they are trying to achieve £36bn, which would be a record level. He noted that this is based on the OBR assessment of the amount needed to sustain the tax gap at its historic level. That will be very challenging for HMRC to deliver. For management purposes, HMRC have forecasted a range that they think they can achieve and the target is right up at the top of the range which is not usual for them.

Tax gap

Asked by Meg Hillier whether the tax gap is likely to grow, Jim Harra said HMRC do not predict what the tax gap will be, as it is influenced by numbers of external factors including the state of the economy. However, they do know that the non-payment part of the gap is likely to increase. In recent years the tax gap has been stable, with the exception of 2021 due to the pandemic. He added that HMRC do routinely revise the tax gap estimate (against previous years) and publish a report annually.

Referencing managing the tax gap, Harra explained that there is a big lag. Compliance yield generally related to tax due in previous years. “We have a strategic picture of risk”, says Harra, which means HMRC identify what the current risks are in the tax system, and use this to advise the Government and allocate resources.

Answering a question about the target percentage for the tax gap, Harra stated that the tax gap is around 5.1% and HMRC would like to sustain this figure and prevent it from growing.

HMRC customer service

Anne Marie Morris provided a personal story about how she tried several times to set up an account to pay capital gains tax online with no success due to HMRC’s website not working (she added that her constituents were facing similar issues). She was told to use the phone or write a letter instead. She tried three times on the phone – waited an hour on the third occasion and finally got through. The woman who answered was helpful and apologetic but could not access her record and told her the department she needed to speak to was closed. She was told they would ring her back in three days. She asked if HMRC recognized the scale of the problem and was looking to introduce ways for taxpayers to pay their taxes more easily.

Responding, Jim Harra said that HMRC’s digital services have very high satisfaction levels, which includes the ability to pay tax online. They have recently introduced a platform that allows people to pay their taxes through mobile banking – and have received very good feedback on this. The payment transformation program is also rolling out new methods of payment, which allows HMRC to allocate a payment against the right liability.

He acknowledged that at this time of year (as the self-assessment tax return deadline approaches) HMRC is not able to handle all of the phone calls it receives within its service standards. “I am confident that in the run up to the 31 January peak, despite the very high volumes, everyone who needs to talk to us can get through, but they may have to wait a considerable time, and on occasion they may have to call back. But what we aim to do is to deflect as many callers who can do things online as possible to the online service so that we have got the resources to speak to the people who genuinely say ‘listen I’ve had this message from the online service saying it will not work, I need to speak to a person to resolve that.’ That’s our strategy. Until very recently our approach was: everyone who rings us, if you want to speak to an adviser you’re able to do so, you join the queue, we’ll get to you as fast as we can. I don’t really think that is sustainable for us given the volume of calls. We have got to get to a position where we able to deflect people into the best possible channel for them and for us, and that is what we are working through as we speak.”

Currently, Harra continued, calls to the self-assessment helpline are about a third higher than they would normally be.  HMRC has deployed an extra 850 people to assist but understand that this is still not enough and HMRC needs to provide a better service. He encouraged taxpayers to visit the HMRC website and use the digital services it offers.

VAT

Asked about concerns relating to VAT delays, Harra responded that the VAT system is a target for criminal attack because repayments are a large feature of the VAT system, and the first place where they manifest is when people try to register for VAT, so managing who gets on the register is a key part of HMRC’s anti-fraud work. At the beginning of this financial year, there was a spike in VAT registration, and therefore HMRC had put additional checks into the registration system.

Despite that, he continued, approximately 76% of VAT applications that HMRC has received are processed within 7 days. Most others are processed within 40 days but a number of applications are taking a significantly longer time as a result of being flagged as suspicious.

Harra added that it is a big challenge for HMRC to effectively manage fraud risk and that they are doing their best to target checks as effectively as they can.

Hillier thanked HMRC for their evidence and said the committee report would probably be published some time before the Easter recess.