MPs challenge HMRC plans over customer service recovery

The PAC has also reiterated its long-held doubts about the benefits that will be realised from the Making Tax Digital (MTD) project. It urges HMRC to make MTD easier and less costly for those with simple tax affairs.

These views are set out by the House of Commons spending and tax watchdog in its annual report on HMRC’s performance, which was published on 11 February. The committee asks HMRC to further explain their strategy and plans in key areas when the tax authority responds formally to the report. HMRC’s response will be technically a government response to the report, and it is expected within two months.

Customer service

PAC recommendation: HMRC should explain:

• the service levels it is aiming to provide and by when, including for the time taken to answer calls and respond to post, and commit to publishing outturn against these measures
• how it has tested the realism of its customer service plans
• its contingency plans if the numbers of taxpayers writing and calling exceed forecast levels

The PAC has examined regularly HMRC’s customer service performance, concluding in 2010 that HMRC’s performance in responding to calls had been poor. In 2016, the PAC found that customer service levels had collapsed because of HMRC assuming two new services, automated telephony and paperless self-assessment, would reduce the number of calls it received.

During this year’s inquiry, HMRC told MPs that in the first half of 2020–21 it had diverted 5,000 customer service staff to work on COVID-19 support schemes. HMRC said that during this period it did not have backlogs. They said that in the second half of 2020–21, its customer services team had to continue to support the COVID-19 support schemes and 3,000 additional customer service staff were diverted to work related to Brexit.

HMRC claimed to PAC that its performance was improving in 2021–22. They said the department had got helpline performance up to a ‘decent service’, and so had diverted resources to handling post, as this was the area with the biggest backlog. When asked by HMRC why call handling performance had been declining before COVID-19. HMRC said that some phone contact is ‘low value’, in the sense that it does not change tax outcomes. HMRC want to get people to self-serve online if they can.

For 2021–22, HMRC have replaced most of their response time measures with metrics of whether it is easy for customers to access and deal with HMRC. Rather than call handling times, they now report publicly the percentage of callers wishing to speak to an adviser who can get through. They continue to report publicly on their postal response times but have not set a target for the number they respond to in 15 days.

This led PAC to conclude that ‘[y]et again customer service has collapsed and HMRC’s recovery plans are not clear’. The committee questions whether HMRC’s strategy to discourage the type of telephone calls that do not change people’s tax outcomes and to drive such queries online is deliverable.

Making Tax Digital (MTD)

PAC recommendation: HMRC should explain how the introduction of MTD will be made easier, and less costly, for taxpayers with the simplest and most straightforward tax affairs.

HMRC’s MTD initiative is central to its ten-year modernisation strategy. It requires taxpayers to keep tax records and submit quarterly returns digitally. HMRC plan to extend MTD to income tax self assessment in 2024, with MTD for VAT already ‘live’.

During the inquiry, the cross-party committee of MPs spoke to HMRC of their concerns about the impact of MTD on the smaller taxpayer, such as a retired person with rental income from one property. The MPs said that other administrative tax changes, such as online self-assessment, have not provided the expected benefits to taxpayers because of problems with software. The MPs felt MTD might lead to small taxpayers serving HMRC rather that HMRC serving them.

However HMRC stated that its evaluation suggested that VAT traders had found that MTD had made dealing with their tax affairs easier. HMRC also pointed out that self-employed taxpayers with income under £10,000 a year would not be mandated to be part of MTD.

The MPs also asked about the support and software that would be available to small taxpayers, with HMRC saying it was gearing up to support customers but that it would not be delivering software itself. Nevertheless, it had received pledges from industry that they would, as they did for VAT, provide free-at-point-of-service software for those taxpayers with the simplest needs. HMRC said the software industry had plenty of time to act on user research and get software right by 2024.

This led PAC to conclude in its report that “[t]he benefits of MTD to those with simple tax affairs are not clear”. The MPs are unclear how those taxpayers, such as the retired person with rental income they had asked about, will benefit from completing quarterly digital self-assessment returns. There is also no guarantee that the software they will need to submit returns digitally on will be readily available or easy to use, said the committee. The PAC questioned the value of asking the large number of taxpayers with simple tax affairs to take on additional costs and reporting.
COVID-19 support scheme fraud

PAC recommendation: HMRC needs to take a number of actions to reassure parliament and the public that it is serious about tackling error and fraud from the COVID-19 support schemes and is taking all recovery action where it is cost effective to do so. (These are set out below.)

There was much anticipation about what the PAC would say about fraud, not least after Treasury Minister Lord Agnew resigned in the House of Lords in January attacking the Government's handling of fraudulent COVID-19 business loans. Lord Agnew accused the Treasury of having ‘little interest in the consequences of fraud to our society’.

The PAC worries that HMRC’s plan for recovering overpayments of COVID-19 support will lead to government writing off at least £4 billion. In a damning summary of their meetings with HMRC, PAC said HMRC currently estimates that error and fraud across its main COVID-19 grant schemes totalled nearly £6 billion in 2020–21. HMRC told PAC that they are focusing on egregious abuse and plan that most recovery action will stop at the end of 2022–23. The MPs are disappointed that the tax authority only expects to recover around £2 billion of the £6 billion it currently estimates has been lost to error and fraud in 2020–21. Losses are likely to be even greater as HMRC have not yet published estimates of error and fraud in 2021–22, worries the PAC.

HMRC said they will have a better understanding in 2022 of the level of error and fraud once it has investigated a sample of furlough payments and examined 2020–21 self-assessment tax returns. HMRC’s approach to recovering fraudulent payments sends the wrong signals and risks encouraging abuse of tax and grant systems in the future, said the committee.

The MPs argue that HMRC needs to take several actions to reassure Parliament and the public that it is doing all it can to tackle error and fraud from these schemes. They ask HMRC to set out:

• the analysis they have undertaken, including the costs and benefits, in determining the amount they plan to spend on recovering error and fraud
• whether their plans mean that they will have pursued all error and fraud where money recovered should exceed the cost which HMRC would incur in doing so
• where further action would be cost-effective, commit to recovering more of the support payments lost through error and fraud and set out how this will be done

The PAC also wants HMRC to commit to reassessing whether its plans are sufficiently ambitious, once it has improved its estimates of error and fraud in 2022.

Compliance

PAC recommendations: HMRC should set out:

• how and by when it will have eliminated the backlog of compliance cases
• how it will report its performance on deferred cases and new cases, so fair comparisons can be made with its pre-pandemic performance levels
• its analysis, including the costs and benefits, in determining the overall size of its compliance programme
• an assessment of the extent to which additional spending would lead to any further increase in tax revenue

HMRC does not have a convincing plan for restoring compliance activity back to pre-pandemic levels, says the PAC. HMRC suspended some compliance work in 2020–21 where taxpayers could not cope with inquiries, and because they needed to redeploy staff to deal with pandemic work. The number of compliance investigations opened and closed in the year fell, which has led to a backlog. The PAC demands HMRC investigate ‘fully’ this backlog of cases and not leave them unchecked. HMRC must identify and separate out the yield from deferred cases and new investigations to understand and explain its performance, says the committee.

Related to this is another PAC conclusion which is that resource constraints are limiting HMRC’s ability to get the optimum level of compliance yield. HMRC spent around £1.5 billion on such activities in 2020–21 and generated a yield of £30.4 billion. HMRC’s data indicate that it would increase this yield if it spent more on compliance, particularly if it increased its activities to ensure large businesses complied with their tax obligations. On average HMRC generates £17 of compliance yield for each £1 it spends, with returns from its large business activity at £60 to £1, we learnt in the inquiry.

Avoidance schemes

PAC recommendation: To reduce the risk of taxpayers getting involved in tax avoidance schemes, HMRC should set down how it will make it easier for taxpayers to identify illegal schemes and the unscrupulous tax agents who promote them.

Citing the loan charge, the PAC said it believes it is too easy for taxpayers to be unwittingly lured into tax avoidance schemes. It notes that HMRC’s strategy for tackling avoidance is now two-pronged: as well as tackling supply (pursuing the 20-30 remaining scheme promoters) they are trying a new demand-side approach to quickly identify and alert users of avoidance schemes and offer them help to get out. In the past HMRC would have opened an inquiry, picked a lead case to pursue to go through the tribunals and courts, with other cases left open which could lead to tax bills building up.

The PAC welcomes this change in approach, and says HMRC should develop it by helping taxpayers not to enter the schemes in the first place.

R&D reliefs

PAC recommendation: HMRC should set down how it will improve its understanding of the cost of research and development tax reliefs; and the reduction in the level of error and fraud it is seeking together with how and when that will happen. This should include clear milestones for this committee to monitor.

In its short inquiry the PAC took a particular interest in the growth in the cost of research and development (R&D) tax reliefs. (They have grown by 240 per cent over the last four years.) Its report concludes that HMRC does not understand the reasons for this, including how much is due to abuse.

HMRC estimate R&D credit error and fraud was £336 million in 2020–21, up £25 million from 2019–20., but the PAC observe that it could be much higher than this as HMRC’s estimates involve a large amount of judgment. The committee note that the Comptroller and Auditor General considered this to be ‘material’ and so qualified his regularity opinion for a second year in a row.

HMRC office space

PAC recommendation: HMRC should work with the Cabinet Office to draw up a plan for how they intend to make sure that spare HMRC office space is not left vacant, and write to the Committee explaining the plan within 6 months of this report; and, each quarter, report the amount and cost of empty space in its estate.

The final conclusion in this year’s report is that changed working practices have left HMRC with more office space than it needs. Noting their ‘long standing concerns’ about the flexibility of HMRC’s estates strategy (based around regional centres with long-term non-breakable property leases) the committee notes that the shift to hybrid working caused by the pandemic has reduced the office space HMRC needs.

HMRC already rents out spare capacity in its regional centres to other government departments. They told the committee 18 per cent of their space was already ‘signed up to’ by other departments. HMRC told the committee if there was space not needed by other departments it would be offered to other public sector organisations and then the private sector. They claimed there is a queue of organisations wanting to take this offer up. However the committee remains concerned that reduced demand for commercial property, combined with increased remote working by HMRC staff, could leave the department with unused spare space in the future.

The report is here.

By Hamant Verma, CIOT  Senior External Relations Officer