PAC hearing on HMRC's performance in 2017-18

HMRC's performance in 2017–18

Boothroyd Room, Portcullis House

Wednesday 5 September 2018, 2.30pm

The Committee will take oral evidence from:

Jon Thompson, Chief Executive and Permanent Secretary, HM Revenue and Customs 
Jim Harra, Deputy Chief Executive and Second Permanent Secretary, HM Revenue and Customs
Justin Holliday, Chief Finance Officer, HM Revenue and Customs

You can view proceedings here.

NB. The note below is contemporaneous and based on notes taken during proceedings, rather than the official record. We cannot guarantee it is error-free!

2.29pm Session started. Meg Hiller, chair, opened proceedings. HMRC reported £600 billion of tax revenue in 2016-17, £31 billion more than previous year.

Caroline Flint posed some questions about country-by-country reporting which came into effect in 2016. Was it as anticipated?

Jon Thompson said 1.6 million records were sent out and 1.4 million were received back. 2,300 disclosures worth £55m extra. £384m expected over the next four years. Jim Harra said the returns inform HMRC's investigations. 

Flint asked if they had informed HMRC usefully. Harra said they had. Getting information up front supports HMRC's risk assessments, and allows better targeting of enquiries, said Harra. He acknowledged some companies complained about the work involved.

Flint asked about the implications for developing countries. Harra said he was not aware of any occasion when HMRC had not shared the information with developing countries. DFID fund HMRC to do capacity building work, he added.

Finally, Flint asked about what action HMRC had taken as a result of data received by other EU countries' tax authorities. Harra said he did not have that information. He thought it unlikely that HMRC would have taken action as a result of such information that they did not already plan to take.

2.36pm Sir Geoffrey Clifton-Brown took over the questioining. He asked for an update on infringement proceedings in relation to a lack of proper clearance for Chinese textile imports. Was this likely to be part of Brexit negotiations?

Thompson said the Government disputed this in principle and had challenged it.

2.38pm Meg Hillier asked about increases in fraud and error in tax credits. She noted that it had increased by less than forecast. Why was this? Thompson said there were two reasons why the increase was forecast. One was the 'commercial and profitable' text being applied to self-employed claimants. The other was the termination of the Concentrix contract, after which they had asked for funds to be kept with HMRC to recruit staff. The prediction of a 1% error rate as a result of the former was made on too small a sample and was definitely a learning point for HMRC, he said. It had actually been 0.2%. In relation to Concentrix they still believe that will add a further 1%. So the still believe fraud and error will increase from 4.8 to 5.5% and then 6% in the next two years.

Hillier asked why tax credit fraud and error was not falling. Thompson said tax credits were being phased out so appetite for changing tax credits was low. Also less resources are being put into this now than when it was HMRC and Concentrix. Finally the benefit itself is systemically flawed as it is done on an annual cycle and people's circumstances change more frequently than that. That level of complexity is inherently open to substantial fraud and error. 19% of cases have an element of fraud or error.

Thompson said the standard of administration of Pay As You Earn was not high enough - it is highly variable. That raised questions with universal credit too. Hillier asked if these were employers or payroll bodies. Employers, said Thompson. HMRC have a 'sin list' but it is unlikely to be made public. He had talked to CEOs of some large companies and public sector employers (though not government departments) about this. HMRC have concerns about pension providers too.

On fraud an emerging risk was payroll bureaux acting as a fraudulent enterprise.

2.50pm Clifton-Brown asked about HMRC's pweors asking whether one of the areas of concern was 'agent or principal'. You've taken it to court five times and lost, he said. So is the concern over who is repsonsible for the tax here? Thompson said some intermediaries look to the consumer as if they are the principal but they are actually acting as the agent. The government have forced intermediaries to give them information. That has been a good step forward. The first two (he did not name them) online intermediaries had been required to provide information. He gave an example of a restaurant that had two sources of revenue - cash and credit card payments. When an intermediary gave them information they saw the turnover was five times what was declared but the money was flowing into other bank accounts so when you saw three sources of income that was significant information.

2.53pm Hillier asked about income-related error and fraud. What are the main drivers? Thompson said a claimant has to estimate their income over 12 months and tell HMRC about any changes. Timing is an issue with late provision of information.

Why haven't you measured the effect of the failure of the Concentrix contract on fraud and error, asked Hillier. We will be doing that, said Thompson.

2.58pm Anne-Marie Morris commented on the conflation of fraud and error. We could separate them, said Thompson. It's 80-20 error-fraud in broad terms, said Thompson. Would separating them benefit the taxpayer? We do that privately said Thompson. We could do it publicly. 

Following the Concentrix failure HMRC had reached out to third sector to ask how HMRC could do more to get customers to tell them in a more timely manner about changes of circumstances, Thompson said.

Responding to Sir Geoffrey Clifton-Brown, Thompson said a certain amount of error and fraud was inevitable.

3.04pm Caroline Flint said she was disappointed in relation to customer service. Letters to taxpayers could thank them, she suggested. She noted the HMRC annual report had not thanked the British people for being one of the most responsible nations in the world for paying their taxes. Thompson said he was grateful for people paying their taxes. We do send out five million letters saying thank you for paying your tax, this is what we're using it for. In response to a suggestion he use social media to consult the public on thanking people more, Thompson said he was not a great fan of social media, having received death threats on it for doing his job at HMRC.

Flint then turned to the issue of inclusion of automated messages in call waiting times. Thompson said figures including it could be published. Flint asked for it to be included in the annual report in some form. Thompson said he would go away and look at that.

Thompson said changing standard letters into plain English and avoiding technical gobbledigook was an aim for HMRC senior management. The biggest cause of complaints to HMRC is mistakes HMRC make, he added.

Personal tax accounts had prompted more enquiries, including about historic data, said Thompson. HMRC had stimulated demand.

Flint asked why digital customer services satisfaction had fallen this year. Thompson suggested it reflected users of Personal Tax Accounts accessing them, liking them but thinking they wishing they could do more.

Flint also asked why mid-sized businesses had the lowest satisfaction ratings with HMRC. Jim Harra said HMRC had changed its approach, introducing a new mid-sized business service, where they will appoint temporarily a customer service/compliance manager at times of change and transition for the business.

3.24pm Anne-Marie Morris asked about producing qualitative measures to give HMRC a better handle on how to improve. Thompson said HMRC was committed to producing a broader range of measures by the end of the current financial year. Morris said as a personal taxpayer it was a frustrating experience to call HMRC, with people having difficulties accessing the right files quickly.

Sir Geoffrey Clifton-Brown asked about taxpayer privacy. How far down the road do you want to go with personal information, he asked.

Lee Rowley asked when Thompson expected the new broader scorecard to be available. It would be in the annual report at the end of 2019-20. But monthly data might be published from spring 2019. He did envisage it would include elements of the 'automated customer experience'.

3.31pm Rowley asked whether HMRC is acting lawfully in the collection of voice recordings for voice biometrics. A complaint has been lodged with the ICO. HMRC are engaging with this. Thompson said he believed it was lawful. Rowley challenged him over where the right to opt out was included in the process. There is no explicit consent in the statement said Rowley, who argued it breached both the DPA and GDPR. Thompson argued that if someone didn't say the requested phrase that would be treated as opting out. HMRC regard that as implicit consent.

Would HMRC delete all the recordings if ICO find against them? Six million people had registered at the time of the complaint, with a further million since, said Thompson. A decision will be taken after the ICO conclude.

3.38pm Hillier then posed some questions about the HMRC estate and staff recruitment. 10,000 extra staff (prediction of 58,000 from 48,000) break down into 5,000 extra for Brexit, predominantly in customer services; 2,000 for customer compliance; rest are people working on tax credits now who would have gone to DWP but are staying at HMRC working on tax credits for now. 

Gareth Snell asked about whether costs for redundancy and guarantees of travel costs for staff asked to move to new offices had been built in. Thompson said that work had been done.

3.49pm Douglas Chapman noted the £7 billion of tax not expected to collected but focused his questions on the cost of reliefs. Of the 239 reliefs where the cost is not known how do you know that that is value for money? Thompson said the £7 billion related to customer insolvency. On reliefs he said HMRC indicated the reasons why they are not estimating; for 179 the cost of gathering information would be disportionate. Harra said HMRC's primary job is ensuring the right people get reliefs. When it comes to evaluating whether the cost of a relief is good value for money, depends on nature of the relief. Some are structural, eg personal allowance. Policy decision not to achieve specific outcome. Some, we define as tax expenditures, intended to achieve an outcome. We identify which reliefs we are going to evaluate based on the nature of the relief, how much it costs, risks... Where we don't have cost data and decide a relief needs looking at we can make some estimates to inform our thinking or do a one off exercise to collect data.

Chapman asked about trends in cost of reliefs. They had gone up by 3.2% in the last year. Would that continue? Harra said that for some of the principle reliefs there are forecasts of cost. Variances against that forecast are monitored and the reasons identified. Policy changes are accompanied by estimates too. HMRC need to know, among other things, whether there are compliance issues.

Chapman asked if the government were looking at simplification of reliefs. Harra said he was in favour of simplification, noted the existence of the OTS, but said the reality was the list of reliefs grows faster than it reduces. 

Sir Geoffrey Clifton-Brown asked if forecasts include behavioural changes. Yes, said Harra.

3.59pm Caroline Flint asked about the register of beneficial ownership for properties owned by foreign companies due to come in by 2021. How is HMRC working with BEIS on this? Harra said HMRC is working closely with BEIS. Transparency is important; hiding behind foreign entities is a problem tax evaders use, though the problems go far wider than tax. Flint asked whether HMRC expects to undertake enforcement activity in this area. Harra said they had an interest in data on the register and it might produce benefits on compliance yield. Two areas of interest for HMRC - might be a UK taxpayer hiding behind that entity, Also CGT expanded to non-resident property owners.

4.05pm Meg Hillier took up the issue of VAT compliance. She asked how much extra VAT had been collected as a result of new compliance measures. Harra said Budget 2017 measures had, to 30/6/18, collected £150m of additional VAT unprompted by sellers who have now registerd for VAT. Also issues joint and several liability notices for £160 million. Measures were expected to raise £35m in 2017-18 and £75m in 2018-19 - we believe they are well on their way to achieving or exceeding forecast revenues, said Harra. 43,500 new applicants from non-EU based online businesses to end June. Harra confirmed he had additional resources to police this area. Seven online marketplaces have signed memos of understanding, including the three 'big ones', said Harra. 

Hillier asked whether marketplaces had stepped up action against 'phoenixism'. Harra said this had been monitored as a risk. The new obligation to actively police systems puts onus on platforms. Expect that sort of due diligence from them. Hillier pressed Harra further over debt collection powers.

On split payments, there were 23 responses to the consultation and ministers will take decisions in due course, said Harra. HMRC still believe split payment could be a very useful too. 

4.15pm Hillier asked about a 'technology based solution' to collecting VAT in the event of no deal on Brexit. Harra said there were two key issues in relation to VAT on Brexit - firstly import VAT as opposed to acquisition VAT, offering a cashflow disadvantage. Postponed accounting would come in for all imports in the event of no deal. Hopw ready is HMRC? It's quite a challenge for us to deliver, said Harra. Depends on functionality of CDS and Making Tax Digital. Challenging for us to deliver, but we are endeavouring to be ready for it, said Harra.

What milestones do you have to meet to deliver that, asked Hillier. "Both HMRC and external software developers will need to have contingent products ready that we can drop in and start using after the 27th March in the event that there is no deal," Harra said. "It is a very high priority for us and is likely to put a strain on some other things that we have to deliver. We are currently in the process,,, of engaging with the external software developers". Harra said this was an area needing to be monitored closely right through to 27th March. 

Hillier asked what would suffer if this was a priority. Harra said HMRC had no plans to stop anything but other things would shuffle down the priority rankings. The most likely impact is on the later release of CDS and on some of the more specialist types of entity that pay VAT who are affected by MTD.

Can HMRC cope, asked Hillier. Jon Thompson said it was sub-optimal. To get to an optimal system takes up to three years.

4.21pm Sir Geoffrey Clifton-Brown asked about collection of tax from big online companies. Do you have sufficient powers? Harra answered first in terms of online VAT fraud, saying the recent measure to put the onus on online platforms rather than HMRC was a game changer. He thought more powers might be needed in due course. Clifton-Brown then took the questioning onto corporation tax. Harra referenced the BEPS project and revised transfer pricing guidelines, as well as the introduction of the diverted profits tax. He said that, nevertheless, it remains the case that multinationals can structure their affairs in ways that the public regard as not bringing taxes into the right jurisdictions. There is more that can be done at a political level, internationally, to resolve this.

Clifton-Brown turned to the Customs Declaration System (CDS). Thompson said the first release was in August, as planned. Second release, planned for autumn, still on track. Third release needs to move back from Jan to Mar so strategy of using CHIEF (the existing system) for exports and CDS for imports is one which needs to be tested. We are five more weeks into testing that CHIEF can be scaled up, three weeks to go. Clifton-Brown asked whether we will still be able to operate a reasonable tax compliance system by March 29th in the event of a no deal. It depends what you mean by a reasonable tax compliance system, said Thompson, Collection is mostly not collected at the border, rather done electronically, "so to start with, subject to what Jim said about VAT, this strategy will give you a customs system that could cope with April 2019. The compliance risks begin to change over time. To bring that to life, at the minute, French wine enters the UK with no customs declaration. Is that any more risky in April 2019 than in was in March 2019. But over time you have to anticipate the different risks would change in that tax system, but to start with I don't feel there's any great risk to tax revenues or tax compliance but I do think over time that will change. It will particularly change dependent on what the government decides to do with tariffs".

Clifton-Brown said he was surprised by that answer. Isn't there going to be a trade off between protecting the tax base and making the appropriate number of inspections and having a massive backlog of lorries at Dover? Security, revenue and free flow of trade are involved in a trade off, acknowledged Thompson. But you can only examine four lorries that come off any ferry. We're not suddenly going to say we need to check twenty. The real risk is the other side of the channel, he said. Thompson agreed there was no significant risk to the UK tax base on March 30th in the event of no deal, subject to what Harra had said about VAT.

Harra said HMRC know the identify of 145,000 businesses that are VAT registered that the government can see are EU-only traders. Best estimate is there are about 100,000 other businesses not VAT registered that would be affected. In August the technical notices provided businesses with additional information. Within the next week HMRC will be directly communicating with the 145,000 businesses. It was always the plan that we would run with both CHIEF and CDS for a period. That dual running will now run for longer than planned. However businesses deal with software products not our system. 

Will there be extra compliance costs in event of no deal, asked Clifton-Brown. Thompson said the cost of no deal would be in three parts: "The cost of customs declarations - 200 million going out, 200 million coming in - that's £13 billion. Plus the EU's standard common tariff - the CBI estimated that at just over £5 billion. So you'd have to add that on." Those were per year figures. 

Finally Clifton-Brown turned to risk from tax leakage at the N Ireland border. What contingencies are you planning, he asked.  Harra said the Facilitated Customs Arrangement would remove burdens we have just been talking about and resolve NI border issue. It's only in the event of no deal that we have an issue. Government and Irish government have said that there will be no infrastructure at border.

4.43pm Lee Rowley turned to HMRC's transformation plan. He was keen to hear about progress.

Sir Geoffrey Clifton-Brown said the NAO had looked at the tax free shopping system at his request. HMRC had said two options were being considered. How realistic is HMRC's goal of completing by Oct 2019? Harra said modernising tax free shopping service and making it slicker was the ambition. Brexit had pushed it down the priority list, and also negotiations with the EU might affect this area.

The committee concluded its proceedings at 4.47pm.

By George Crozier, Head of External Relations.