Live blog: HMRC leadership faces annual Public Accounts Committee grilling

This ‘live’ blog is contemporaneous and not checked against Hansard. We cannot guarantee that no errors have crept in and we advise on checking any passage against Hansard before repeating it.

The Committee is expected to question HMRC officials on the issues identified by the National Audit Office (NAO) in their report (link) as well as how HMRC is managing tax reliefs and revenue collection.

Appearing on behalf of HMRC are:

• Jim Harra: HMRC Chief Executive and First Permanent Secretary
• Angela MacDonald: Deputy Chief Executive and Second Permanent Secretary at HM Revenue and Customs
• Justin Holliday: Chief Finance Officer at HM Revenue and Customs
• Jane Whittaker: Director for Knowledge, Analysis and Intelligence at HM Revenue and Customs

The full membership list of the Public Accounts Committee can be found on the Parliament website here. Coverage on this blog is restricted to those who are questioning HMRC representatives.

You can watch proceedings on the parliamentlive.tv website by clicking here.

The evidence session

Spending review

Dame Meg Hillier (Chair, Labour) began proceedings by asking Jim Harra about the prospects for further budget cuts in HMRC as a result of the government's spending review. Harra said that HMRC is currently working to its existing budget. He added that HMRC is always looking to improve its efficiency, with digitalisation of the tax system a key component of this.

Asked what additional efficiencies could be found by the end of the current financial year, Harra said these were unlikely in the short term. But looking further ahead, he said the digitalisation agenda and move to a single online customer interface online would be front and centre of HMRCs efficiency plans.

Harra said that further cuts may require projects to be delayed but not cancelled. He said he believed in his department's objectives but acknowledged that they may take longer to achieve in the absence of funding. He also said that it would be a 'false economy' if HMRC's budget were to be cut back, given the authority raises far more than it costs to operate.

Landfill tax

Sir Geoffrey Clifton Brown (Conservative) focused on HMRC's enforcement of landfill tax. Harra acknowledged that the tax had been "difficult to enforce" with high levels of non-compliance. He said that HMRC had a range of civil and criminal powers available to it to enforce the tax and that it worked closely with the Environment Agency and other agencies in the devolved administrations to ensure compliance. The scope of the tax has been widened to include fly-tipping and, while this has increased the tax gap (as fly-tipping is harder to enforce), it has provided HMRC with greater scope to target those involved in illegal waste dumping.

Clifton-Brown then asked about HMRC's commitment to closing the waste tax gap. Harra said this remained the case for two reasons: to achieve environmental objectives by encouraging reuse and recycling, and to tackle criminal activity.

Fraud

Peter Grant (SNP) spoke about a business in his constituency that had been the victim of identity theft, where its company registration details were fraudulently used to register for VAT. Specifically, he asked about HMRC's ability to target fraud of this kind.

Harra said that two taxes (VAT and self-assessment) were a frequent target for organised crime given the high levels of refunding associated with their design. There have been "concerted" attacks on these taxes over the last two years. While it is an "arms race" to keep up with this activity, Harra expressed confidence in HMRC's ability to identify and target this kind of criminal and fraudulent activity at an early stage, while acknowledging its impact on legitimate businesses. The authority is "constantly alert" to this activity.

Asked by Grant to outline the specific steps taken to validate registrations, Harra said he would need to be "circumspect" in his descriptions to avoid disclosing its operational activity.

Investment zones

Olivia Blake (Labour) asked about the development of Investment Zones and their impact on HMRC income. Harra said that the detail behind the operation of these zones is ongoing and that HMRC is ready to act on the decisions taken by the Chancellor and the Treasury.

Hillier asked about the fraud risks associated with their development. Harra acknowledged that tax incentives provided opportunities for abuse but said that HMRC was able to design systems that could help to target abuse.

Inflation and the tax gap

Hillier then asked about the impact of inflation on HMRC. Harra said that inflation impacted HMRC in two ways: on the costs of running the department and in the amount of tax collected, as higher inflation led to higher tax liabilities. HMRC would be reviewing how inflation would impact on its activities, alongside its wider operation and collection activities.

In the context of the UK's current economic climate and the impact of the pandemic, Hillier then asked why the tax gap had not changed significantly. Harra said there was "less confidence" in the data underpinning the tax gap due to the distortions caused by the pandemic.

Jane Whittaker added that the overall percentage tax gap had remained "constant" at 5.1 per cent but said that beneath the headline figures, there were variances in the tax gaps of individual taxes. She then explained the methodologies used to establish the tax gap and the social and economic changes that were observed during the pandemic that had an impact on this.

Asked by Hillier about the uncertainties behind the robustness of the tax gap data and whether HMRC could in the future provide a wider range of figures when estimating the potential tax gap. Whittaker explained that the varied methodologies used to calculate each tax made it difficult to aggregate. While the current estimates provided were HMRC's "best view" of the total gap, Whittaker said the authority would continue to keep its methodologies and processes under review to ensure the robustness of its data.

Hillier asked: are you confident the tax gap has remained the same? Whittaker said it is based on the best available data.

Compliance Yield

On compliance yield, Hillier asked when it is getting back to where it was before? Harra said that in 2019 HMRC had a record compliance yield. He said this year HMRC are targeting £36 billion of compliance yield – ‘but it will be a stretch’. Harra said there is certainly enough compliance risk to chase. We are seeing different payment behaviours from taxpayers which means HMRC must adjust our compliance yield for what we can recover, which is a concern in relation to the tax gap. HMRC recruited 4,200 new people which meant HMRC had to take experienced people from the compliance team away from their desk to train the new compliance staff. It will be 2025 before HMRC expect to recover compliance yield because of this recruitment drive.

Hillier said PAC are champions of HMRC and want HMRC to get the funding they need.

Harra said it takes time to train new recruits which puts a strain on delivery in affected areas. Harra claims there is no issue with retention in the compliance area but HMRC does have an issue with retaining new people who join the customer service teams.

IR35

Hillier asks for estimate of reduction in tax if IR35 reforms had remain cancelled, Harra said £2 billion. Harra said that would have been an increase in non-compliance. Harra does not know what resources HMRC have deployed on IR35, saying a lot of work was done ‘up front’. He said there was no operational impact of the two week gap between Kwarteng announcing changes to IR35 and that announcement being scrapped.

Revenue generation

Harra said for every pound spent by HMRC on its customer compliance group, we recover £18 of additional revenue.

A key risk for HMRC going forward is non-payment by taxpayers, with Harra seeing evidence that as we return to pre-pandemic way of working, we are not seeing pre-pandemic payment and compliance by taxpayers (especially non-payment of PAYE). But debt balance is still higher than going into the pandemic because new debt post-pandemic is arising at a higher level than before, partly caused by cost of living crisis, he said. We have record levels of productivity in the HMRC department that deals with that, however strange that sounds, said Harra.

Debt

Harra told Peter Grant (SNP) that people were allowed to defer payments during the pandemic, such as VAT, but just several hundred million of VAT debt is outstanding. Harra said the amount of indebtedness is not expected to reduce in this financial year. 

Grant opined that some people are in debt with HMRC for the first time because of the pandemic and cost-of-living crisis. Harra said HMRC are 'segmenting' these 'customers' because you have serial offenders and new people with very small debts. 

Angela MacDonald said Time to Pay has been extended in duration of time allowed to pay money back but the majority of Time to Pay debtors pay their money back. Harra said much of Time to Pay has been automated to help taxpayers, which he says 'is safe to do'. 

Hillier asked if this means people using HMRC as a credit card? Harra said Time to Pay interest may be less than a credit card, that is true, but people must pay liabilities all the same. Harra said HMRC do refer people to agencies that can help vulnerable taxpayers with their financial state. In addition, where there is distress in particular sectors, HMRC will work with other government departments to help them.

Online accounts

Harra said that customers give more positive feedback about online services than analogue services.

Peter Grant asked about the Single Customer Account. Whittaker said HMRC have a variety of different transformation programmes. They want one experience for the customer – one front end into which all of those services go. Transformation of debt support is part of that.

Harra said yes, one of the key reasons for the single customer account is that at the moment HMRC have separate digital services that are not integrated. Underlying that it is relatively simple to build a digital front end, the real challenge is the detail that underlies it. There is a major programme of work called the unique customer record which is going on to ensure all the data is joined up and can be presented to a single customer.

Grant asked about the current interest rate for debt to HMRC. 2.5% above Bank of England base rate said Harra. This is statutory.

HMRC priorities and transformation

Meg Hillier asked about HMRC priorities. Will some digital programmes go slower?

Our transformation has four main thrusts said Angela MacDonald – resilience, remediation, security – core pieces which customer doesn’t see but without which we don’t function. Then there is UK transition – single trade window, freeports, etc. Then there are ministerial and legal commitments. Then there is transformation. All of these are choices we offer to ministers, she continued. Some bring in additional revenue. We lay out choices to ministers and invite them to make choices and prioritise. In response to questioning from Hillier she acknowledged that changes of governments can lead to reprioritisation. But HMRC have a long-term strategy of the transformation they want to see in the tax system. Speed of that can depend on ministerial choices. There is a connection between decisions made on transformation and what HMRC can deliver. 

Justin Holliday said decisions on efficiencies fall into two brackets - continuous improvement which is not investment heavy, and improvements which are dependent on investment. Our investment and development approach is incremental at the moment, he added.

Hillier asked when the cut off point is for making efficiencies in the next financial year. Harra said there is a difference between efficiencies and cuts. He can make cuts as fast as he is told to but that would involve a cut in performance. Hillier said efficiencies can't be implemented overnight. Harra said he would want to be looking at 24-25 rather than next year. It is not just HMRC that has to make changes but customers too - eg accounting software.

Error and fraud in covid support schemes

Responding to Louis French Jim Harra said HMRC had had adequate controls in relation to covid 19 support scheme error and fraud. Jane Whittaker said HMRC was more confident of estimates now as they have more data, including from random enquiry programme for furlough scheme. We recognise there is still uncertainty in estimates, she added. People carrying out work for their employer while being on furlough a major cause of fraud and hard to detect.

French asked if it was realistic to estimate amounts of abuse at this stage. Whittaker acknowledged this was difficult. We have put together all the available data, she said, including from ONS surveying. People struggled with recall in more recent surveys.

How much can HMRC recover? Harra said HMRC had been given £100 million for a temporary taskforce and had opened about 40,000 compliance investigations so far. We forecast £1.1 billion will have been recovered by the time the taskforce is wound down - about a quarter of the error and fraud.

Rate of return HMRC get on tax compliance work is higher than rate of return on covid scheme fraud and error, said Harra.

French asked what lessons HMRC had learned. Harra said HMRC had very effective upfront controls which prevented organised crime from abusing these schemes. Operational work downstream is detecting very little evidence that this did happen. Big lesson is the more up to date data we have the more we can assess what their needs are and are less dependent on them self-certifying. If we immediately had to do this he could not see how they would have access to all the data they would need to avoid self-certifying.

French asked how HMRC went about detecting fraud. We cross-reference against different data sources, said Harra, and you would not believe how blatant some people are. HMRC have received furlough claims on the basis a business has furloughed all its staff and made an 'eat out to help out' claim on the basis of record sales. Large amounts of furlough with a lack of decline in business performance would prompt HMRC investigation. But, Harra added, we have found more error than fraud.

French suggested councils were sending cheques out with minimal checks during the pandemic. He asked how HMRC would stop this happening in a future situation. Harra said there was a priority choice and we were always going to see some level of error and fraud.

Later in the session Peter Grant would raise issues involving businesses in his constituency who had been impacted by competitor businesses fraudulently benefitting from pandemic support schemes.

Harra recognised the frustration felt by businesses who may feel as though they were placed at a competitive disadvantage and said that it was HMRC’s objective to ensure that revenues were protected while maintaining a level playing field. He reminded Grant that HMRC had online and telephone hotlines for people to report fraud and that each case was evaluated and triaged for investigation. HMRC’s aim was to target fraud and not genuine mistakes.

R&D relief

Olivia Blake (Labour) asked whether HMRC had concerns with the estimates of fraud and error within the scheme.

Jim Harra said that the current estimate of 4.9 per cent represented an increase on previous estimates but that this was largely as a result of methodology improvements. He added that further improvements are to be made along with the introduction of a random inquiry programme.

Compared to the overall tax gap of 5.1%, he said the figures quoted were “not out of step”. The R&D relief scheme is a very important incentive for the government to achieve its aim of 2.4% of GDP being spent on R&D but acknowledged that it was also an attractive target for those seeking to abuse the system. The overall aim is to ensure that HMRC can police the scheme effectively while allowing those with legitimate claims to access and benefit from it.

Harra then explained that an organised criminal attack identified in April meant that payments had been stopped for 2 weeks while investigations were ongoing. The subsequent addition of further payment checks meant that a 28-day turnaround for claims had been increased to 40 days in order to protect revenues.

Further measures set to be introduced from next April will help to strengthen compliance activity. These will include businesses being required to make online claims, to provide advance notice of such claims, provide additional data in support their claims,  to identify a named person required to certify the application for relief and for the details of any advisers supporting their claim to be disclosed. This will introduce an element of personal accountability in the system.

On the estimates of fraud within the scheme, Blake asked for an explanation of the differences between ONS and Treasury estimates of the value of R&D investment (£25.9bn v £47.5 billion of activity where relief has been claimed respectively). She said that this appeared to suggest that the 4.9 per cent estimate of error and fraud had been underestimated?

Harra said that the disparity was a cause for concern but that there may be legitimate reasons for this. For example, he pointed out that the ONS research focused on UK activity while the relief could be extended to include costs incurred outside UK. He said that HMRC had recently worked with ONS to produce a joint paper that had closed this gap significantly. The ONS has revised its estimated upwards as a result.

Asked by Blake whether it was legitimate for R&D relief to be given where activity was carried out abroad, Harra said that some changes have been made to the relief to target that. He also acknowledged that for large business especially, they may have overseas operations where elements of activity are carried out but where the overall R&D benefit accrues to a UK business where intellectual property is generated.

Jane Whittaker added that she was aware of discrepancy in estimates between the ONS and Treasury and reemphasised that HMRC was actively working with ONS to share data and understanding.

Harra said HMRC was working to increase the certainty of the estimates it provides and that the organisation was getting better at doing this. He again stressed that the random inquiry programme would help to provide further certainty and may lead to further revisions.

Blake then asked specifically about the small business scheme, citing concerns raised by the Chartered Institute of Taxation that the introduction of a pre-notification window could exclude some businesses from obtaining R&D relief, particularly small or newer companies who may miss the 6 month window.

Harra said that he had no personal insight into that specific issue but noted that it was typical of the challenge involved with policing error and fraud while ensuring genuine claimants can access the scheme. He said the aim was not to exclude businesses from accessing the scheme but to improve levels of compliance. This was “sort of typical of the trade-offs” between ensuring security and supporting the government’s policy objectives.

Blake then asked about Corporation Tax R&D reliefs and the effectiveness of efforts to tackle fraud.

Harra said that HMRC had increasingly clarity around where risks lay and that these were predominantly within the small business scheme. While around 1 per cent of claims within the large business scheme had been associated with error and fraud, this figure rose to 7.3 per cent within the small business scheme. Harra said policing this volume of claims was challenging but that HMRC would continue to assess how its enforcement measures were working and whether further action would be required.

Blake raised a further concern from CIOT in relation to accessing these schemes, noting that upcoming changes may be confusing for some applicants. Asked whether this was a price worth paying, Harra said that the last thing HMRC wanted to do was to exclude genuine claimants from accessing support. He said HMRC would continue to keep the scheme under review and listen to taxpayer feedback.

Finally, Blake asked whether there was evidence that this relief was contributing to the government’s aim of improving productivity and growth, Harra said that research undertaken by HMRC could demonstrate that the scheme had helped generate more R&D investment. He said this was particularly noticeable within the large business scheme and more marginal in the small business one.

Meg Hiller – who noted that the effectiveness of tax reliefs was an area of interest to the committee – then raised a concern involving a constituent business unable to contact to HMRC for support. Harra said he would look at the specific concerns and spoke more generally about the impact on service levels that had resulted from April’s criminal attack. Hillier warned that backlogs had left many businesses within her constituency on the brink of bankruptcy.

Peter Grant asked about the ways HMRC caseworkers handled applications. He said that rules introduced in 2021 to ensure consistency in the way applications were handled implied inconsistency prior to this. Harra was unaware of the details behind the changes but stressed that HMRC has always had a dedicated resource to support R&D claims.

Customer service levels

Peter Grant asked by HMRC’s customer service levels had been in consistent decline since 2018.

Angela MacDonald described this period as “hardly usual times for HMRC”. Through that time, the authority had dealt with the impact of the pandemic at the same time as handling changes resulting from Britain’s departure from the European Union. Set alongside longer-term changes within HMRC (including falling staff numbers) this means that it was harder for HMRC to manage shocks to the system. She would later stress the importance of HMRC’s digitalisation agenda in improving the customer experience.

Grant then focused on poor service levels associated with HMRC’s telephone line. MacDonald said that the authority had been listening to and acting on customer feedback to change how it managed calls. She said that around 5.5 per cent of calls were not put through at times of high demand and wait times, but that because customers had indicated a preference for waiting longer (as opposed to being disconnected to retry at a later date), this figure had fallen from around 11-12 per cent. Giving customers the option to not be connected was, she said, standard industry practice among businesses with customer contact centres but ideally, the “nirvana” of having enough colleagues to answer the phone was preferrable.

Harra added that a challenge facing HMRC was the need to ensure that it could channel people towards its online services where many would-be telephone queries could be more effectively dealt with. HMRC’s own processes were stymieing these efforts and he acknowledged the need for improvement.

By CIOT External Relations team