Public Accounts Committee quizzes HMRC on service levels

Senior HMRC officials were questioned by members of the Public Accounts Committee (PAC) about customer service, research and developments tax credits, IR35 and the tax gap on 14 December.

The hearing was the annual PAC session on ‘HMRC’s Annual Report and Accounts’, postponed from early November due to the early prorogation of Parliament ahead of the King’s Speech. It featured witnesses:

• Jim Harra, HMRC’s First Permanent Secretary and Chief Executive
• Justin Holliday, HMRC’s Chief Finance Officer and Tax Assurance Commissioner
• Angela MacDonald, HMRC’s Second Permanent Secretary, HMRC

Customer service

MacDonald told MPs that while there has been recent upward pressure on both post and phone traffic, HMRC is currently delivering its best post service for four years. However, she acknowledged that only 74 per cent of enquiries are being dealt with in 15 days, below the 80 per cent target.

MacDonald said telephony was a ‘harder area’. She repeated a number of HMRC’s messages in this area – that more than half of the enquiries they receive are capable of being served through online services and that, unless these customers can be diverted to online services, HMRC will continue not to be able to meet demand on current resources. They have a target to reduce ‘analogue traffic’ by 30 per cent by the end of next year, she said.

Committee chair Meg Hillier drew on evidence from professional bodies including CIOT and ATT in telling the officials: “Some of the evidence we have had is from frustrated agents – they’re the people who would be able to understand the digital portals and the other routes through – but they are struggling to get through when they have got a really more complex question to ask.”

MacDonald acknowledged that agents tended to deal with more complex cases: “I have stood before many stakeholder forums and shared the data of the ‘more than half of this is capable of being done digital’ to be met with incredulity from a number of agents who would say that that’s not their experience, and it isn’t, because for many agents they are dealing with the more complicated end of customers.”

MacDonald said closing the VAT registration helpline had improved service quality on VAT registration “because they have been able to reallocate all of those resources for those low value calls into actually doing the work which is the thing that the agents really, really are after.” She added that, in order to drive ‘channel shift’, HMRC are taking actions to insist that, where there are digital services available, customers use them, “rather than simply enabling them to use whichever channel of their own choice they would prefer.”

SNP MP Peter Grant asked if HMRC could guarantee “that there will always be a phone in service for tax agents”. Yes, replied MacDonald, qualifying her reply with the statement that “wherever there is not a digital service at which the agent can self-serve we will always offer, whether it is an agent or citizens, we will always offer service. But it is the same for agents as for direct taxpayers – where there is a digital service  it is not an unreasonable expectation that agents will use it.”

R&D

Grant questioned why estimates of fraud and error in R&D reliefs had been revised up from £336 million to more than £1 billion. Harra said that initial assumptions had been that because the compliance cases originally looked at were riskier ones levels of fraud and error more widely would be much lower. However a random inquiry programme found that levels of non-compliance generally were “significantly higher” than expected among SMEs, so the overall estimate had been raised.

The fraud and error rate HMRC saw in 2021-22 among SMEs was 24.4%, said Harra, explaining that 10% of that was fraud and the remainder error.

He added that about 90% of R&D claims involve an agent or a tax adviser, but the quality of the work done by some specialist R&D agents is “extremely poor”. Reforms earlier this year mean there must now be a named person in the business who takes personal accountability for the quality of the claim, and any advisers used to help submit the claim must be identified to HMRC.

Grant highlighted submissions by bodies including the Chartered Institute of Taxation, which criticised HMRC for going "too far the other way”: “Effectively, completely honest operators, which have never had any problems, are now being pulled into the net,” he suggested.

“The Chartered Institute of Taxation is reporting that it is discouraging some firms from investing in R&D, because they would be scared to put in the claim in case they came under suspicion as fraudsters,” explained the SNP MP.

Harra replied that HMRC are “trying to tread a very careful path” and assured the committee that they engage with bodies including the CIOT to improve how they deal with advisers. He added: “We also very much want those bodies to look at how their members can add more value so we can have more confidence that intermediated claims are correct.”

Harra continued: “There have been lots of measures taken since 2021 that we believe will tend to drive down the level of fraud and error. There are also other measures that have been taken that make the scheme more generous in some aspects.”

IR35

At the start of the session the committee tackled HMRC over some issues around the employment status of contractors – commonly known as off-payroll working or IR35.

Harra identified broadcasting as a “key area” where there have been long-standing disputes between HMRC and taxpayers, and HMRC has been “testing” employment status rules through litigation. He said specific guidance has been provided to broadcasters, but “it is important that those engagers understand how the rules work and apply them effectively.”

Peter Grant said he has heard from people who will only be taken on by the ’big broadcasters’ as employees, and not self-employed, because they “do not have any confidence in HMRC’s interpretation of those rules”. “The problem is that the BBC and ITV, for example, can see the self-same people that they want to give work to being dragged through the courts time and time again by HMRC,” he added.

Harra said he was not aware of this but “it is for any engager to decide the basis on which they engage people.” He added that much of the recent litigation covered in the media predates the most recent IR35 reforms, which now see the burden moved to the employer.

Grant criticised HMRC for taking company Atholl House Productions, of TV presenter Kaye Adams, to court four times, and questioned if this was a “test case to set precedents that you can then use in interpretation of other people’s cases”. Lib Dem MP Sarah Olney suggested that unclear guidance may be responsible for these cases.

Harra replied that the fact one case reached the Court of Appeal shows there were “important points at stake” which could help clarify employment rules. “That is why those cases are important, because a lot of people’s affairs could be affected by decisions in those cases,” he added. “They are a relatively small number, but it is the case that some of them are very important.”

Other issues

Ben Lake (Plaid Cymru) raised the case of a constituent who saw a large number of businesses register at their address and received lots of correspondence. Harra replied that it appears to have been an accident on behalf of a foreign agent trying to register at a service company with the same postcode, rather than a genuine attempt to commit fraud.

Moving on to VAT on online marketplaces, Sarah Olney flagged that many customers who use an online platform to trade were finding their funds frozen while the platforms carried out checks for fraud. She questioned whether HMRC guidance was “sufficient to enable a rapid transaction”.

Harra replied that while the rules are new, they are “operating well”, adding: “As well as giving them guidance, we have been engaging with them one on one to make sure that they understand what their obligations are and that they are applying them correctly and effectively.”

Asked how confident he is in the process for estimating the tax gap, Harra said it was a “good measure” and “the best we can do”. He added that the relationship between compliance yield and the tax gap “is not a straightforward arithmetical link” and a number of other factors can influence it.

Harra said the failure to meet the compliance yield target for 2022-23 included settling cases from previous years and “there is always going to be a lag”. “On a trend basis it is upward, and I expect it to be upward again this year, but it is lagging behind the target,” he acknowledged. Holliday added: “The tax gap can only be properly measured two or three years after the event, but we need to be trying to manage something in the year in question.”

Harra said that due to rising wages and frozen tax thresholds, there will be about 4 million additional income tax payers by 2028-29, as well as 3 million more in the higher rate and about 400,000 more in the additional rate. “All that creates more of a pressure,” he said, and “by and large… we are not getting more resources to answer more phone calls or deal with more post.”

Ben Lake said there had been a “significant reduction” in the number of prosecutions in recent years. Harra responded that HMRC uses its “extensive” civil powers as well as criminal proceedings. “Increasingly, we are selective about when we use our criminal investigation powers and when we seek prosecution,” he said. “We do not do it routinely even for deliberate error.”

Harra added that HMRC will pursue debts if it is cost-effective, even if the sum is small. He said recent years had seen a high level of non-payment, mainly by small businesses, but that was not all down to the pandemic. However, he said that, last year, debt collection agencies recovered a record £852 million on HMRC’s behalf.

On tax credits migration, Angela MacDonald said there are about 940,000 child tax credit and working tax credit cases still in payment but recent work to automate systems means they can now be processed. She added that the number of HMRC staff working on tax credits has been “reducing for some time” and when it concludes in March 2025 around 1,000 staff will be redeployed elsewhere.

Read the full transcript.