Treasury Cttee hearing: HMRC Annual Report and Accounts

House of Commons Treasury Committee Hearing - Thursday 14 September 2017

Subject: HMRC Annual Report and Accounts

Witnesses: Jon Thompson, Chief Executive and Permanent Secretary, Jim Harra, Director General, Customer Strategy, and Nick Lodge, Director General Transformation, HM Revenue and Customs

You can listen to the hearing here.

Summary

The majority of the session was focused on Customs and Brexit. The implications  of leaving the EU with no agreement were explored. HMRC indicated that they are keen to see a decision on an interim period as soon as possible - within a few months. HMRC conceded that there was a risk that at some point they might have to say 'no we can't deliver this'. More likely other (unnamed) priorities would need to be dropped or downgraded. A crude extrapolation would mean an extra 3,000-5,000 HMRC staff needed for 'day one' but this is probably an overestimate. c130,000 businesses currently trade with the EU only and would be dealing with Customs for the first time. 

HMRC agreed that making the new Customs Declaration Service happen on time was 'mission critical'. There might be a need for 'additional infrastructure' in the Dover area but this is something the Department for Transport would lead on. HMRC want to minimise physical checks at the border. HMRC are looking to distinguish between 'local trade' and 'international trade' in relation to the Irish border. Hypothetically the UK could decide not to collect tariffs from EU imports but this would forego significant revenue. A project looking at a 'single window' for importers and exporters rather than the current 26 agencies at the border has been halted - this is conceptually possible but would be expensive and time-consuming.

On Making Tax Digital HMRC confirmed that the income tax pilot is still running and would be broadened out on a voluntary basis. "Essentially all the functionality is there and is being tested end to end with agents and with individual businesses," said HMRC. HMRC are going to encourage voluntary participation. Only businesses with a turnover above the VAT threshold will be required to take part in the initial stage of MTD, rather than all VAT-registered businesses. The OBR will update the revenue score for MTD at the Budget.

On tax credits, HMRC chief executive Jon Thompson said his view was that the system was deeply flawed. The level of fraud and error - mostly the latter - was very high and because of a couple of policy decisions by government, it would continue to rise until tax credits are replaced by universal credit.

A Conservative MP raised relations between HMRC and business and people being 'frightened of the Revenue and unwilling to communicate unadvised'. He referred to the Robert Maas Hardman Lecture from 2015. Jim Harra of HMRC said his response to Robert Maas was a challenge to the tax agent community to step up and do more to help businesses get their tax right.

HMRC said the Government's objective was to reduce the number of people in self-assessment from the current c11million to 'the low single millions'. Jon Thompson said he was 'slightly uncomfortable' with the level of staff turnover at HMRC. HMRC staff are being 'reinvested' from customer service to compliance in response to automation.

Liveblog on the hearing

10.05am Customs and Brexit

The committee started with questions on Customs. The chair, Nicky Morgan (Conservative), asked Jim Harra about the resourcing implications of leaving the EU with no agreement in place. Harra said they had already recruited some policy and transformation staff but were still working through the implications in terms of operational staff. If the UK left the EU with no deal HMRC would ensure there was a functioning 'day one' structure in place, but it would not be something he (Harra) was happy with long-term. HMRC would like to see a decision on the interim period sooner rather than later, Harra said, as otherwise people will have to plan for a contingency even though it is not the Government's plan to invoke that contingency. HMRC's policy at the moment is they do not want to incur any spend that is not useful in all scenarios. Asked at what point a decision would be needed Harra said towards the end of this financial year HMRC would need to start 'reaching out' to traders, so it would only be a few months. Morgan also asked how confident HMRC were that other countries' Customs bodies would be ready for Brexit. There were no significant discussions with other Customs authorities in the EU about their post-Brexit arrangement, Harra said.

Stephen Hammond (Conservative) also posed questions on Customs. Jon Thompson told him HMRC had been very involved in the production of the Government's Future Partnership Customs paper. Hammond probed the two options the paper put forward and their relative merits. HMRC officials were careful not to express a clear preference for one over the other. The highly streamlined model is more recognisable to Customs officials, acknowledged Harrra. Thompson said HMRC was looking at Customs arrangements between the US and Canada, Germany and Switzerland, Singapore and Australia, among others.

John Mann (Labour) compared the forthcoming change to the introduction of tax credits, which had not gone smoothly. He questioned whether HMRC had either expertise or resource to handle this big change. We would need to increase our capacity and our resource to manage the new partnership, said Thompson. At this point HMRC had been asked for options - they had put two options out. Thompson said when he took on the role of CE of HMRC he was told there were two aspects to it - running a very large organisation and managing a huge transformation programme; now Brexit had been added on. Mann pressed him on whether HMRC had the capacity for this change. Thompson said risks had been flagged to the Treasury. Is there a risk HMRC could say 'no we can't deliver this' said Mann. Thompson conceded it was a possibility. HMRC has a list of priorities. At some point they might have to say priorities below a certain point could not be delivered.

Pressed by Morgan, Harra said that his 'crude estimate' of the number of staff that would be needed for 'day one' was an extra 3,000-5,000 people based on extrapolation but he thought it wouldn't be that many because we know that even if the number of declarations grow a large number of those would be from existing traders. c130,000 businesses currently trade with the EU only and would be dealing with Customs for the first time. 

Alison McGovern (Labour) returned to the issue of risk. "There is an acknowledgement that you can't simply take 250 existing projects and add on a significant number of additional ones," said Thompson. Brexit constituted 50-70- additional projects of which about 30 were Customs-related. Thompson said projects which impact directly on customers, such as Making Tax Digital, would generally have a higher priority. Lower down would be changes which do not impact directly on customers. He resisted attempts to get him to give examples of low priority projects.

Alister Jack (Conservative) wondered who set the objective of frictionless borders for trade. Harra said the Prime Minister had set this as a priority. Jack pressed him on this, especially in the context of the Irish border and agricultural transporters. He pressed HMRC on whether there were any examples we were looking to for the Irish situation. Harra thought the situation was unique. There is an excise border between Ireland and the UK at the moment because of different excise rates but policing this is intelligence-led. Controls, if required, can be operated away from the border, said Harra.

Catherine McKinnell (Labour) wondered if the March 2019 deadline could be met. The Customs Partnership could not be met by then, said Harra. Some of the elements for Northern Ireland will take time to implement. The answer to the question of when you finish depends on when you start, he said, and it would be ideal if we could make an early start. 

Charlie Elphicke (Conservative) asked about a scenario where there was no deal and whether HMRC would be ready. Harra said there would be 'something in place' but ideally there would be an interim period. Nick Lodge highlighted the delivery of a new Customs Declaration Service (CDS), which was well underway already. Pressed on what would happen if the system was not ready on day one Harra said 'ro-ro' ports in particular would be reliant on manual processes. There are 55 million customer transactions at the moment, outside the Customs Union that would rise to 255 million but CHIEF [the current system] only has a capacity of 100 million, so CDS is mission critical, suggested Elphicke. Harra agreed. Even with further resources CDS could not be fully implemented before the current scheduled date of January 2019, though the beginning of the phased introduction would be August 20187, said Thompson. He said he was wary about being confident about technology projects. He could offer no guarantees. The project is currently rated amber. Ultimately trade offs might need to be made between the three objectives of security, free flow of trade and revenue, said Thompson. Elphicke, who represents the port city of Dover, asked about the possibility for disruption to ports, in other countries as well as the UK. Thompson said the major concern was the 'closed loop' system that is Dover-Calais. That is where HMRC are focusing the most. There might be a need for 'additional infrastructure' in the Dover area. HMRC have talked to the Department for Transport who would have lead responsibility for this. Elphicke asked whether HMRC agreed the border should be seen as a 'tax point'; rather than a 'search point'. Harra cautiously agreed, saying HMRC wanted to minimise disruption and physical checks at the border. Harra said a priority for HMRC was information and intelligence sharing and it was important to secure these for the future.

Elphicke asked whether there was a case for joint and several liability for VAT to be collected by online traders. Thompson said the Government had issued a call for evidence and saw the solution as a split payment solution, where when you pay for your goods online the merchant acquirer removes the tax at that point and HMRC gets the revenue. HMRC are about to martial the evidence and send it to ministers, he said. This could not be implemented under existing EU law. He also suggested the UK could follow the lead of other countries which had joined together border control and tax at the border into one single department. Thompson said a 'single window' for importers and exporters rather than the current 26 agencies at the border was conceptually possible but would cost £500-800 million and take 5-7 years to implement. HMRC had been asked if there would be a business case for it. It would be better for business and would boost GDP, Thompson said. Only Singapore and Australia had done it so far. HMRC had hired the team which had done it in Singapore and asked if it could be done in the UK. Under further questioning he explained this 'one government at the border' project had been stopped because it did not take enough account of Brexit and a new project had been substituted.

McGovern pressed Harra on how HMRC would distinguish between 'local trade' and 'international trade' in relation to the Irish border. This would need to be negotiated with the EU, Harra replied. Criteria could include size of company. She also asked about the Union Customs Code, which Harra explained.

Kit Malthouse (Conservative) asked about WTO rules and whether we could just operate as we do now, post-Brexit. He suggestd the UK was under no obligation to collect tariffs. The WTO would expect the UK to enforce tariffs, said Harra, though HMRC would have discretion about how this was done. Thompson said we couldn't control what happens on the other side of the border. Also Customs processes would need to be in place for a larger number of importers and exporters. If Government didn't collect revenue there would be a loss of £3 billion (per year, presumably). Hypothetically the UK could decide not to collect tariffs from EU imports.

11.34am Tax free childcare

Morgan drew attention to a letter she had sent to HMRC posing questions about this. Nick Lodge responded briefly.

11.41am Making Tax Digital

Malthouse asked about corporation tax (CT). Harra replied that a commitment had been made of no additional obligations before 2020. HMRC's assessment had been that bringing income tax into MTD offered greater benefits. The situation regarding CT would be looked at alongside this. Lodge said the income tax pilot was still running and would be broadened out on a voluntary basis. "Essentially all the functionality is there and is being tested end to end with agents and with individual businesses," he said. HMRC are going to encourage voluntary participation. Harra said only businesses with a turnover above the VAT threshold would be required to take part in the initial stage of MTD. It would be voluntary for those who are registered for VAT but have a turnover below the VAT threshold. Malthouse probed the situation for those who make annual VAT submissions. Harra said he was unsure and offered to get back to the committee. Malthouse asked HMRC to provide feedback on how the pilots are going, especially in relation to compliance costs. He also asked about the rationale for quarterly income tax reporting and expected revenue from MTD. Harra said the original policy costings for the measure were the net cost of errors in the taxpayer's favour minus those in HMRC's. Thompson said the OBR would update the revenue score at the Budget.

11.47am Tax credits

Responding to Malthouse, Thompson said his view was that the tax credits system was deeply flawed. It was trying to do too many things with a benefit which has an annual cycle and reconciliation. The level of fraud and error - mostly the latter - was very high. The target was 5% but HMRC would not be able to get to that. Tax credits would eventually end with everything migrated to universal credit. HMRC accounts would be qualified until that point. Levels of fraud and error would, if anything, rise to 7-8% under decisions made by previous Treasury ministers, eg because of policy changes relating to the self-employed, he said. "The choice that was made by the previous Chancellor of the Exchequer was, what did he want: did he want either the £500 million less public spending, was he therefore prepared to accept that we would have a higher error and fraud rate, and that's the choice that was made, and our estimate is that that will add at least 1% to the overall fraud and error rate. And the seocnd area where we are heading in the wrong direction was, the previous version of this committee took a lot of evidence on [Concentrix]... Ministers decided to not replace that capacity in HMRC with additional employees and therefore we have less capacity to look at fraud and error and there's another 1% in that as well. So if anything the direction of travel is that the rate of error and fraud in tax credits will rise over the next two years heading towards something around 7.5%." Malthouse queried the absence of an extra line in the scorecard covering this. Thompson said it would be included in the overall figures for tax credits.

McGovern asked HMRC to confirm the additional amounts were error not fraud. Harra confirmed this. She pressed on whether the tax credits flaws would carry through into universal credit too, but HMRC were reluctant to respond on this, as universal credit is a DWP not HMRC matter. 

11.56am HMRC and tax agents / business

Malthouse raised relations between HMRC and business and people being 'frightened of the Revenue and unwilling to communicate unadvised'. He referred to the Robert Maas Hardman Lecture from 2015. Harra confirmed he had been present at the lecture. "[Maas] pointed out that relations between the professions and the Revenue had hit an all time low and had changed very significantly." Had HMRC been tracking relations between HMRC and business and the profession? he asked. Harra replied that he had responded to the lecture the following year. "We do survey businesses about their experience of dealing with HMRC and actually small businesses have got quite high levels of satisfaction when they engage with us; tax agents traditionally report much lower report levels of satisfaction in their engagement with us. I think that there is a challenge for HMRC in relation to small businesses because there is a very large number of them. Broadly speaking we leave most of them alone most of the time. When we do engage with them sometimes that is support and help and sometimes that is investigation. I think one of the aims of making tax digital is that we want to reduce the extent to which small businesses make errors, and therefore reduce the extent to which they get unwelcome interventions from HMRC when it comes to putting those errors right. My response to Robert Maas was actually a challenge to the tax agent community to step up and do more to help businesses get their tax right. This is an industry where 75% of small businesses probably use an agent but a lot of them are still presenting to us..." Malthouse interrupted at this point, saying, "That's true but he made some quite serious allegations about the Revenue effectively gaming the system - it's not about what tax is sue, it; was about what tax could be got and that created antagonism between the two." He asked for data on satisfaction to be shared. Harra thought it was public already.

11.59am Data sharing

Mann raised the issue of sharing of data with the Student Loans Company (SLC). Thompson said a project was ongoing. He resisted an offer to make a 'land grab' for the SLC's work.

12.02pm Tax returns / self-assessment

Mann asked if we would see the promised 'end of the tax return'. Harra said digital accounts for business and personal taxpayers would, long term, mean the vast majority of taxpayers would not need to make an annual submission.

Thompson said the Government's objective was to reduce the number of people in self-assessment from the current c11million to 'the low single millions'. HMRC are currently going through the criteria, trying to map this out, he said. He said HMRC saw personal tax accounts as the principal way in which people would interact with them.

12.07pm HMRC structure and personnel

Thompson said he was 'slightly uncomfortable' with the level of staff turnover at HMRC - currently around 10%. Mann pressed him over staff morale and retention of staff, particularly preventing them being 'poached' by the private sector. Thompson set out various things that were being done and said he was 'optimistic; about the future.

12.11pm Compliance yield

Mann asked if HMRC would meet their targets around avoidance and evasion. Thompson said he expected the compliance yield to continue to rise. In the current year HMRC are slightly ahead of the target. Numbers of prosecutions were also rising. Staff were being 'reinvested' from customer service to compliance.

12.13pm Tax havens

Mann suggested we were giving lots of money and assistance to 'tax havens' hit by the hurricane but they were not giving assistance to HMRC in 'getting the money there'. He cited the British Virgin Islands in particular. Harra said the UK had been in the lead in international work to reduce profit-shifting and implementing measures at home. BEPS 'still has some more work to do' he added.

12.16pm Gender pay gap

In response to a question from McGovern Thompson said the gender pay gap was within 2% at all grades and we should not assume women are paid less than men at all grades. HMRC do not believe they have a pay gap problem. They are a majority female employer and 7/10 director generals are women. HMRC agreed to wrtite to the committee with details. 

The session ended at 12.18pm.

George Crozier, CIOT Head of External Relations.