HMRC paid for Panama Papers: Public Accounts Committee session on HMRC's performance

HMRC is undergoing a period of transformation—it has plans to transform the tax system by 2020, in particular by digitising the tax system. In addition to its digital plans, HMRC is also undertaking a long-term estates replacement programme. HMRC’s “Building our Future” programme sets out to close 137 offices and centralise in 13 large regional hubs and four specialist sites. HMRC will keep open a limited number of transitional sites, for several years. 

The session will also focus on the challenges facing HMRC as the UK prepares to leave the EU.

A list of members of the PAC can be found here. The Chair is Meg Hillier (Labour).

The witnesses:
Jon Thompson, Chief Executive and Permanent Secretary, HMRC
Jim Harra, Director General, Customer Strategy and Tax Design, HMRC
Nick Lodge, Director General, Transformation, HMRC
Angela McDonald, Director General, Customer Services, HMRC
Justin Holliday, Chief Finance Officer, HMRC

Paradise Papers

Meg Hillier (Chair) introduced the five witnesses

3.35: Paradise Papers - Jon Thompson said he knew a leak was coming but had no access to ICIJ Paradise Papers, even though they requested it two weeks ago (from ICIJ, the Guardian and the BBC). No further requests made by HMRC. He said there is potentially one case which gives more information to HMRC than they already knew, Not aware that HMRC have contacted Appleby. HMRC will have to go allegation by allegation, taxpayer by taxpayer without the full papers. Thompson said over the last 18 months HMRC have improved the way we ingest information from outside intelligence about individuals. Unwilling to say HMRC has enough resources to deal with the information from the leaks. Customer compliance, where HMRC intervenes, is now the largest part of HMRC. HMRC are not employing the Big Four to help them but do have some specialist external tax professionals who help, mainly in law sector, too many conflicts of interest with the tax profession.

3.45pm: Jim Harra said we are entering a new phase when HMRC can now collaborate with other agencies in the UK, such as NCA, With Panama Papers, he said it was like someone driving ten trucks into your car park and saying there is something there. 

3.46pm: Caroline Flint is told by Thompson that HMRC still have people dedicated to help particular wealthy taxpayers. Under powers they have, HMRC can reopen cases in relation to HMWIs.  Hillier asked how long HMRC can chase people for retrospective tax dodging, 20 years back was the answer.

3.49: Shabana Mahmood was told by Harra that there are likely no engagement between HMRC and the International Financial Centres Forum.

Harra said there has been a positive impact of register of beneficial ownership and interests. Register of trusts now and a register by Companies House of person of Significant Control - those are not public but accessible to HMRC. 

Geoffrey Clifton-Brown said that when HMRC makes an inquiry to BBC, for example, it should help you, unlike on Paradise. Thompson said HMRC did get the Pananma Papers at a financial cost - he did not give a figure or promise to do so, legal worries.

HMRC Annual Report and Accounts

3.54: Flint spoke about DPT charge notices. Thompson said it raised £280 million in the last tax year (16/17) and say there was some behavioural change in taxpayers. Harra said the income was above HMRC estimations, although not all from notices; combine DPT work with a look at transfer pricing. All yield will come from additional corporation tax. On CbC Reporting, Flint asked if it worked. Harra said it is too early to say. Harra was sceptical about CbC but he is now said it gives HMRC more information than he thought. Asked about whether CbC should be enabled to be public by Flint, Harra said the OECD says not all countries want it to be public, however, the UK Goverment is pushing for it to be public. Banking and aggregate companies have to make their CbC information public, so why not other sectors, she asked? Harra said there is a different rationale for that measure which was not 'tax-led'.

4.03: Clifton-Brown said DPT only raised £138 million, with the rest down to change of behaviour in corporation tax. He doubts the scope of DPT is wide enough. DPT is 'ground breaking', Harra said. HMRC want to 'get tax into the boardroom' and said some conpanies are not clearly publishing financial information such as tax strategies in an accessible way, to be seen by HMRC. HMRC are not really dependant on such strategies to carry out their work, in any case.

Hiller said she is ' still reeling' from HMRC admitting that it pays for information. Thompson said HMRC judges the quality of sources and make a decision, although he said the payments 'are in a range' but promises to refresh his memory after the meeting. HMRC is the second largest law enforcement operation in the country, he added.

4.13: On the Tax Gap, Thompson said a minimum level is difficult to say, certainly not zero, because of measures come and go. Harra said the hardest tax to crack is from small businesses (in a tax efficent way) and the underlying pressure as a result of people moving into self-employment. He spoke up for MTDfB as a solution to closing small business tax gap. If VAT threshold was to lessen, more companies would come into MTDfB, Harra confirmed to Clifton-Brown. A small scale MTD trial for income tax is ongoing with 41 businessses and 53 agents, said  Nick Lodge. HMRC will begin to run a trial for VAT business from April 2018, to give busineses and software developers a full year before mandation. He told that Clifton-Brown that cash rich businesses will be included in the trials.

4.20: Flint said haulage firms in her constituency say they directly employ drivers, pay pensions etc, but face unfair competition from firms which take people on, on a self-employed basis. She asked the witnesses whether the definition of self-employed is as good as it should be? Thompson pointed to a number of court cases ongoing about this and he added that the worst manifestation is that some self-employed have to sign up to tax avoidance schemes or miss out on work. 

4.23: What is HMRC doing to repay taxes to taxpayers? Justin Holliday said HMRC make provisions when there is a 50 per cent chance or more of losing a case and legal cases take a long time to go through the courts so numbers in the report should be considered in that light. He does not think 'materially' the situation is getting worse.

4.24: Mahmood spoke about an employment tribunal which found that VAT should be payable on all Uber transactions. She wanted to know why HMRC have not raised a protective assessments in relation to Uber. Thompson said they cannot talk about Uber for legal reasons. Since 2014, he said five times HMRC has tried to establish that the agent is actually the principal in the courts and therefore responsible for VAT and lost. HMRC continues to monitor developments, such as EU cases in this field, which may change the advice to us. Harra said European VAT law determines matters and therefore something the UK cannot change itself. Why not raise a protective assessment and see how things pan out over four years? Mahmood asked. Harra said these assessments cannot be raised so simply.  

Transformation projects

4.31: Lodge said HMRC recognises the need to prioritise its workload because of Brexit. Asked if he has 'bitten off more than he can chew' with 15 transformation projects, by Hillier, he said they have been structured to be part of a wider HMRC transformation but with the addition of extra workload from Brexit, 'we need to take a step back'. Hillier said HMRC is far short of its efficiency savings, Thompson said the executive committee was aware of this and said the current £707million of savings predicted by 2021 against a target of £717 million, which he said 'is not far out'. Holliday said the original assumptions of savings was reasonably 'doable'. There are a whole range of things, such as digital projects, that HMRC have been able to defer. Thompson said it is not credble to continue with all the 250 transformational projects because of the likely stress of Brexit and the Autumn Budget. Hillier asked what can be dropped? That will be up to ministers, said Thompson, but revenue raising will continue to be a priority and very concious of maintaining customer care. He said assumptions made in 2015 about possible HMRC savings was 'extreme'. Thompson said the expected £920 million in extra tax revenue as a result as MTD will be addressed in the Autumn Budget.

4.51: Mahmood said a recent NAO report showed that HMRC customer service has improved. Thompson expects a continued fall in the number of telephone calls to HMRC and said the authority must accept that there are also reasons for people to call and the call levels may never fall much lower than today. On tax credits, the MP said people will call for reassurance over the phone.  Angela McDonald said HMRC have to remove the need to call altogether. What about rural areas? asked Mahmood. McDonald said for those with the confidence and capability to go online, HMRC will provide such services but HMRC will continue to deliver phone services, which are now available seven days a week. Why assume people who hang up have had their query dealt with, asked the MP. McDonald said over the last six months HMRC have reviewed how automated messages work. HMRC's speed of answering calls is only measured from the time they have spoken to a human adviser, we learn (an automated message can be between two and four minutes before human contact). HMRC want to be 'slick and quick', says McDonald. Thompson said he cannot give a guarantee that the number of staff on the telephone services will stay the same even without a continued drop in demand. "There is a risk in future years", he added.

HMRC Estate

5.12: Thompson told Clifton-Brown that he is unwavering in support of the HMRC restructure and reversing closures would be 'extremely costly' to the taxpayer. The new 13 regional centres were signed off by the Cabinet Office, he said. Holliday told Hillier that he is confident that national property controls do work and said if we have shorter leases than the agreed 25 years no break cluse deals,it would be more expensive. Clifton-Brown said the lease deals negotiated would never happen in the private sector and whoever was negotiating with the Govenrment on this 'must be rubbing their hands with delight'.

5.12: Thompson told Clifton-Brown that he is unwavering in support of the HMRC restructure and reversing closures would be 'extremely costly' to the taxpayer. The new 13 regional centres were signed off by the Cabinet Office, he said. Holliday told Hillier that he is confident that national property controls do work and said if we have shorter leases than the agreed 25 years no break clause deals, it would be more expensive. Clifton-Brown said the lease deals negotiated would never happen in the private sector and whoever was negotiating with the Government on this 'must be rubbing their hands with delight.

5.23:  If there is a Government property agency we would put our new regional hubs into it, said Thompson. HMRC expect savings will be £75 million a year 2025/6 as a result of the changes to its estate. The financial benefit from leaving STEPS PFI contract is not factored in as yet. There is a risk that there might be a site or two that might slip beyond 2021, which means HMRC may need to extend PFI deal for a while.

5.29: Thompson said the Croydon hub is up and running and Holliday said the costs are lower than forecast. Thompson reiterated that Wrexham is less risky in tax terms than London and this is the sort of thing that influenced the new locations.

5.33:  Hillier wanted more information about Fulfilment Houses Due Diligence Scheme, which Harra said has been passed by Parliament. Harra said HMRC know some locations that look like Fulfilment Houses which will be targeted. He expects that over time HMRC will flush out more. There is a financial penalty for those who run a registered and approved Fulfilment House, about £10,000 fine which is in the existing scheme and can be raised without new legislation. He said this time next year HMRC will definitely see some results.

Fraud and error

5.35: Mahmood wanted to talk about overpayments of tax due to fraud and error gone up from 4.8 per cent to 5.5 per cent. Thompson said former ministers made two decisions which have taken us in the wrong direction: The introduction of commercial and profitable test for those people who claim tax credits who are self-employed, which reduced total amount of tax credits paid out by £500,000  a year, but at the cost of an increase in error rate; and in the wake of Concentrix those resources were not replaced by HMRC staff and overall capacity looking at fraud an error in tax credits was reduced, which increased the overall fraud and error rate by one per cent. He said the target is to keep the overall rate at about five per cent.

Aside from Concentix, he said tax credit is poorly designed and over complicated and the most popular reason MPs write to him about. HMRC are looking at six areas to work on to bring down the error and fraud rate, which are income, working hours, childcare costs, undeclared partners, who has care of the child and the disability of the child. The amount HMRC can do on this is limited by the move to Universal Credit “The more resource you apply to this [tax credit] problem, the better the result.”

Mahmood then asked about the forecast of the amount of tax credit debt to be tranferred to DWP, from HMTC which she says is about £7 billion. The debt moves with each person, Thompson said. There is scope for an increase in fraud and error in the transition. Harra was keen to say there will be transitional protection for some tax credit claimants and that is where there is a risk of ‘infection’ of Universal Credit.

5.45: On Concentrix, Mahmood asked Thompson to what extent he knew the fallout from the scandal would have an impact on fraud and error, at the point at which he spoke to the Committee in January. He admitted that he wrongly assumed that the capacity HMRC was getting from that company was to be replaced, which it was not because of Treasury decisions ‘knowing what the pros and cons were’.

The session can be viewed here.

By Hamant Verma