MPs on the Public Accounts Committee question HMRC chiefs about the tax gap, Making Tax Digital, the role of tax agents, the loan charge and – of course – Brexit.
The House of Commons Public Accounts Committee regularly looks at the performance of HMRC, based on the National Audit Office’s annual report on HMRC’s systems and performance. The committee’s report, depending on what happens in Parliament, will be out by Christmas, said chair Meg Hiller during the session.
The evidence in this session was given by Jim Harra, Interim Chief Executive and Permanent Secretary, Justin Holliday, Chief Finance Officer, Angela MacDonald, Director General, Customer Services, and Penny Ciniewicz, Director General, Customer Compliance, all HMRC. The report below picks out a few of the key areas of interest for tax advisers from this two hour session, not necessarily in chronological order. The full transcript is available in both PDF and HTML.
Revenue collection – targeting the tax gap
Harra cautioned against putting a target on revenue collection because tax policy and the economy affect that; rather the key measure for HMRC is the tax gap, which he conceded was ‘bobbing along’ in the last few years (it was 5.6 per cent in 2017-18). He said Making Tax Digital will remove the opportunity for people to make errors in their VAT return.
Harra agreed with MP Nigel Mills that HMRC was ‘running to stand still’ on the tax gap. He said he would love to hit a five per cent target for the tax gap in three years’ time but that would set the Government ‘quite an investment challenge’. It is very difficult to get a benchmark with the rest of the world, he said, because the UK is the only country that produces a comprehensive measure, although the VAT Tax Gap in the UK is at the median for the EU. “You can also see how some countries have been putting measures in place that mean they are making very rapid and accelerating improvement through things such as e-invoicing, fiscal tills and withholding taxes,” he added. “Those are the kinds of areas that the UK would have to move into if it wanted to see that further shift in the tax gap.”
Asked by Mills about Brexit and the tax gap, Harra talked of the risk that HMRC will lose access to certain data and collaboration in how you manage non-compliance, but in terms of cross-border fiscal risks, he does not see immediately any big challenges arising.
Targeting the self-employed
Harra identified increasing self-employment as a problem for the tax gap, given that self-employed tax is ‘leakier’ than PAYE. Harra said the gig economy is a key challenge for HMRC in terms of coming up with a strategic response that ensures the right tax is paid and fits with how people want to work and lead their lives. There is a need for HMRC to put in place means of collecting tax from the self-employed that help them to get things right and avoid opportunities for mistakes.
Harra said HMRC’s traditional approach to the self-employed has been ‘pretty resource-intensive’. “Increasingly, we have to break out of that as the way we manage small business tax risk, and we have to get into ways where their accounting systems talk to us, which is what Making Tax Digital does. Or we have to find new ways for third parties who work with gig workers to give us information or even to withhold tax. I think, to make a big downward shift in the tax gap, given that countervailing pressure, that is the kind of thing that the UK would need to think about in future.”
Sir Geoffrey Clifton-Brown pointed out that HMRC’s annual report says it takes about four times the amount of resources to deal with self-employed taxpayers as it does PAYE taxpayers. Harra emphasised that, rather than asking more resources to do things in the traditional way, HMRC should look at ‘strategic ways’ of addressing the risks in a different way, which involves less resource being put into tax inspectors in HMRC but also means that you have got a more friction-free way for the gig workers and the self-employed to get their tax right.
Is there any way of simplifying the self-assessment process, asked Clifton-Brown. Angela MacDonald replied that HMRC are pre-populating some of the data that they know about into the self-assessment process. They have also started to take some of the information out—for instance, bank and building society information, which HMRC are now getting directly from the financial providers. MacDonald went on to say HMRC are exploring just how much of the seven per cent of people who file manually could be pushed into doing it online if HMRC changed processes, communicated more or were a little more assertive, as well as exploring the barriers that mean that people do not want to do that, while being very mindful that they must have a service that deals with 100 per cent of customers. The increase in people into self-assessment is partly down to self-employment, but also income from properties and the high-income child benefit charge. HMRC are not seeing an increase in tax agent usage matching the increase in self-assessment, she said.
Harra stated that HMRC does not have a policy to reduce the usage of tax agents but wants HMRC and the tax authority’s ’customers’ to get more value from agents in the tax system. Harra said: “It is a bit of a shame that a lot of self-employed people use a tax agent, yet such a high proportion of self-employed filings are not correct. One of our aims is to drive agents up the value chain and to help us and their clients to get things right more often than they currently do.”
Mills asked Harra if HMRC are inclined to achieve that by encouraging agents to get better, or are tempted just to say that those individuals are such ‘useless’ agents that you will not let them file on behalf of clients anymore. Harra said: “Our experience is that most agents involved in the tax system do more to help us than to hinder us. Nevertheless, it is our experience that a high proportion of the returns filed by agents, if we investigate them, turn out not to be correct. We want to take the grunt work, if you like, out of an agent preparing a file, because we want that to happen through the accounting software, for example, as routinely as possible, therefore enabling agents to offer a different, more value-added service to their customers.”
Mills enquired if HMRC are inclined towards an agent quality mark or some kind of quality threshold that they have to hit. Harra was non-committal and said: “Obviously, we have a completely unregulated tax agent market in the UK, in the sense that a large number of agents are members of professional bodies that regulate their professional standards and conduct, but others are not a member of any body at all. At the worst end, we have agents in, for example, the avoidance space, such as promoters of tax avoidance schemes, who we are increasingly regulating and are trying to regulate out of business, frankly. It is quite a mixed picture, but at the moment it is a largely unregulated market, and we rely on the membership bodies to maintain standards. There is a need for better transparency in the market that enables taxpayers to choose their agent. We have done a lot of research in the past about how people pick a tax agent. The main thing is: ‘Well, my mate recommended this one’. There is not a lot of transparency in that market that enables you to choose one based on their professional standards.”
If HMRC find misconduct or poor professional standards by an agent who is a member of a professional body, they report that agent to the body and invite them to take action, either to improve that agent’s standards or a misconduct action, said Harra. Ultimately, HMRC reserve the right to refuse to deal with an agent if HMRC believe their standards are below an acceptable level, he said. Penny Ciniewicz said that while she did not want to say too much about how HMRC does risk profiling, they do want to understand the behaviour of agents as well as the behaviour of taxpayers. “We also investigate tax agents, depending on how they are dealing with the tax affairs of their clients,” she added. “Particularly in cases of serious non-compliance, that will be something that we would pursue.”
Harra told the committee that, earlier this month, HMRC published a list of 593 non-structural tax reliefs (these reliefs are not created simply to create the structural basis of the tax, but are reliefs that you could decide to have or not have in the tax). Unlike public expenditure, HMRC cannot control the take-up of reliefs, in that if people are entitled to them, they are entitled to them whatever the size. If take-up of reliefs exceeds expectations, that might be good, he said, because it might point to, for example, investment in the economy. Behavioural changes are part of this, it is not just about tax, he added. The prime responsibility, in terms of whether the policy is being achieved in value-for-money ways, lies with the Treasury, he said.
Customer service performance
Mills said he was concerned that the speed of answering calls and [related] things have ‘gone the wrong way’. MacDonald blamed some recruitment challenges as HMRC came up to the fourth quarter this year (January to March 2019), and was also ‘heavily challenged by the resource and planning that is occurring in order to support and stand up three lots of day one no deal [Brexit]’. She spoke about a number of inefficiencies and some ineffectiveness in recruitment processes, which HMRC are fixing.
MacDonald also discussed HMRC’s new ‘scorecard’ of performance measures, which was published for the first time in August. “We have put out quite a lot of additional data, starting to look at not just timeliness, which is what we have usually measured, but the effective outcome—so, trying to infer, “Did you ring us back? If you rang us today, did you ring us back within seven days? If you dropped out of the ITA,” which is the automated telephony system, “did you ring us back the same day?” We are using that as a prop to try to get a proxy for, “Did you get the thing you wanted from us?”
Harra backed his colleague up: “As Angela says, whether you answer the call in five minutes or five minutes fifteen seconds is relevant, but it is less relevant if this is one of five phones calls I have had to make in the past three days to get this matter dealt with.” Harra then added that while easures of success traditionally focus on phones and post, “volume of phone and post contact is going down all the time and digital services are going up. We are performing well in terms of [digital] satisfaction levels.”
Making Tax Digital
Harra said there are 200,000-300,000 businessed who have voluntarily entered Making Tax Digital for VAT, in addition to those mandated to do so. HMRC’s original strategy for this was to start with income tax, but actually they started with VAT because that was what Government and Parliament had asked them to do. “The Government will need to decide what it wants to do next”, he said. Even though HMRC have now doubled the overall number of people working on this service, it still only amounts to just north of 300 people. The benefits of MTD are in additional tax revenues, not really in efficiencies in HMRC, he told committee chair Meg Hillier. Over 1.7 million VAT returns have been made through it. More than 90 per cent of the people who were mandated to use it in the first stagger—that August return—are now signed up for the service. “That is a pretty smooth implementation so far,” he declared.
Harra noted that some countries – those making the biggest accelerated difference in changing their tax gap – are being “considerably more ambitious and going considerably faster than the UK in transforming their tax systems, particularly in using digital solutions but also in other innovative solutions. One of our challenges will be to consider how we get acceptance in Government and in Parliament, amongst our stakeholders, to be more ambitious in transforming the tax system if we wanted to target bringing down the tax gap, for example,” he told the MPs
Corporation tax misreporting
The committee challenged HMRC over its misreporting of corporation tax revenues in 2018-19, over-reporting them by £4 billion due to an error. Harra emphasised that it was “an error in statistics; it does not affect the tax that we have collected or the tax that is due. We had two things: a data misfeed, which meant that some data did not feed through to the statistics that should have, and a miscommunication internally between our finance people and our statistics people about the adjustments that needed to be made to certain figures.” He added that HMRC “have asked Ed Humpherson from the Office for Statistics Regulation to do an independent review of the quality assurance process to make sure that we learn the lessons from this, because we pride ourselves on the statistics that we issue and we are embarrassed by this error.”
Mills noted that a £4 billion error in a year, out of £56 billion, is 14%, roughly. “If many of your taxpayers made a 14% error on the many tax deductions they were entitled to claim, I suspect you would not be highly amused.” Harra said he was not prejudging Humpherson’s review, “but I suspect one of the things it will come out with is that we have got rather complex systems and linkages between the accounting side of our systems and the statistics side that require a lot of manual intervention and adjustment, which is where error creeps in. I will not be surprised, for example, if that review recommends that I need to find and spend some money on strengthening those systems.”
Tax credits overpayments
The committee also questioned HMRC about fraud and error, particularly in relation to tax credits. Hillier noted that HMRC had confirmed that this area had been deprioritised. “Have you done an assessment of the impact of that deprioritisation on the individuals concerned and the service that they get, and of the hardship, frankly, when there is an overpayment or similar? We have all had constituents come to see us with major overpayments. It is very scary when you are told you owe lots of money to HMRC because of some glitch in the system.” MacDonald acknowledged that this can be a ‘real issue’.
Harra explained the vast bulk of outstanding tax credit debt simply arises through the routine processing of tax credits. It is not from error and fraud investigations, either by Concentrix or by HMRC, which form only a very small proportion of it, he said. Obviously once HMRC closed the Concentrix contract, HMRC did rework cases and made sure that they were satisfied with the outcomes. He said: “We have acknowledged that this is an area that does not have a long-term future for us. If we had more investment—in particular, if we had been able to keep the funding for the Concentrix contract—we could have kept the error and fraud figure lower than it currently is, but those were the prioritisation choices.”
The committee asked what factors were preventing HMRC from improving the accuracy of PAYE. Harra said HMRC do quality checks at the start of the year about the extent to which the coding notices that they issue match the information they hold. They are 99 per cent accurate. At the end of the year, HMRC do the reconciliation and find that, in about 85 per cent of cases, people have had the right amount deducted during the year. “One of the problems we have is that employers provide information but, when we go along and audit them, we find that there should have been a different figure on their return than the one they made,” he said. This is more likely to be bonus payments and benefits in kind than salary, he explained. Harra said he was not aware that it is extra powers that HMRC needs on PAYE.
The Government has launched an independent review of the loan charge, but Harra reminded the committee that it remains in force. HMRC have settled about 8,000 cases with disguised remuneration users for about £2 billion (up to the end of August). The number of settlements is lower than HMRC would like, he told Clifton-Brown. About 28,000 people registered an interest in the settlement, and about 19,000 provided HMRC with all the information needed by 5 April to settle. HMRC expect that some of the 19,000 people will now wait to see the outcome of the review before they settle.
Asked by Clifton-Brown to treat affected people sympathetically, Harra replied that HMRC have already announced automatic entitlement to time to pay for people settling with them. In addition, anyone else can negotiate time to pay with HMRC. Harra added: “We have committed that no one will have to sell their home in order to pay this bill, and that we do not want to bankrupt people. In particular, if people are able to meet their ongoing tax liabilities and are not deliberately trying to evade paying a debt, we will not bankrupt anyone.” The review is due to report to the Government next month. Asked by Hillier if there could be a change of policy on the loan charge, Harra coolly said ‘We will have to see the outcome of the review and the Government response’.
Brexit – HMRC preparedness
About half of the session dealt with Brexit. Harra claimed ‘internally we are ready—our systems are ready, our guidance is in place, and our staff are in place and trained’ for a No-Deal Brexit. He pointed to HMRC having auto-registered 88,000 businesses with an EORI number and auto-registered 95,000 VAT-registered businesses for the transitional simplified procedure. He said about 20 per cent of the 3,000 high-value businesses that export to the EU but do not export or import to the rest of the world that HMRC has one-to-one contact with, are not as ready.
Gareth Snell asked Harra how soon before December 2020 HMRC would need to know the exact terms of any future trade arrangement in order to have all the infrastructure that they have got ready for a no-deal Brexit next week pointing in the correct direction for December 2020. Harra said the tariffs are the most important thing for HMRC to know: “As far as loading the tariffs into our systems and being able to administer them goes, you are talking about a week or so, really. It could be that late. We are content that we can make the systems changes necessary to operate the withdrawal agreement by 1 January 2021”
On customs declarations, the report states HMRC have 4,000 agents who could help with those declarations, but HMRC says that it is not sufficient. Harra said an external organisation has estimated that HMRC may need anywhere between 10,000 and 30,000 agents. He said for traders who currently trade with the rest of the world, that the vast majority of them prefer to use a customs agent, rather than try to do this themselves. On meeting the October 31 deadline, he said HMRC capacity will not be there and this is why mitigating actions such as the transitional simplified procedure, which enables an importer to wait a further six months before they have to comply with the obligation, are necessary. HMRC will prioritise flow over revenue protection, Harra said. The key thing is that they do not have to complete their compliance at the point when they bring the goods in. We can therefore protect the flow and they can sort out the paperwork and any tariff payable at a later date, he explained.
On EORI numbers, if HMRC detect someone bringing goods into the country who should have registered for an EORI and for transitional simplified procedures and has not done so, the action HMRC take will be to give them education and advice about how they can become compliant.
Hillier said she was concerned that the Border Delivery Group has lost Sir Jon Thompson, Karen Wheeler and her replacement.
Harra said CDS is now able to handle all declaration types for imports and exports and HMRC plan to migrate all traders on to CDS by September 2020. HMRC expect, for a no-deal Brexit, to require about 7,100 additional staff over and have about 6,100 of them in place.
Brexit – the Irish border
On the Withdrawal Agreement’s plan for Northern Ireland – Republic of Ireland trade, Harra said there will be no customs controls or customs tariffs on goods moving north-south and south-north across the land border, but some documentation will be needed both for regulatory purposes and for fiscal purposes on goods moving east-west (Great Britain into Northern Ireland).
On the different VAT rates in those nations, HMRC administer that now through intra-EU procedures that will in future have to be administered through third country procedures, which was something that HMRC were already geared up to do from 1 November for no deal. HMRC have systems already developed to do that, he said. On NI-Ireland, he said that although there will be slightly different administrative procedures for VAT and excise duty, HMRC should be perfectly capable of putting something in place by the end of the implementation period. There is nothing in the withdrawal agreement that would require the UK to collect any customs duty on goods moving west-east from Northern Ireland to GB.
Harra explained that the ability for the UK to waive or reimburse tariffs is not dependent on whether the goods do or do not move. Any tariffs collected by the UK in relation to goods moving into Northern Ireland, whether from the rest of the world or whether, exceptionally, from Great Britain, are UK resources. They do not get passed to the EU. As far as goods going into Northern Ireland via the EU are concerned, that would depend on where the importer chose to clear customs. Both the EU and the UK have agreed that that land border is not a customs border, and goods can move in free circulation between the EU and Northern Ireland, and Northern Ireland and the EU.