Government backs measures to improve HMRC performance

However, it has refused to set out publicly what level of investment in personnel is needed to reduce the tax gap, saying this information should be “considered in private”. It also refused to investigate and report to the committee the impact that R&D expenditure has on the UK economy within the next 12 months. Read the full Government response here.

The committee’s report, HMRC performance in 2021–22, set out seven conclusions and recommendations to improve performance across all levels of HMRC:

1 - Conclusion: HMRC has not yet returned to setting a formal compliance yield target, against which it can be meaningfully held accountable. Recommendation: HMRC should return to a formal compliance yield target with HM Treasury from April 2023 and report the target publicly. In doing so, targets should take account of inflation and economic factors, for example by setting the target relative to tax revenue.

The Government agreed to publish the compliance yield target externally in HM Revenue and Customs’ 2023-24 Outcome Delivery Plan.

2 - Conclusion: Resourcing HMRC’s compliance work to maintain rather than reduce the tax gap means the government is missing out on billions in lost revenue. Recommendation: HMRC should set out what level of investment in its compliance teams would be needed to reduce the size of the tax gap, and confirm what, if any, intention it has to pursue this, and HMRC should also calculate and report an uncertainty range for its headline tax gap estimate to provide more transparency to users of the estimate.

The Government disagreed that funding levels should be publicly disclosed, saying they are a decision for Treasury ministers and should be “considered in private”. However, it agreed to produce an uncertainty range by December 2023, employing the same statistical techniques that were used to calculate and publish ranges of error and fraud in the COVID-19 pandemic support schemes.

3 - Conclusion: HMRC’s plan to only recover a quarter of losses due to fraud and error on its COVID-support schemes does not go far enough. Recommendation: In determining what further recovery action to take on fraud and error on the COVID-19 support schemes, HMRC should keep under review the return on investment of spending more resources on recovery; and set out how it will ensure it maintains a level playing field for individuals and businesses that did not abuse the schemes, rather than being seen to reward those that were dishonest.

The Government has already implemented these recommendations. While the COVID-focused Taxpayer Protection Taskforce has been dissolved and staff returned to “business as usual” roles, HMRC will continue to address and recover overclaimed grants as part of its normal compliance activity.

4 - Conclusion: We are concerned that HMRC may be lagging behind other established tax authorities in preventing fraudulent VAT registrations. Recommendation: HMRC should engage with its international counterparts to understand what lessons it can learn in preventing fraudulent VAT registrations and minimising the impact to honest taxpayers.

While HMRC already has an “effective range of controls” in place to protect against criminal attacks, it will “engage further” with international partners to understand more about how other tax authorities tackle VAT fraud through controls on registration, with a target date of March 2024.

5 - Conclusion: Taxpayers and their agents are still not receiving an acceptable level of customer service. Recommendation: HMRC should write to the Committee setting out its plan to improve customer service to adequate levels as quickly as possible, and within three months, including the metrics HMRC will use to monitor its customer service performance, including metrics it needs to demonstrate it can answer calls and deal with post in a timely manner; the level of customer service taxpayers and their agents can expect to receive over the next three years against each of these performance metrics; how it will support customers who are unable to engage digitally or have a preference for post or telephone contact; and its contingency arrangements if its plans to reduce demand for traditional channels are unsuccessful or take longer to implement.

HMRC has already committed to write to the committee this month laying out its plan to improve service levels. It will also set out customer performance metrics in its 2023-24 Outcome Delivery Plan, which will be reviewed with quarterly and monthly performance updates.

6 - Conclusion: HMRC has further to go until it can differentiate between taxpayers who are genuinely struggling, and those who can afford to meet their liabilities but are choosing not to. Recommendation: HMRC should set out how it will strike the right balance between providing support to taxpayers who need it, whilst ensuring that those able to meet their liabilities are doing so, and HMRC should also set out when its single customer account will be ready and consider how it can bring the implementation of it forward.

The Government said it is investing £47.2 million to allow HMRC to better distinguish between taxpayers who can afford to settle their tax debts but choose not to, from those who are temporarily unable to pay. In January, HMRC wrote to the Committee “outlining its transition to six new debt journeys based on data-led insight that will ensure that debtors receive treatment which is more closely aligned to their circumstances.”

It added the Single Customer Account (SCA) will “transform” HMRC’s digital services, with incremental releases and improvements planned over the next two years. New features to support customers changing details such as address, phone number and marital status will be available through an improved digital account, starting with personal tax services in Summer 2023.

7 - Conclusion: Research and development tax reliefs are costly, prone to abuse and provide questionable benefit to the UK economy. Recommendation: HMRC should develop its analysis of the additional research and development expenditure its relief schemes result in, to consider what impact that expenditure has on the UK economy. HMRC should report to the Committee on its findings within 12 months.

The government disagreed, saying HMRC has already published reports on the additional research and development expenditure stimulated by the R&D tax relief schemes, which is backed up by several academic studies that have shown that R&D expenditure has positive impacts on economic growth. Further analysis will be carried out to evaluate the impact on R&D expenditure of upcoming reforms to R&D tax relief policy, but this will not be within 12 months. HMRC will provide an update on that once ready.