Taxpayers urged to file tax returns in January and rely on HMRC to rectify matters afterwards
The House of Commons Public Accounts Committee (PAC) held a meeting on Monday 16 November 2020 with HMRC officials Jim Harra (Chief Executive), Angela MacDonald (Deputy Chief Executive) and Justin Holliday (Chief Finance Officer). The meeting was PAC’s annual look at HMRC’s Standard Report and the department’s annual report and accounts.
A key message from Jim Harra was for people to submit their self-assessment tax forms as fully as possible and on time in January 2021. Personal issues related to COVID-19 can always be addressed afterwards, he said.
Furlough and SEISS
Committee Chair Meg Hillier, Labour, is concerned about firms that have taken large amounts of taxpayers’ money in furlough but continued to pay dividends or even very high executive salaries. Jim Harra explained that there is no fixed rule about executive pay and dividends when firms take furlough payments, adding that the furlough payments do not benefit the companies themselves. In separate comments, he said a ‘small number of companies’ have voluntarily paid back money that they were entitled to but did not need.
Lib Dem Sarah Olney is concerned about people who move between short-term payroll contracts to comply with IR35 but were inbetween payroll roles in March (and missed out on furlough and were ineligible for SEISS). Harra replied that no one who is self-employed is caught by the IR35 rules. He added: “I feel that we did everything we could in the design of the scheme to enable people on short-term contracts to benefit.” Hillier asked if HMRC have thought of going back through their tax records and trying to find a way of matching what people paid over the last three years in tax and attaching some sort of algorithm or scheme so that they could get a proportion of the tax that they paid, in effect, as furlough money? Harra replied that there are no plans to do further work on new schemes. Conservative Dame Cheryl Gillan complained that ‘it would be in derogation of the Government’s duty not to examine this’.
Hillier (pictured thanks to Parliament UK) highlighted that in submitting HMRC’s supplementary estimate to the Treasury in February of this year, HMRC incorrectly reduced the amount of cash they needed for the 2019-20 accounting period by £1.2 billion. Not identifying that error ultimately led to HMRC breaching their net cash spending control by £726 million. Harra accepted that this is a ‘serious matter’ and ‘embarrassing’. He explained that HMRC “incorrectly treated our non-voted working capital, which resulted in an error in that supplementary estimate” – but stressed there were no wider impacts for the overall fiscal position. An internal audit subsequently suggested strengthening the financial models that HMRC use and the quality assurance checks that HMRC make prior to submission of the estimates. Justin Holliday emphasised that there had been ‘no real-world impact from this error’; he said that HMRC did not overspend or exceed their budget - but they did use up more cash than they had predicted.
Tax receipts and tax debt
Harra said receipts to date are significantly down this year compared with last, although higher than the previous forecasts by the OBR: COVID-19 is depressing the income on which receipts would be paid. In addition, the Government has agreed to allow people to defer payment of certain taxes. As a result, HMRC are working to manage new compliance risks. It is not clear that, in a period of economic downturn, the tax gap is significantly affected, he said. HMRC’s aim is to get as much of that as they can into managed payment arrangements and to minimise exposure to losses through insolvency. He said HMRC have an unusually large debt balance—about £27 billion—that is not in any payment arrangement at the moment. The priority until now has been to make sure that people are paying their ongoing liabilities, as opposed to the debt from the past. HMRC’s priority is to enable viable businesses to continue, while paying their debts off, over a period that they can afford, he said.
Harra went on to tell Meg Hillier that HMRC have restarted debt recovery action. The debt balance that peaked at about £72 billion at the end of August is now down to £69.5 billion at the end of September, and it will continue to go down over the course of October, because of the restarted debt recovery action. But ‘the Treasury most certainly has not been breathing down our necks to collect that tax’, he said.
Eat Out to Help Out (EOTHO)
Hillier asked what HMRC have learned from the EOTHO scheme. Harra said operationally, it went very well and HMRC are working on post-payment compliance action (making three arrests for suspected fraud). He accepted criticism that EOTHO will not be analysed fully before it may be rolled out a second time but said there is ‘some evidence’ that it increased overall demand for that sector as it reopened. It was not an objective of EOTHO to increase the tax take, but VAT will be reduced because the rate was reduced.
“Would you seek a ministerial direction again if it were introduced from, for argument’s sake, 3 December, when we are expected to come out of this lockdown?” asked Hillier. Harra replied: “Last time there was simply a lack of information, particularly counterfactual information, which meant that it was not possible to predict it with sufficient certainty. I do not know whether that would change if there were another such scheme, but nothing has been announced.”
Deferred tax payments
Conservative Sir Geoffrey Clifton-Brown said tax deferred in July will have to be paid in January. Taxpayers will also have to pay the next tax demand in January. He can foresee a number of small businesses having cash-flow problems paying both lots of tax together. “Will you treat that in the same way, so that they will be given enough time to pay two lots of tax when their cashflow allows?” he asked. Harra explained the payment on account for the current tax year is calculated on the previous year’s profits and taxpayers have the right to go online (SA303) and adjust that. He went on to promote the self-serve time-to-pay facility. He said: “I urge people: file your tax return, because that tells us what the liability is. Then, if you can’t pay it, please use the online service or if you need to get in touch with us, do so. But do not miss a payment or miss an instalment payment without letting us know.”
Coronavirus job retention bonus (CJRB)
Harra confirmed to Richard Holden, Conservative, that now that the retention scheme has been extended to 31 March, the CJRB is not required in January and therefore the bonus will not be paid then. There has been no formal announcement about the future of CJRB. Harra said in the case of the CJRS, HMRC assume that there could be five per cent to 10 per cent fraud and error. Holden asked why Harra asked for a ministerial direction in terms of the EOTHO scheme, and not in terms of the CJRS. Harra said it was because in the case of the CJRS and the SEISS, there was good evidence of what it would achieve and what the counterfactual would be if we did not put it in place. He said: “I was satisfied at that time that there was an urgent need to act and that saving jobs during a temporary downturn would give value for money for the Exchequer. In the case of Eat Out to Help Out there simply wasn’t the data available to determine whether it would be value for money.”
COVID-19 and HMRC performance
COVID-19 means HMRC had to divert staff from providing support to people in the tax system and compliance work, to work on the COVID support schemes, Harra told Dame Cheryl Gillan. This had an immediate impact on their service levels in the tax system. On the impact of COVID-19 on the tax gap, Harra said that in the years after the financial crisis in 2007 there was not a significant and discernible impact on compliance levels. We expect people to continue to behave largely as they have in the past, he said.
On any given day, about eight per cent of HMRC’s workforce works in the office, and about 92 per cent are working at home, said Harra. Over the course of a week, about 16 per cent of colleagues come into the office, because some people, such as Harra, will come in for one or two days but not every day. HMRC have implemented a project that means 7,000 members of staff can take helpline calls at home. Harra told Dame Cheryl that HMRC paid for about 23,000 pieces of kit. HMRC rely on staff using their own broadband, but if people have expenses from working from home, HMRC pay up to £6 a week for excess expenses (there are no plans to change this standard allowance, said Harra). HMRC staff have restarted visiting premises to do checks, he confirmed.
Customer service targets
An NAO Report has looked at HMRC’s customer service targets and found they only met three of the eight customer service targets in 2019. The performance data show that over the three years certain areas of your performance have fallen, commented Dame Cheryl. Angela MacDonald said the second half-year performance 2019 was heading back towards target [a year in this case is April to April].
Dame Cheryl then said recruitment targets were missed by quite a considerable amount— by 40 per cent in April and May 2019, and by more than 30 per cent still in September 2019. MacDonald’s reason for this was that HMRC prioritised putting resources into EU exit work, as opposed to into ‘business as usual’. She claimed a review of recruitment practices at HMRC means it is ‘significantly better positioned’ now.
HMRC’s target performances for this year are already published. It is very clear what our target numbers need to be for 2021, said MacDonald. Some examples are to hit a five minute average speed to answer calls and to achieve at least 80 per cent of post being turned around in 15 days. “[O]n the delivery of our service for post, we are delivering target performance; we have been doing so all through this financial year. Our telephony performance has been somewhat more variable, and as you quite rightly pointed out earlier it has been impacted by having to deal with nearly one million phone calls related to schemes and 366,000 webchats that we were not expecting to have, so we have diverted there. We have our plans in place for January [self assessment deadline], and… we are confident that we will be able to deliver.”
Jim Harra said HMRC will continue with its plan to move to 13 regional centres. He expects that many more HMRC staff will be able to spend, say, two or three days a week working at home, in the future. He said that would affect the quantity of estate that HMRC need, noting that HMRC have already reduced their footprint in a number of their regional centres to make space for other government departments.
Sir Geoffrey Clifton-Brown was critical of HMRC’s policy of taking non-breakable 25-year leases, saying this was even more unwise given the likely increase in people working from home in the future. HMRC’s Justin Holliday argued that the most cost-effective way of getting good rent in the property market is to enter into longer-term leases. Sir Geoffrey said the whole of the private sector is moving towards shorter leases, but HMRC are still doggedly sticking to what was too long a lease in the first place.
Angela MacDonald said HMRC have offered the opportunity for staff who are outside reasonable daily travel from a regional centre and who would like to stay with some more flexible working arrangement, potentially even full time working from home, the option to do so. We have seen a number of colleagues taking us up on that offer, she said.
Dame Cheryl Gillan asked Jim Harra what the impact of the relatively poor state of HMRC’s IT has been on the cost-effectiveness of the tax system? Harra is concerned that HMRC spend an excessive proportion of their IT spend on ‘live’ running of the legacy estate and an insufficient proportion on investment for the future and on modernization: “In particular, in the area of self-employed taxes, we have infrastructure, both data infrastructure and technology infrastructure, that, frankly, was put in place in the mid-1990s and has not been significantly reformed since. Obviously, it has been kept technically up to date, but that means it is not as flexible as I need it to be.”
HMRC’s future strategy
Richard Holden asked about HMRC’s digital plans. Harra argued it is not about having a rigid plan; it is about having a set of principles for what a ‘resilient, flexible tax administration looks like and iteratively making progress on that’. He said the ambition is to have better, more real-time data about taxpayers and also digital systems that increasingly move away from simply enabling people to transact with HMRC and actually are used to manage the relationship with the taxpayer and manage their compliance behaviour and to limit the scope for error.
Universal credit and tax credits
At 2 April, at the end of the 2019-20 tax year, about two and a third million families were still claiming child tax credit and working tax credit. That is down from about 3.5 million at its peak. Harra explained that the managed transition of customers has been deferred, because the DWP obviously have seen a very significant increase in the number of universal credit claimants and therefore they are focusing all their resources on managing those new customers. The planned migration of the remaining tax credit customers to universal credit is on hold, and there is no re-planned date for that. It was scheduled for September 2024, but that is now not likely. Angela MacDonald said that if a customer wishes to close their tax credits claim and go over to universal credit, nothing prevents them from doing so. I do not think that you can make the sweeping statement that all customers are better or worse off with one or the other, she charged. The Government’s investment is in universal credit, added Harra.
Harra does not expect COVID-19 to have any impact on tax credit debt. But he spoke about a temporary easement in the rules that means HMRC should be able to maintain a smooth entitlement because of COVID-19.
EU infraction proceedings against the UK
Sir Geoffrey Clifton-Brown asked Harra about the ongoing EU infraction proceedings against the UK in relation to the alleged treatment of Chinese footwear and textiles. Harra said the infraction has not yet been resolved; HMRC continue to disagree with the Commission both on liability and on the quantification of any losses. It remains to be seen whether HMRC will be able to resolve that infraction by agreement with the EU, or whether HMRC will end up in litigation.
Making Tax Digital
Sir Geoffrey said he finds it ‘very unsatisfactory’ that the consultation for MTD for Corporation Tax runs right over a period when there is lockdown. Harra responded that the 12 November to 5 March next year consultation is a long period by usual standards. “And many of the people who you would expect to contribute to it are working in a relatively normal fashion during this period,” he said. When asked why HMRC settled on £10,000 as the de minis level for business rental income to be included in income tax for businesses from 2023, Harra said he would need to write to Sir Geoffrey. Harra said he expected that those businesses that are registered for VAT but have turnover below the threshold will also come into MTD; about a third of those non-mandated businesses have already voluntarily joined the scheme, he said.
Harra told the MPs that from next year, HMRC will publish a list of all reliefs with the objectives to change behaviour, specifying what those objectives are. From spring onwards, HMRC will specify in the tax information and impact note (TIIN) whether a new or amended relief is intended to change behaviour, and how they will measure that. Harra went on to say that from next year, HMRC will also publicly report more information on the groups and sectors that benefit from the most significant non-structural reliefs. He told Meg Hillier: “We will certainly publish a list of every tax relief, and we will publish as much information as we possibly can on each one of them.”
Harra said there is no plan for a ‘wholesale’ review of pension tax relief. The recommendation to carry out a review of the whole of the pension relief was rejected because it is only about four years since a very wide-ranging review was completed.
Abuse in the R&D tax system
Harra said HMRC estimates the level of error and fraud in the R&D (research and development) tax credit system at 3.6 per cent. He said it is important that HMRC get the relief to people quickly. HMRC have service standards that they need to hit to do that. That gives HMRC only a limited time to do pre-payment checks on claims, and they are therefore reliant a lot on post-payment investigation. He said that HMRC recently added a further 100 full-time equivalent staff on post-payment investigations for R&D.
Meg Hillier noted that, according to that day’s Financial Times, HMRC had written to businesses warning them that they would be looking at transfer pricing very closely. Harra explained that HMRC have identified businesses where they consider there is a high risk that they have not got their transfer pricing right and HMRC have opened up a facility for them to disclose their errors before they are investigated. HMRC have written to several hundred companies (not the 2,000 figure mentioned in the FT). At the moment, for example, on diverted profits tax, HMRC have about 100 cases open.
Chair Hillier asked about inheritance tax, especially the complicated forms people have to fill in. Are you planning to look at the bureaucracy involved with some of those taxes? It makes life difficult for people, particularly with inheritance tax, which is often on death, and so at a difficult time in their lives, she said. MacDonald said her Department have started to make some improvements. They have mapped the entire end-to-end customer journey and started to make improvements in it in the way that we would for many other areas. She added: “It is true to say that there is further to go, but it links into what Mr Harra was saying earlier about the opportunity for investing in our IT and getting ourselves into a more modern position on our IT. It is also important that it is not only about IT, but about the way we communicate with customers, and how we help them to understand and navigate. You should not have to be a tax expert in order to navigate these situations.”
The full session can be read here.
By Hamant Verma.