HMRC to scrap projects because of Brexit pressure

The Public Accounts Committee (PAC) held an oral evidence session on HMRC's performance, on Monday 30 April 2018. The witnesses were Jon Thompson, Permanent Secretary, HMRC, and Jim Harra, Second Permanent Secretary, HMRC. Chair Meg Hillier, Labour, opened the hearing by comparing this ‘catch-up’ session with HMRC to the BBC show Mastermind, given the likely range of questions on taxation by MPs directed towards the tax authority’s representatives 

This was the first session since the Government responded to a PAC report on HMRC’s Performance in 2016–17. This is a summary of the exchanges taken from a live viewing of the session. It is worth saying that Thompson agreed to write to committee Chair Hillier with more information about the reprioritisation programme, specifically what projects have been axed to accommodate more resources for Brexit. After the committee meeting, HMRC gave some indication to professional bodies of what had been paused or stopped as a result of its reprioritisation programme (see here). HMRC have confirmed they will delay plans to introduce further digital services for individuals, in particular halting progress on: Simple Assessment, real time tax code changes, digitising services for inheritance tax, tax advantaged venture capital schemes and PAYE Settlement Agreements (PSAs).

HMRC reprioritisation exercise

Thompson took the lead on answering questions on this topic. He said there were 267 potential ‘change projects’ in the HMRC portfolio, to which Brexit and two recent fiscal events since then have added another 81 projects (to make 348 in total). In 2017-18, 111 projects were completed, but  39 have been stopped or slowed down to create capacity for the incoming projects because of Brexit. HMRC have also ‘consolidated’ 70 projects which are similar, so HMRC has entered this financial year with 128 projects.

Conservative Lee Rowley asked for more details. Thompson gave the examples of HMRC no longer making tax credits an online service if you are a new claimant, no new services on the personal tax account, a longer run to a single financial account as part of MTD for Business and the refurbishment of HMRC’s Newcastle office has been postponed. The criteria used to decide what to axe came down to which projects were urgent because of Brexit, additional receipts and cost efficiency, reducing risk, impact on customers and their alignment with the goals of HMRC. The efficiency programme was first expected to save £717 million of running costs, now it is £670 million. On revenue raised, the estimate was £480 million but because of other changes not necessarily related to the efficiency programme, that has increase to £694 million. Thompson said: “So for the original estimate of £1.3 billion as one-off, the Exchequer will be better off by £1.4 billion a year.” He has ‘medium to high hopes’ that £670 million will be achieved.

Hillier asked for more details about the 39 projects cancelled and Thompson agreed to write to her with more details.

Rowley was told that some projects were axed because they only delivered minor benefits. Thompson accepted that Brexit was given an ‘AAA’ rating by HMRC when deciding on priorities because it was considered urgent rather than present savings to HMRC.

Thompson has tried to correct ‘overly aggressive’ projections of a reduction in customer contact by telephone, since he became Chief Executive.

Thompson still says there is a lack of IT project managers and ‘digital frontend’ staff at HMRC to deal with Brexit. They continue to recruit to deal with this.

Customer service

Thompson said that in 2017-18, the average speed of answering telephone calls was four minutes and 28 seconds (fairly consistent throughout the year, he said), compared to three minutes and 53 second the year earlier. The target last year was five minutes, excluding the automated answering period (can be an additional two to four minutes). Rowley said by excluding automated period, HMRC is not getting an end to end overview of customers' experience. Thompson disagreed and said HMRC’s approach takes account of people ‘ringing off’ before they speak to a human being. The percentage of calls answered in the current period is 87.1 per cent compared to 92 per cent last year, which Thompson said is down to a reduction in customer demand.

Other matters

PSCs

Hillier said CEST is not fit for purpose, according to BBC Director General Lord Hall. Thompson disagreed, saying the CEST tool has been used 750,000 times by citizens across the UK and it is a ‘reasonable guide’. Lord Hall’s comments are regrettable considering that HMRC has given significant help to the BBC to help the broadcaster comply with employment taxation, he said. Harra said ContractorUK has its own calculator to promote and that may be the reason for them suggesting that CEST does not work well. In 85 per cent of cases, CEST gives a result a business can use, it is ‘perfectly good’ says HMRC. Harra added that if people use the CEST tool correctly, then HMRC will abide by the result it gives. HMRC will check whether public sector bodies have used it correctly, in some cases, however. And HMRC will make no promises of not looking back at past years’ tax records if they are suspicious of people or public sector companies stating a taxpayers is self-employed when not really.

Paradise Papers

HMRC have still not got access to the Paradise Papers. International Consortium of Investigative Journalists (ICIJ) does not cooperate with any law enforcement agency, said Thompson, and the Guardian has told HMRC that it has no access to the documents. The BBC has not responded to HMRC requests on this matter. However, HMRC has scraped 300,000 data from what was published in various media outlets. Sir Geoffrey Clifton-Brown, Conservative, learnt that until HMRC get individual company names they cannot do anything about the Paradise Papers.

Customs

The committee asked about a news story that systematic failures by UK customs officials have allowed criminal gangs to defraud the European Union of at least £2 billion in just four years plus billions more in lost VAT, the EU anti-fraud office OLAF has claimed. Clothes and shoes were imported through the UK at fictitiously low values for years to avoid duties, Olaf has found. As a result, investigators say the EU budget has lost millions of pounds in customs duties. HMRC said they plans to challenge Olaf's claims about lost revenues. HMRC have increased significantly the opening of various containers of Chinese textiles and foods and this has made a significant difference in terms of fraudulent imports. Much of these extra pre and post clearance checks are being done inland, away from the ports. OLAF’s sums do not add up for Thompson. Harra said no liability should fall on the UK because HMRC have taken reasonable steps to deal with risks in this area. HMRC did say that fraudulent importers simply do not unload in Felixstowe in England anymore. Instead they go to Holland – so the problem is just shifted from the UK, said Thompson.

Shabana Mahmood, Labour, asked about HMRC’s confidence in the planned Customs Declaration Service (CDS). An independent review of CDS by the Infrastructure and Projects Authority was fine, said Thompson. This project is in ‘good order’ but there are inevitable risks when it comes to implementing a £270 million project. It is in ‘live testing’ now to see if it can manage 100 transactions a second. Migration from Customs Handling of Import and Export Freight (CHIEF) to CDS is still to happen, he said. Customer readiness is fairly low, he concedes, but HMRC ‘are not naïve’ about the risks from this. CDS is in as good a shape as can be expected, he said. Harra added that existing CHIEF users are highly intermediate dependant, as most businesses use software for example, so HMRC must deal with them. HMRC sent mailshots to existing users of CHIEF to get them ready to deal with intermediaries. There is a group of customers who do not deal with CHIEF (who may not import or export at the moment), and HMRC will want direct contact with them to nudge them to the right place to get help – but those who use intermediaries are the priority.

Mahmood asked why HMRC have been downbeat about Authorised Economic Operators (AEOs). Harra said AEO status is not suitable for all businesses. HMRC do not want people to get into AEOs if it is not going to meet their needs, instead they will need something more tailored.

Thompson said CHIEF can only cope with 80 million declarations without any changes but there are changes to CHIEF that can be scaled at low effort, to take 230 million declarations. HMRC is waiting for the business case on what constitutes ‘low effort’, however. Hillier was told by Harra that it is unlikely there is a significant risk of companies having to be moved back to CHIEF if something goes wrong with CDS.

Border and Brexit

Sir Geoffrey Clifton-Brown asked about the board of the Border Planning Group’s (BPG) assumption that the risk to border activity will remain unchanged immediately after Brexit – and how long it is safe to make that assumption. Thompson said it will hold for a ‘short period’ (goods, people, animals and plants) but ‘not for very long’. All government Departments involved in this are working through new compliance models under the various scenarios of leaving the EU and identifying what resources will be need in terms of compliance. Sir Geoffrey said HMRC will need some reasonable answers, such as on food regulations, by the time of the ‘meaningful vote’ in Parliament on a Brexit deal in the autumn. The BPG is looking at infrastructure and IT at the moment.

Sir Geoffrey was told that HMRC is working with the Department for Transport (DfT) on some contingency plans but whether land, near ports for example, is being bought for this purpose is a matter for DfT to make public. Sir Geoffrey was told by Harra that BPG does not believe infrastructure is needed solely at ports.

In the event of ‘no-deal’ there are no plans to put infrastructure in Northern Ireland. 

Thompson reminded the panel that borders are the responsibility of many departments. There are a series of working groups, such as with Eurotunnel and the devolved administrations, to help BPG risk assessment.

VAT

Hiller cited PAC’s report on tackling VAT fraud and error, in October. Thompson is confident that online marketplaces known to enable fraud will sign MOUs with HMRC and hand over information to them. On how much money HMRC expect to get from joint and several liability notices, Harra said the OBR has costed the yield as a result of these measures: Budget 2016 and latest Budget measures on VAT fraud will raise about £1 billion by 2023 cumulatively. HMRC have continued to ‘ramp up’ the resource to tackle VAT fraud, Harra was keen to say. Anne Marie Morris, Conservative, wanted to know how flexible HMRC is on changes to VAT post Brexit (when the UK can vary VAT more). It takes days and weeks to change VAT rates, not years, replied Thompson. The UK would probably stick to the OECD model on VAT, Harra added.

Split payment mechanism

The European Commission published a report in September which said there was no strong evidence that the benefits of split payment would outweighs its cost. The UK is pushing the envelope globally on this, said Thompson, which is why a consultation paper has been sent out. Hillier was keen to say the committee is in favour of split payment.

Mahmood asked about HMRC powers in regard to seizing of stock. Harra replied that HMRC has two seizure powers; under customs legislation to deal with goods looked after by fulfilment houses and ‘misdeclared’ goods (and right of access to goods) under bailiff legislation if there is an unpaid debt. HMRC powers are strongest when goods are held in debtors’ own premises. When held by a third party, HMRC needs a warrant and that can be ‘practically unviable’. HMRC would like a more streamlined set of powers to deal with warrants, especially as the evidential burden is too high to make a request worthwhile. HMRC is having discussions on this with the Justice Minister, the committee was told.

Mahmood said there has been 27,500 new VAT registrations but Harra cautioned that it will be a long ‘slog’ to get the £1 billion to the Treasury. HMRC have set up a Chinese language website, he added.

Pensions 

Rowley asked why HMRC’s pension calculator was giving out incorrect advice, according to the Financial Times. Thompson recognised the calculator was inaccurate for people who earn more than £150,000 a year and wanted to contribute more than £40,000 to their pensions – ‘a small number of taxpayers’. The calculator is ‘not definitive’ but he cannot imagine anyone would have ‘lost out’ and he apologised for the mistake. Thompson has asked for the calculator to be amended; the problem was tdue to the complicated calculations to do with the tapering of the annual allowance and how that interacts with someone’s total pension contribution. The calculator was only wrong for eleven days, he said.

Lycamobile

Thompson accepted it was an error of judgement for an HMRC official to include a reference to political party donations made by Lycamobile in a letter to the French tax authority. However, the evidence provided by the French did not meet the 12 tests which are required (and failed on 11 of these tests) for HMRC to investigate. He said the media’s reporting of the story was a disgraceful distortion of the truth. HMRC received more than 216 similar requests to the Lycamobile case and executed 191 requests, although he did not give the time frame.

The full session can be viewed here

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