HMRC chiefs pressed over impact of pandemic on compliance and customer service

NB. This report was initially uploaded on 1 December without the later rounds of questioning. These were added at 10pm on 2 December. 

The session, held on Wednesday 1 December, was the PAC's annual hearing on HMRC’s annual accounts. The PAC has a remit to examine the value for money of government projects, programmes and service delivery. Drawing on the work of the National Audit Office it holds officials to account for the economy, efficiency and effectiveness of public spending.

The witnesses at today’s session were Jim Harra, Chief Executive and First Permanent Secretary, HMRC; Angela MacDonald, Second Permanent Secretary, HMRC; Joanna Rowland, Director General Transformation Business Group, HMRC; Justin Holliday, Chief Finance Officer, HMRC.

Tax avoidance schemes

Sarah Olney MP (Lib Dem) opened the questioning, on the loan charge. She asked about progress on pursuing promoters of schemes. Harra said the strategy was two pronged – reducing supply of schemes and demand for them. HMRC have been successful in driving the ‘respectable end of the tax profession’ out of avoidance schemes. We are left with a hard core of 20-30 who try to promote schemes. Many of them are offshore. The vast bulk of the schemes they market are targeted at agency workers, he said. Umbrella companies pay a large part in the present market, he said.

HMRC are using the full panoply of powers available to them, Harra said. These include criminal investigation and prosecution through to insolvency law and advertising standards.

Is there anything to protect taxpayers who have unwittingly been sold an unlawful scheme, asked Olney. There may be something in the regulatory environment, said Harra. The single enforcement body for labour market enforcement may help. But there is no protection in tax law, he said.

Peter Grant MP (SNP) said the minister had said during Finance Bill second reading debate that it was difficult to catch promoters who were based in the Isle of Man. He had had a letter from Tax Watch which said that it is possible to catch them under existing laws.

Harra said that promoters put structures in place designed to make life difficult for HMRC but HMRC make all efforts to bear down on them. The 20-30 promoters aren’t in any recognised body, they don’t adhere to professional standards. Working with the Advertising Standards Authority HMRC have managed to get websites shut down where promoters have been selling online, and have got claims removed from websites. HMRC also litigate if promoters do not disclose their schemes under DOTAS rules. “They are not beyond our reach but they do make every effort to hide behind structures,” he said.

Grant referred to the big sense of injustice felt around the loan charge. Why don’t HMRC make a bigger song and dance around promoters they catch?

Harra said HMRC have been taking steps to disclose information about promoters more quickly than in the past, to warn potential users off.

James Wild MP (Conservative) raised the case of a constituent who had made a complaint about the fairness with which they had been treated with regard to the loan charge. There was some discussion around delays in dealing with such complaints.

Sarah Olney then asked briefly about IR35. Constituents in the creative and cultural sector is having an impact on flexibility and mobility. Has HMRC done any analysis on impact of IR35?

Harra said the IR35 rules are not intended to affect, and should not affect, flexibility. They purely relate to the amount of tax people have to pay. There has been quite a lot of case law in broadcasting recently clarifying the law.

Tax take and the tax gap

Committee chair Meg Hillier asked how HMRC went about maximising tax take during 2020-21. Harra says top priority was to deliver covid support schemes, second was to deliver smooth transition from EU, and third was to continue delivering key parts of tax system (ie revenue raising). We successfully managed self-assessment peak, enabling people to continue paying their taxes, he said. He pointed to the postponement of late filing penalties as a way in which HMRC had recognised the challenges facing taxpayers.

Receipts were down on a year before but they were up on what OBR had forecast, said Harra. Partly down as a result of decisions to reduce taxes and to defer some payments.

Hillier asked why HMRC don’t know yet what the impact of temporary tax cuts was. Harra said HMRC have more knowledge now than when the annual report was written. He said about 150,000 firms and 2.4 million employees had benefited from the VAT cut for hospitality.

Is there political pressure about how you evaluate them, asked Hillier. The policy decision to have a reduced rate is not for him, but a lot of effort was put in by HMT and HMRC officers to advise on what they thought the effect of the cuts would be.

Hillier asked about the impact of the pandemic on the tax gap. Harra said there wasn’t at this stage evidence that the pandemic led to changes in people’s behaviour, in terms of returning accurate amounts of income, for example. A key risk is level of indebtedness, as non-collected debts are part of the tax gap. Non-payment is one area of the tax gap where he would expect to see an impact. Air passenger duty dropped very dramatically but that reflected fall in passenger numbers.

Hillier asked about projections for next year. Harra said much of the risks in the tax system remain unchanged. HMRC are doing lots of education and guidance to ensure tax payers and advisers know what to do in respect of payments for covid support schemes. In 2021 HMRC suspended some compliance work to redeploy resources. That is reflected in yield. Aim for next year is to get compliance yield performance ‘back on an even keel’, he said.

Going into the pandemic total tax debt was c£22 billion. Peaked Aug 2020 at £72bn. By end of financial year down to c£57bn. Now under £44bn. Trend in the right direction, he said. Most of that was a result of policy decisions, allowing people to defer, he said.

Bulk of payment arrangements are 12 months, Harra said. There was an online facility enabling people to self-serve for 12 months time to pay.

Hillier turned to staff recruitment. Harra said HMRC are on plan with 1400 contingent workers in the department, which increases flexibility. We are in constant recruitment, he said. We have put an additional 3,500 people into compliance this year, said Angela MacDonald. HMRC typically lose about 3,000 people from customer services a year, in line with other industry percentages. About half of those are leaving HMRC, with most of the remainder going into compliance roles. The labour market is tougher at the moment and it is challenging to recruit, said MacDonald, but the real challenge is keeping skill levels up.  People have needed retraining for covid, for Brexit work…

Peter Grant noted that the reported compliance yield this year was down by c£5-6bn. The NAO reported that that was because last year’s figure was artificially high. Did HMRC highlight last year that the high compliance yield was a one off? He suggested HMRC pointed to exceptional circumstances when they led to yield going down but not when they led it to go up.

Harra said compliance yield can be bumpy. We had several big litigation cases in 2020 which increased yield. We didn’t specifically flag that last year, said Justin Holliday.

Grant drew attention to figures suggesting that, for individuals and small businesses, the ration of compliance spend to compliance yield was ten to one, whereas for the wealthy and larger businesses the payback was forty to one. If you concentrated more on the big fish would you get more money in?

Harra said payback was not the only factor HMRC take into account. It is important we cover all aspects of the tax gap and small businesses unfortunately cover a large part of the tax gap. The way we have tackled non-compliance in that group is quite expensive and therefore the rate of return is lower. One of the reasons HMRC are doing MTD is because they would prefer not to deploy so much resource for a relatively low return. While that is the average resource per person that does not mean that would be the marginal resource you would get for putting in additional people.

For large businesses, 5.5% of the total tax they paid last year you had to chase them for, said Grant. Doesn’t that suggest if you put in more resources for bigger businesses you’d get more money back for the taxpayer?

Harra responded that the 2,000 largest businesses are ‘heavily policed’ by HMRC. They each have a compliance manager so we understand what they are doing all the time. We recover a much higher proportion of the large business tax gap than we do the small business tax gap. Vast majority of small businesses don’t hear from us.

Craig Mackinlay MP (Conservative), a chartered tax adviser, asked about the non-payment part of the tax gap. Harra said the figure would be skewed over the last 18 months by the fact that there has largely been a moratorium on insolvencies. In a typical year we write-off or remit about £5 billion, said Holliday. Last year it was £1.5 billion.

Mackinlay noted that there have been 29% fewer compliance case opened over the last year and 26% fewer closed. Harra said HMRC had made a deliberate choice last year: there were people fighting to keep their livelihoods going and if they couldn’t cope with a compliance enquiry and we were able to defer that without losing tax that is what HMRC were willing to do. HMRC made sure revenues were protected so pursued cases where they were up against time limits, said Harra.

Would HMRC go back and look at cases from the covid years or give them up and start afresh, asked Mackinlay. We think the action we took last year will defer our ability to recover tax but it won’t significantly involve a loss of tax that we would otherwise be able to collect, replied Harra.

The HMRC estate

Mackinlay asked about the HMRC estate: Is the strategy with super-centres holding up? Yes, said MacDonald. We have an estate of ‘incredibly high quality’. This has made it easy to offer to other government departments as part of moving of roles across the UK. Leeds centre has 22 departments on one of its floors, which HMRC now don’t need due to home working and hybrid working. Positive move not just for HMRC but for broader civil service. Harra described them as ‘government hubs’. There are about 7,500 non-HMRC officials and about 65,000 HMRC officials in these at the moment.

New plan is for hybrid working in perpetuity, suggested Mackinlay. Yes, said MacDonald. That can make us competitive as an employer and also enable us to occupy less property.

Mackinlay asked on what basis the committee could assess HMRC’s compliance work post-covid. Harra said he expected compliance activity to be back to normal in the current year. On the tax gap itself he only expected to see a distortive effect on non-payment.

Would HMRC consider sub-letting to third parties, asked Mackinlay. Justin Holliday said HMRC had good, modern accommodation. The Cabinet Office exercises central control, pushing other government departments to use space in HMRC’s hubs before renting their own space. He described a hierarchy where space would be offered to central government departments first, then other parts of the public sector, then potentially the private sector.

Making tax digital

Craig Mackinlay asked what MTD is for. He said he had asked different financial secretaries to the Treasury what MTD was for and each gave a different answer. Joanna Rowland said MTD is integral to HMRC’s 10 year tax strategy, it’s about making tax easier, it’s about keeping tax moving in the digital age and it’s about making business more productive as a result.

Why is quarterly reporting necessary, Mackinlay asked. Rowland said HMRC’s research shows that for 80% of their customers MTD is either very easy or fairly easy. The other benefit for the tax system is the self-employed make up a huge proportion of the tax gap and a large amount of that is errors: “We’ve all heard stories of people emptying a year’s worth of receipts on their accountants’ desks…” Mackinlay observed that most of that error was in HMRC’s favour. Rowland said HMRC were about getting tax right.

Mackinlay said he had concerns about the retired person with a small rental income. Rowland said the income tax element (which has been delayed to 2024) has a threshold of £10,000 of self-employed income. Those with simple tax affairs are also likely to have free software available, she said. The software industry have provided pledges that they will provide free at the point of service software for those with the most simple needs, she added.

Mackinlay said he still hadn’t heard why something was needed every quarter. Harra said HMRC people want people to keep their records up to date, not just once a year. “Quarterly reporting will give us evidence that the records are being kept fairly contemporaneously as well as giving us some information that will enable us to play back to taxpayers how their tax liabvility is growing up over the course of the year to assist them, because one of the pieces of feedback we get from self-employed people in particular is that they are often caught by surprise by their tax bill because they haven’t had a good view during the year of how that is going.”

Mackinlay said the latest answer from the Chancellor is because of covid - we would have had a much better idea of what support is needed if we had more regular reporting. Harra said that getting information only once a year and in arrears, as HMRC get from the self-employed, does limit the help that can be provided.

Mackinlay said he still remained unconvinced that this would help the small taxpayer – retired with one rental property. He was yet to hear how being modern, being digital would help them, as it seemed they are being made a servant of HMRC rather than HMRC being a servant of them.

Mackinlay asked whether people working from home had been able to access all areas of HMRC that they need to access. Angela Macdonald said there were about 5,000 people where it was not possible to do their jobs from home and they were in office all through. Everyone else was sent home. Everything is scanned and digital.

Was there something wrong with the digital interface, asked Mackinlay. No, said MacDonald. The issue was work prioritisation, not that people couldn’t access things.

Peter Grant probed the issue of free software further. Joanna Rowland said it was very much in the interests of software providers to provide good quality software, but the pilots would obtain user feedback.

Richard Holden MP (Conservative) asked about the changing numbers on how much MTD would bring in. Jim Harra said key policy decisions had changed the nature of the benefits, including going first with VAT rather than income tax. OBR had validated and certified the forecasts. Rowland said MTD was about changing habits – the return on investment increases over time.

Fraud and error in covid support schemes

Meg Hillier observed that HMRC’s estimate of error and fraud in the covid support schemes is £6 billion but current ambition is to receive just £1 billion over two years. She suggested that did not seem very ambitious.

We have already recovered c£500 million (from furlough) said Harra. A further £350 million has come in from self-correcting. We expect the task force will bring in a further £1 billion. He defended HMRC’s planning assumptions on furlough fraud.

On the self-employed scheme he said eligibility rules were tightened up in the final two phases of the scheme and HMRC needed to look at the impact that had had on people’s behaviour.

Hillier asked about lessons learned. Harra said the more data you have the less opportunity for people to make mistakes or defraud you. The reality of some of these schemes is you are reliant on self-assessment. Hillier asked about the people who got nothing under the schemes. Harra said an extra 500,000 had been brought in by changing base year for the last two phases.

Hillier pressed further on HMRC’s assumptions over levels of fraud and error in the covid schemes, questioning whether HMRC were showing sufficient urgency in this area.

Craig Mackinlay observed that the furlough scheme was, according to HMRC’s accounts, by far the biggest potential source of fraud. Was it a weakness of the system that the individual employee was not part of the claim process? Harra said they had recognised the risk and had been more transparent, enabling any member of the public to see which employers claimed under the scheme. Employees can see on their online accounts (if they have them) that they were the subject of a furlough claim.

Peter Grant asked what progress HMRC had made going through reports made to their furlough fraud hotline. Harra said there had been about 35,000 calls to the hotline. Every one of them had been triaged and taken into account in deciding whether to open an investigation. Human intelligence is valuable but HMRC are limited in the extent to which they can go back to people who have made reports – beyond a certain point they become a ‘covert human intelligence source’ around whom thee are ‘all kinds of rules’. There is also an issue of confidentiality around investigations. He acknowledged that there is a demand for feedback from people who make reports but HMRC do not normally collaborate with an informant to the extent of involving them in an investigation.

Mackinlay wondered if HMRC had considered randomised letters to employees for whom a furlough claim had been made, asking them to confirm that had been the case. Harra said it was not HMRC’s plan to do so in a randomised way, though he was not aware of anything preventing them from doing so if they had wished to. HMRC is planning to do a random inquiry programme of furlough claims to get a sense of the level of error.

The committee then broke for two votes in the chamber on the Finance Bill.

On the self-employed scheme (SEISS) Mackinlay wondered if the 2021-22 tax returns would be relied on for inquiries or would work be done in year? Jo Rowland said it was both, but of course tax returns for both 2021-22 and the year before would be a huge source of information for HMRC. She noted that 2.6 million had claimed the first grant but only 1.2 million the fifth.

Mackinlay wondered whether HMRC were looking closely at any particular sectors in terms of investigating SEISS claims. HMRC were reluctant to generalise.

Mackinlay and Grant each posed questions on potential abuse of the Eat Out to Help Out scheme. Grant recalled that a ministerial direction had been requested for the scheme by Harra. Harra explained that at the time the scheme was being designed there was very limited data to identify the value for money of the scheme. It was nothing to do with error or fraud.

Customer service levels

Craig Mackinlay kicked off this section of the hearing. “Looking at figure 7 in the NAO report, on every one of them it is worse than even anticipated,” he observed. What went wrong?

Angela MacDonald invited the committee to consider the last 18 months in three parts. In the first half of 2020 HMRC diverted about 5,000 people, focusing them on (a) being trained and (b) delivering covid support. During that period, post intake dropped, HMRC stopped doing debt collection, so staff in these areas were able to be diverted. The post did not have backlogs at that point. HMRC were ‘pretty much on top of it’. While the phone situation was more variable that was because HMRC had focused on making sure that people calling about covid were getting through in less than a minute.

Then in the second half of 2020 HMRC were still doing covid schemes. They also needed to divert about 3,000 people towards Brexit. They had about 60 IT systems that were being changed, so another group were diverted to that. HMRC “really focused during that second half on making sure we stayed strong on the fundamentals of the tax system” such as the self-assessment peak and the annual tax credit peak, said MacDonald. A number of other parts of activity had to be put to one side and a backlog built up.

Then in the first half of 2021 HMRC restarted their debt activity (in May) and the debt position reduced dramatically. They also started compliance activity again. As the economy opened up the pre-pandemic levels of post activity returned. “We are doing core taxes work back at pre-pandemic levels and managing covid activity we were doing and making sure our EU work was really on it,” explained MacDonald. Backlogs had developed in a number of areas, she said, and she recognised the impact that had had on tax agents and taxpayers. HMRC are ‘extremely sorry about that’. HMRC are now ‘making really good progress’ with month on month improvements, she continued, “and we expect to have finished that outstanding work by the time we get to the end of this financial year”.

It hasn’t been about technology, it has been about the challenge of multiple competing things going on at the same time, said MacDonald. HMRC have prioritised what will keep the money flowing - flowing out in the case of covid schemes, and ‘keeping the border’ and making sure big set pieces of the tax year run effectively.

Mackinlay wondered about specialist tax departments, like trusts: they wouldn’t have been repurposed? That depends, said MacDonald, on the skills of the individuals involved. She listed a number of areas where she said HMRC is giving good service and delivering on targets.

Mackinlay – a chartered tax adviser – observed that it had been a disappointing experience dealing with HMRC over recent months as a tax agent, because ‘the client always thinks it’s our fault’.

Jim Harra acknowledged that HMRC had switched off the dedicated agent line for a period to ‘help us balance the calls’. He reiterated that there had been, over the course of this year, month on month, gradual improvements. The October data has not been published yet but for each of the lines it is better again. When the phone lines got to the point where more than 80% of calls were getting through first time to an adviser they stopped assigning additional resource to that and diverted it on to improving the post, where the biggest backlogs were. He identified P87 repayment claims and PPI repayment claims as areas where there were still backlogs which needed particular attention over the next 4-5 months.

Mackinlay asked if HMRC make an assessment of the type of calls they get and identify areas which are particularly problematic (eg website is inadequate) and decide that if they were to fix that it would get rid of a lot of calls. Harra said the operational excellence team focus on that – each month the HMRC executive committee looks at key pieces of customer insight – what is driving demand, what is generating friction, and what are HMRC doing to fix that?

Sarah Olney MP (Lib Dem) asked whether extra, contingency staff could have been brought in earlier. Angela MacDonald said bringing in brand new people doesn’t really help because training time is long. You also reach a saturation point where the volume of new people is such that the training of those people becomes a distraction to the people who are trying to do the work. A balance needs to be struck.

Olney asked what HMRC are doing to ensure accessibility to services for all taxpayers. We have a variety of extra help available, said MacDonald, including (pre-covid) going to people’s homes and also teams in the services and compliance groups who are specially trained. We also have language translation services, she explained.

James Wild MP (Conservative) asked how customer service levels are reflected in the remuneration of HMRC’s senior team. Jim Harra said that he is responsible, along with Angela MacDonald, for the performance management of everyone in the leadership team. Each person has to hit their targets in order to get their appraisal marking and to get a bonus. However there are some objective reasons for the poor performance standards in 2020 and late 2021 which were a result of collectively taken decisions.

Wild pointed to figures indicating call answering numbers were heading in the wrong direction even before the pandemic. Harra said that HMRC have a set of finances that they have to deliver to and efficiencies that they have to deliver: “we are not resourced to give a brilliant service, we are resourced to give a decent service, and that is what we are constantly trying to manage”. Where we are today is we have got some things back on an even keel and some things that still need to recover, he added.

Fraudulent claims – refund companies and R&D

Wild picked up on a report in The Times about ‘rogue’ refund companies, and taxpayers being sent demands for repayments while the company that has taken them has disappeared.

Harra replied that we do need to look at whether we have the balance of checking right on this area. Self-assessment applies in this area, with risk assessment taking place after. People select agents, most agents do a good job for them and this is mostly an unregulated market. There is no doubt there are agents who give a poor performance or who try to scam the taxpayer. “I wouldn’t want to suggest that is a lot of people, but it is an area of concern” he added. His advice to taxpayers was to choose their agent carefully, and not to give anyone else their credentials.

Referring to a claim about abusive claims for EIS, Wild asked: does HMRC not check the schemes these individuals are alleged to have backed actually exist? Harra said some security checks are carried out but if that is what someone claims on a self-assessment form then initially that is what will be processed. Wild said his view is HMRC should be checking whether a scheme exist before they pay out funds.

There is a qualification on HMRC’s accounts due to fraud and error relating to R&D costs. Peter Grant asked how much of increased costs in this area is down to abuse of the system and how much to genuine business expenditure? Harra replied that HMRC have made their estimate, which is in the accounts. It is a difficult thing to monitor because the policy has, over the years, become increasingly generous, but they have consistently exceeded forecasts. In the Budget and in the previous day’s announcements the government is taking steps to make R&D both better targeted and better protected from abuse, he told the MPs.

Grant asked about the nature of fraud in this area. Harra said one thing being seen was a new set of advisers moving into the market and saying to businesses: “You’ve already spent a lot of money, we think we can recharacterise some of that as R&D and get you some tax relief.” HMRC have found that often the business person doesn’t know much about the claim or what the adviser did to compile it. We are looking at making an identifiable, named person in the business accountable for the claims so they focus more on the service they are getting from those advisers, as well as pre-notifying when they make a claim and notifying HMRC of the identity of the advisers who help them make a claim.

Meg Hiller returned to the issue of recovery of fraudulent and erroneous covid economic support claims, asking how much extra money HMRC would need to bring in all of the £6 billion estimated. Harra responded that if he was given a free hand on what he would like to spend more money on to raise more money he’s not sure that is the area which would provide the greatest payback. Hillier suggested he was just writing it off as too resource-intensive to collect. Harra replied HMRC would recover all it can and had just given a reasonable estimate of how much it thought it would bring recover. On error HMRC’s approach was that it was not going to actively try to find genuine mistakes or minor errors people had made. For example in the first phase of the furlough scheme you had to be completely furloughed. So if someone went to an office to deal with a fire alarm that breached the rules.

Hillier said the committee would produce a report on HMRC’s accounts after Christmas.

The session closed at 5.05pm, having begun at 2pm.