The Public Accounts Committee has begun an inquiry into Tackling the Tax Gap. The first oral evidence session took place on Monday 7 September with witnesses Jim Harra, Chief Executive, HMRC; Penny Ciniewicz, Director General, Customer Compliance Group, HMRC; and Beth Russell, Director General, Tax and Welfare, HM Treasury.
Topics covered by the session included deferred tax payments, the loan charge, furlough scheme fraud, HMRC compliance interventions and the accuracy and definition of the tax gap. MPs also probed the officials on resourcing of HMRC, Making Tax Digital, phoenixism, HMRC offices and home working, delays in dealing with taxpayer inquiries and Brexit.
This report summarises the session but the full transcript of proceedings can be read here.
Tax yield / loan charge
Asked by Chair Meg Hillier (Labour and pictured thanks to Parliament UK) about the impact of COVID-19 on the tax gap and tax yield, Harra said he expects non-payment to be a ‘significant’ but that there is a lack of research on the impact of recessions on the tax gap. It is too early to speculate on the impact of deferred payments. HMRC have started doing some analysis to identify those people who they think are likely to have been least affected by the pandemic and, where they are in debt, to inquire with them why they are in debt and what their capacity is to pay.
James Wild (Conservative) asked about loan charge settlements. Ciniewicz explained that at the time of the Morse review, there were around 12,000 customers who still had the opportunity to conclude a settlement (by end September deadline) with HMRC: 2,000 of those have settled or no longer need to settle; 6,000 are talking with HMRC; 3,000 of those customers who were able to settle originally have not responded to HMRC letters or have missed deadlines; and another 3,700 or so customers are still able to settle, and a small number of those have asked HMRC to pause, mainly due to COVID-related issues. She said HMRC have about 1,000 people working on loan charge settlements and explained that HMRC cannot adjust the 30 September deadline on their own behalf. It would require legislation.
Coronavirus economic support
Richard Holden (Conservative) asked for a ‘ballpark’ number about furlough fraud. Harra said that HMRC’s furlough fraud helpline has taken 8,000 calls. Currently, HMRC are inquiring into 27,000 high risk claims (of which HMRC expect to check up on 10,000). Harra said that the error and fraud rate in the furlough scheme could be between five and 10 per cent (between £1.75 billion and £3.5 billion).
Chair Hillier asked why Harra has doubts about Eat Out to Help Out. Harra explained that HMRC did not have the time to do all of the analysis before launch and there was significant uncertainty as to whether the policy would give value for money. We learn that the Treasury and HMRC are in discussion about how they will carry out a post-implementation evaluation of that scheme.
HMRC compliance interventions
Craig Mackinlay (Conservative) kicked off questions specially about the tax gap. Harra said of the 95.3 per cent of tax collected, roughly five per cent comes in as a consequence of direct compliance activity. Asked how to reduce the tax gap further, Harra said the small business tax gap, which accounts for about 43 per cent of the total tax gap, and legal interpretation, are ‘stubborn in their size’. On the latter, he claimed the Government’s recently announced measure to require large businesses to disclose to HMRC where they have made a filing based on a legal interpretation that they know HMRC would regard as contentious, may help.
Mackinlay wanted an explanation of why 2018-19 was the first-time ever that the compliance yield exceeded the estimate of tax gap. Ciniewicz replied that HMRC settle some large cases from time to time, and certainly some of that played into the yield in that year.
A one-to-one approach (such as having someone go to a business and watch the till) to managing the compliance of all 5.7 million small businesses is just not a feasible way of managing that tax gap, said Harra. He said: “Our strategy is to restrict the one-to-one engagement with small businesses to those real cases of evasion that we need to tackle, and to try to get more one-to-many solutions for all the other aspects of that (small business) gap.” Making Tax Digital (MTD) will drive down error and failure to take reasonable care in the small business sector, he said. Mackinlay worries about the many frauds in the hidden economy, to which Harra said for the scale of the population, a one-to-one approach is not going to bear fruit unless you very significantly increase the size of HMRC, ‘which I am not sure anyone wants’.
Ciniewicz told Peter Grant (SNP) that she accepts there is a whole range of reasons why people will or will not respond positively to paying their tax, but ‘we try to get under the skin of all those different elements’. Harra told Grant that HMRC are unable to measure the indirect effect of many of their costs on propping up voluntary compliance.
Grant asked if HMRC have any indication of what the actual cost to UK tax revenue of base erosion and profit shifting is? Harra answered that the tax gap is a measure of non-compliance with UK tax law, and it therefore includes multinationals that shift their profits, in breach of UK tax law. He said: “Similarly, the yield figures include the amount of yield that we collect from tackling that kind of behaviour. What it does not include is what you might call the “policy gap”—in other words, the tax that we are losing that is not due, but which might be due if you could tighten up the tax rules.”
Ciniewicz claimed HMRC target individuals who fail entirely to submit tax returns and look at a full review of their business interests as well.
Harra told (Labour’s) Olivia Blake that there are no plans for HMRC to measure the tax gap in each of the UK nations. Blake then asked about the construction industry scheme and the tax gap. Harra said there is no specific measure but Ciniewicz said HMRC are making sure that that scheme is run in compliance with the law and this is a significant part of their compliance activity in those business areas.
Compliance yield and resourcing of HMRC
Sarah Olney (Lib Dem) asked about compliance activities. She was told by Harra that the yield table shows HMRC have brought in more and more yield with the same amount of resource. He said: “When you look at some of the areas of our work, for example, on small business compliance, you can see that what we have done is quite successfully achieve efficiencies so that we are getting more yield per case.” Olney – an accountant before she was elected to Parliament - suggested the Treasury give more resources to HMRC to make ‘real progress’ on the tax gap. She wondered why the number of compliance interventions has fallen while yield has remained stable. Ciniewicz said that HMRC have improved productivity since the 2015-16 baseline, by about 13 per cent.
Olney asked why HMRC have reduced resources to pursue small businesses for their unpaid taxes. Ciniewicz responded that the number of staff overall in the individuals and small business compliance directorate has remained broadly stable from the start of 2015 to 2019 and HMRC are doing much more ‘one-to-many’ activity, which reaches more businesses with fewer people. She added that MTD will reduce the failure to take reasonable care and the error rate.
Olney said she was concerned about the idea of a ‘one to many’ one-size-fits-all approach to small businesses in terms of recovering their unpaid taxes because so many will be grappling with new and unprecedented challenges. Harra says he understands Olney’s concerns. He said: “In the past, we might have identified 500 risky cases and taken each of them up for investigation. Our approach now would be to contact those 500 people or businesses and say, ‘We have identified risks in relation to you and we could well take you up for investigation, but first you have an opportunity to review your filings and step forward if you think you’ve got them wrong’. If 400 of them step forward and change their filing, that leaves 100 for us to investigate. We potentially get yield from all 500, but we do not have to investigate each one individually.” He added that because of COVID-19 HMRC have steered clear of taking up new investigations in relation to businesses who they believe will be struggling just to keep their heads above water. It will mean a reduction in compliance yield in 2020- 21 compared with previous years.
Harra told Mackinlay that all non-payment of taxes that were due is counted in the tax gap, as part of the tax gap. Ciniewicz said HMRC makes sure that they pursue phoenixism and insolvency risks. If HMRC see evidence that disqualified directors are behaving in ways that do not align with the conditions of their disqualification, HMRC go back to the Insolvency Service to support it to take further action.
HMRC offices, redeployment and home working
Harra explained to Mackinlay that a significant number of staff have been redeployed from business-as-usual tax work to supporting the COVID-19 support schemes, such as compliance workers who understand PAYE or self-assessment. Between 4,000 and 5,000 colleagues were coming into the office every day throughout the lockdown and HMRC will use the full COVID-19‑secure capacity of their offices in the coming weeks (which is 30 per cent of normal capacity).
Asked by Hillier about the HMRC office regionalisation plan, Harra said HMRC remain committed to their programme of having large regional centres, but COVID-19 does call into question some of the policies they have had towards flexible working. In the recent voluntary redundancy scheme HMRC have operated as they close some offices, which applied to about 3,300 staff, HMRC have offered greater flexibility to those who wish to stay on in the organisation than HMRC previously would have done. “For example, we recently agreed in principle that 600 colleagues can have flexibility ranging right up to permanent home working as an alternative to them taking redundancy, because they are unable to reach the regional centre,” said Harra. “We are also doing some work, to complete by February, on our longer-term strategy for how we can combine regional centres with more flexible working, learning the lessons from the past few months and leveraging the technology investments we have made recently.”
Ciniewicz told Mackinlay that it is unlikely HMRC will meet achieve 380,000 compliance audits in the coming year because of the impact of COVID-19 on the tax authority’s work.
Harra said the move away from cash towards more secure payment should help HMRC to ‘manage’ the tax gap.
On Brexit, Harra said the duty gap will depend on what UK tariff policy is and what kind of free trade agreement UK might have with the EU. He said: “Initially our focus will be on helping people to get ready to comply with the new obligations, rather than worrying about a new tax gap, but over time that’s something that we will need to track. I don’t think the impact is very substantial. I think much of the tax system will be as it currently is, and the risks will be very similar to what they currently are.” An area where HMRC are able to make progress when UK leaves the EU is in relation to VAT on online sales, where HMRC’s policy in tackling that has been constrained to some extent in the past by EU VAT law.
Making Tax Digital
Mackinlay failed to see the link between MTD, more receipts and getting rid of the tax gap for a lot of taxpayers.
Harra said the Office for Budget Responsibility, which is independent of HMRC, has validated their estimates for the extent to which MTD for VAT will reduce the error and failure to take reasonable care gap in VAT. MTD will require people to keep records that automatically generate a filing to HMRC and will reduce the opportunity for them to make a mistake that underreports their income to HMRC, he said. HMRC published a document on 21 July 2020 that describes what other steps you might take in a tax administration strategy to tackle areas of the tax gap. You can in the future build on MTD to tackle other parts of the tax gap—for example, by building risking and nudges and prompts into the software, whereby you believe people are doing things that they ought not to do, he explained. MTD means improved record keeping and improved accuracy of filing, and hopefully other benefits for businesses as well as for HMRC. That will reduce the need for HMRC to deploy resources on tackling that part of the tax gap and free those resources up to do more on the abusive end of the tax gap, on deliberate evasion and avoidance, Harra told the committee.
Mackinlay continued: “I honestly believe that, because we are into the Donald Rumsfeld “unknown unknowns”, the underground economy is significantly higher than you anticipate. I would hugely recommend, given the rewards of at least £7 back for every £1 spent, if not more, that you make a plea—I will back that plea up on your behalf—that you need more staff to get rid of the underground economy and all the foulness that goes with it. I think that would be money well spent and I would recommend that you put that application to the Treasury.”
The full transcript of the session is here.