HMRC upbeat about customer service recovery in front of MPs

At a wide-ranging hearing, HMRC officials also told the committee that:

• Their best estimate of how much will be lost to error and fraud because of COVID financial schemes after enforcement measures is £2.5 billion
• The tax authority is not concerned about having only nine people in the MTD for income tax pilot at the moment
• Several government departments are having to pay HMRC extra money after discovering that they were affected by changes to IR35 rules in 2017
• A fall in prosecutions for tax fraud is the result of a deliberate decision by HMRC
• There are no plans to let people delay payment of inheritance tax until completion of the sale of a dead person’s home

The witnesses were Jim Harra, Chief Executive, First Permanent Secretary and Accounting Officer, HMRC; Angela MacDonald, Deputy Chief Executive and Second Permanent Secretary, HMRC; Penny Ciniewicz, Director General for Customer Compliance, HMRC.

Covid schemes and pandemic impact

Committee Chair Mel Stride, Conservative, understood that across furlough error and fraud is 8.7 per cent, SEISS error and fraud about 2.5 per cent and ‘Eat out to help’ out error and fraud about 8.5 per cent – leaving an overall expected loss from error and fraud across the three schemes at about £4.3 billion.

HMRC’s Jim Harra said ‘that is pretty close’. He added that HMRC have so far recovered £536 million across the three schemes, recovered a further £350 million from prompting employers to double check their furlough calculations, and expect to recover about £1 billion more during this financial year and the next one (so recovering close to £2 billion in total). Harra acknowledged overall losses would still be £2.5 billion but HMRC are not giving up on that money. He said HMRC had largely been able to prevent criminals accessing the schemes, which means HMRC are mostly chasing overclaims by real employers and self-employed people, which are ‘are fairly small amounts’ in each case. The likely £2.5 billion loss is partly down to HMRC not having time to build in controls because of time restraints and reliance on an element of ‘self-assessment’ of entitlement, particularly by employers.

On lessons learned, Harra said the tax authority did the best job it could but HMRC now know that where they have good referential data and can make the assessment of entitlement, they get a lower level of error and fraud. He said that, with more time, HMRC could have collected more third-party data to verify claims against but he explained that HMRC risk assessed 22 million claims within a 72-hour window pre-payment.

On SEISS, HMRC found that some taxpayers’ identities had effectively been stolen and claims made on their behalf, because people were duped into revealing their credentials through a phishing site, for example.

Stride asked what the pandemic did to the tax gap. Harra said that following the bounce-back from COVID-19, he would not expect to see any fundamental change. But he pointed out that HMRC are running a much higher level of debt because of the pandemic, mainly as a result of policy choices to allow people to defer VAT and self-assessment payments. Going into the pandemic, tax debt was about £15-16 billion, it peaked at about £68 billion in August 2020, but by the end of September 2021, it was down to £42 billion, with £11 billion of that in a payment scheme. The element of the tax gap that is made up of non-payment is likely to be higher than it previously was, but less than the OBR predicted, Harra added.

Harra said of the original (pre-enforcement) £5.3 billion lost to fraud and error in the furlough scheme it was estimated that £1.4 billion was error and the rest fraud. The amount of error in SEISS was thought to be negligible.

In other comments, Penny Ciniewicz said HMRC has additional Spending Review 2020 money to hire around 4,200 new staff into compliance but it takes around 18 months to train a compliance officer.

Customer service standards

Dame Angela Eagle, Labour, (photographed below thanks to Parliament UK) was told by Angela MacDonald that HMRC are ahead of their target that by the start of April 2022, they will be able to deliver pre-pandemic levels of customer service. An on-target position would see them with a head of work of about two million items (HMRC get about 1.8 million to two million pieces of post every month).

Jim Harra agreed to look into Eagle’s suggestion that it might be a good idea to have a measurement of backlog so MPs can make better sense of the performance stats. Harra went on to say HMRC have got their phone performance up to a level that is giving a ‘decent service’ and compliance is back on an ‘even keel’ – but it will take a couple of years to deal with the currently high debt balance. He repeated the view he gave to Public Accounts Committee that the level of customer service performance that HMRC have reached gives taxpayers a ‘decent service’, but HMRC does not have the resources to deliver a ‘brilliant’ performance of 100 per cent of calls put through to an adviser being picked up by an adviser. HMRC’s post-clearance target is to reply to 80 per cent of post within 15 working days, which seems a long time, but even with the extra Spending Review cash, with two million pieces of post coming in every month, ‘that is realistically what we can achieve’ to ‘maintain a decent level of service’ in the next three years.

Eagle asked particularly about delays with VAT registrations. Harra said VAT registrations are up ten-fold compared to normal times mainly because of the new VAT rules for online sales which have prompted huge numbers of overseas sellers to register for VAT. HMRC’s MacDonald remarked that, at the worst, you were waiting 12 to 16 weeks for a VAT registration. We are now back within the target, which is within 30 days. Harra remarked that investment in digital means the volume of phone calls that HMRC get year on year is going down.

Tax debt management

SNP Shadow Chancellor Alison Thewliss asked about HMRC’s aim to get debt down in a couple of years. Jim Harra said the tax debt will be somewhere between £33 billion and £36 billion (when it is normally between £15 billion and £19 billion). The two-year recovery period is because there was a pause on insolvency action, for example, and the uncertainty over an economic recovery. He added that HMRC did not do the writing-off of debts last year that it would normally do, because there were very few insolvencies. Harra said that, in the last year, both for self-assessment and VAT, HMRC have been successful at opening up digital services for financially stressed people to set up payment arrangements.

Harra told the committee about the segmentation of debtors that HMRC had carried out. They had looked at doing it by sector but found this did not deliver good results. The focus was on data on ‘things like the turnover from their VAT returns compared with pre-pandemic levels or the extent to which they had or had not furloughed their staff according to their furlough claims’.

Harra told Thewliss that HMRC are as efficient as the debt collection agencies and achieve the same turnaround. He explained that if a debtor does not engage with them, HMRC parcel up debts and pass them to a debt collection agency which must follow HMRC policies and processes. The debtor will get the same service in terms of Time to Pay arrangements and such like, said Harra. He added: “All of the activity around debt collection is desk-based. They do telephone calls, SMS and post. They do not do any visits to premises and they do not take any enforcement action on our behalf.”

Public Interest Business Protection Tax

Alison Thewliss asked Jim Harra about the operational impact on HMRC of this new and unexpected tax. Harra hopes it will have no operational impact because it will deter behaviour by utility firms and lead to zero collection of tax. He added: “It is there in the Finance Bill for me to enforce in the event that any utility firm undertakes the activity it is intended to deter.”

Making Tax Digital (MTD)

Julie Marson, Conservative, asked why HMRC have delayed MTD for income tax by a year. Jim Harra told her that HMRC suspected that taxpayers, tax agents and software houses would not be able to devote the time needed to getting ready for MTD because of the pandemic.

Harra confirmed that there are just nine people in the pilot, which he claimed mimics the approach HMRC took with MTD for VAT with ‘a handheld approach with a very small number of people, which will not mimic the real world when millions of people are using it’. HMRC will invite more people to come in to the pilot and start doing it at a larger scale. “Our way of doing that will be via the software providers. We are unlikely to go out directly to the taxpayers and ask them to come in. We are likely to invite software providers to bring their clients into the pilot so they can test their products and test their own service models as well as ours,” he said. With MTD for ITSA, HMRC said the pilot is starting and they will use that extra time to make the most of that pilot period.

Harra claimed taking time on MTD for VAT paid dividends. As well as getting the vast majority of the mandated businesses in, about a third of the non-mandated businesses voluntarily joined that. He went on to say it has gone ‘pretty smoothly’ from the point of view of administering the VAT system. It has not caused any disruption, he said. HMRC ‘have been affected’ by quite a lot of engagement with stakeholders in the early days about getting acceptance of this programme – ‘we are in a much better position now’- and then also by the pandemic.

Harra told the MPs: “As well as extending beyond VAT and income tax into other taxes, we want to increasingly look at how we can enrich the nudges, prompts and playbacks to businesses that are provided by MTD and the proprietary software that it uses, which will give us a way of managing the tax gap that is different to deploying thousands and thousands of tax inspectors to investigate it.”

Marson remarked that one of the things that MTD is supposed to do is to reduce the tax gap overall, but the figures that MPs have seen show that the tax gap for self-assessment is widening. Angela MacDonald countered that the tax population and the tax take are getting larger, so therefore as a percentage of the liability the self-assessment tax gap is going down, not up. Harra said that ‘several million’ self-assessment filers who will move to MTD for ITSA will already be using digital products to keep their records and will be filing VAT filings that way.

Self-employed

It is mainly payroll employment that is above its pre-pandemic peak, which leads Conservative Harriett Baldwin to wonder if that is because people are choosing now to go on payroll, as a reaction to IR35. Harra said that measure is one of the reasons why HMRC are seeing a reduction in personal service companies (PSCs). Those workers either go on to the payroll of the businesses that engage them, or go on to the payroll of an umbrella company, which the engager then gets the temporary worker from. “It is a logical choice that engagers and workers are making,” he said.

Harra told Baldwin that he is not aware of that generating distress among people in the case of the off-payroll working reforms, although he said HMRC understand the ‘life-changing bills’ relating to the separate issue of the Loan Charge. On the Loan Charge, Harra said it was not for him to say if we need another report following on from the Sir Amyas Morse.

Penny Ciniewicz said HMRC are aware of a number of cases in which people who have been involved in tax avoidance have taken their own lives, ‘very sadly’ when faced with Loan Charge. In those circumstances, HMRC report that to the Independent Office for Police Conduct.

Harra confirmed that several government departments are now having to pay HMRC extra money because of discovering that they were affected by the updated IR35 rules when rolled out to the public sector in 2017.

Penny Ciniewicz said HMRC do not ‘approve’ umbrella companies. HMRC put a lot of information out directly on to Gov.UK and they have had a big communications campaign, which involved social media. And HMRC have written to 33,000 people in the last year and three quarters to warn that they may be involved in disguised remuneration via an ‘umbrella’ company.

Tax fraud

Conservative Kevin Hollinrake is concerned that there are so few prosecutions for tax fraud, and a reducing number of them. HMRC’s Ciniewicz said that while the criminal cases that HMRC launch are reducing, HMRC are increasing the number of investigations of the wealthiest and most sophisticated tax offenders. That has risen from around 50 in 2016-17 to around 430 at in March 2021. Hollinrake challenged HMRC that the number of cases in reducing: ‘At the first hearing at magistrates courts in 2016, there were 791. That has gradually reduced to 476. That is pre‑pandemic.’

Ciniewicz explained that most fraud cases pursued by HMRC are civil not criminal. “Last year, my fraud investigation service tackled 8,200 civil cases, alongside launching 212 new criminal cases. The criminal cases that we launch are reducing. They are complex. They are going to be tackling the most severe harms. We have a range of other powers that we use to tackle non-compliance, including things like taking proceeds of crime action, asset freezing orders. There is a whole range of powers that we deploy that are not just about criminal prosecution to bring people to book.”

Hollinrake said the number of code of practice 9 (COP9) cases was also falling. He worried about the message HMRC was sending: “Jesse Norman, when he was Financial Secretary to the Treasury, told an APPG seminar that HMRC’s job is revenue collection, not to pursue long and expensive court action to collect money. Does that not send the wrong message to people? It is like saying to a burglar, “You have stolen stuff out of that house, but give us it all back, maybe a little bit extra, and we will let you carry on”? Is that not what we are saying to people?

Ciniewicz said HMRC’s powers were far-reaching and, if caught, people will ‘give us a lot back’, typically double the tax due.  HMRC brought in more than half of the total UK money from the Proceeds of Crime powers last year, she told the MPs. Harra chipped in to say the reduction in prosecutions is the result of a deliberate decision by HMRC that they would not do ‘volume prosecutions’ of low-level fraud and concentrate instead on tackling the most serious fraud.

Hollinrake asked if a tax adviser or accountant made a settlement with HMRC under code of practice 9, would they be allowed to continue practicing? Ciniewicz said ‘I would sincerely hope not. It would depend on their professional body, not on us’. Do you instruct the professional bodies to strike them off or something? he asked. Harra replied: “If we identify misconduct by a member of a professional body, we will share that information with the professional body and expect them then to follow their own misconduct proceedings against that person, which can result in them being struck off by the body. We then liaise with the bodies to make sure that the quality of the information we are giving them is right from their point of view and that, from our point of view, we can see effective action being taken.”

Hollinrake probed whether HMRC knew how many of those referred by them to professional bodies had actually been ‘struck off’. Harra said HMRC would have information on the number of referrals, but not necessarily beyond that. Hollinrake suggested the professional bodies could be approached for information. (NB. CIOT and ATT wrote to HMRC proactively after the hearing with the information they hold on this area.)

Separately, Harra said that, ‘since April 2016, more than 20 people have been convicted of offences relating to arrangements that have been promoted and marketed as tax avoidance. They have received over 100 years of custodial sentences. We have more inquiries under way. We use prosecution against promoters where there is criminality involved in their promotion of avoidance.”

Ciniewicz explained to the MPs that the promotion of tax avoidance is not, in itself, a criminal offence.

Northern Ireland border checks

Jim Harra told Labour’s Rushanara Ali that HMRC have enough resources to deal with abuse of customs arrangement in Northern Ireland. He explained that the Northern Ireland protocol is not a revenue-raising protocol but has a high risk of causing undue burden for businesses. For goods moving into Northern Ireland from the rest of the world, HMRC operated a temporary easement whereby they could use CHIEF (the old customs system) if they wished (even though it is being generally phased out). HMRC know some businesses cannot directly use CDS (the new system), because they do not have the software that supports it, but the Trader Support Service (TSS) can make the declaration on to the system for them if they wish. TSS has been extended to cover rest-of-the-world goods as well.

Asked by Ali about burdens on business, Harra said for international traders, declarations on CDS involve not just different software. They gather different data items and therefore you have to re-engineer some of your business processes that gather the data that feeds into the declaration, as well as changing your software. HMRC’s experience of the year since the transition period ended on 31 January last year is that the number of declarations that HMRC have received is significantly lower than forecast, which would then mean that the admin burden increase would be lower as well.

High-income child benefit charge (HICBC)

Labour’s Siobhain McDonagh asked why so many people do not understand what they need to when they exceed the income limits for child benefit. Penny Ciniewicz said HMRC are taking action such as amending forms to make the HICBC much more visible. HMRC have written between 70,000 and 90,000 letters to people to remind them of their obligations over the past few years. But she admits that HMRC cannot reach everyone, not least because they cannot know about household formation and changes to the household.

Ciniewicz said HMRC charge interest because it is tax that, ‘in truth, those individuals have had the benefit of while others have paid the tax that was owed’, but if someone’s failure to pay their HICBC was not culpable, there is no question of charging them a penalty. She told McDonagh that HMRC tends not to have amnesties but ‘I can understand their value if there are people who have had a long pattern of non-compliance and we need to get them to sort out their affairs’.

Harra summarised the challenge as that ‘we do not tax people on a household basis, but we are now looking at the circumstance of a partner of a taxpayer to determine that person’s liability’. He estimates that about 150,000 people have to complete a self-assessment return in order to return the HICBC to HMRC, which are people who otherwise HMRC would not ask to complete a return.

Harra said the government had concluded that they should legislate to put beyond doubt that discovery assessments do apply to HICBC and this was in the current Finance Bill.

Research and development tax credits

Why is there such a problem with research and development tax credits that it leads to HMRC’s accounts being qualified? asked Anthony Browne, Conservative. Jim Harra said this is because they can result in a payment out to the claimant rather than just a reduction on a tax bill.

The Government has announced measures to tackle boutique firms generating claims for taxpayers and really pushing at the boundaries of R&D, said Harra. Officers of companies are not taking the care that they should take when overseeing claims made by advisers. There are policy measures being looked at to target the relief more effectively at its policy objectives, he explained. HMRC are also working with professional bodies on this, added Penny Ciniewicz. Harra told the MPs that HMRC are also carrying out a random inquiry programme into R&D credits.

Browne asked whether changes could be made to the tax credit system to make it better targeted. Harra said we need to avoid it being a ‘dead weight cost’ such as an adviser goes into a company and says, ‘You know this expenditure you have had for the last four years? Well, actually, I could put in an R&D claim for that’. It is clear that relief has not ‘incentivised that behaviour’, he said.

Inheritance and probate

Anthony Browne mused about a ‘Catch-22’ that you cannot sell the house of a dead person without paying inheritance tax and you cannot pay inheritance tax without selling the house. Are there easier ways of doing it, for example so that the payment of inheritance tax happens at the moment of completion in the same way that payment of stamp duty does?

Jim Harra told Browne that HMRC allow people to postpone payments but are not looking at the ‘fundamental option’ of changing the timing of payment of IHT. Browne suggested that if IHT was paid at completion, ‘pay fees to the conveyancers, pay the estate agents, and also pay inheritance tax at the same time. Then you would stop this roundabout money-go-round, which causes a lot of people real confusion at a time of great vulnerability’.  Harra said he would bear in mind the suggestion.

The full session is here.

By Hamant Verma, CIOT Senior External Relations Officer