Brexit & EconomyHMRCPAC: HMRC transformation plan has ‘potentially catastrophic consequences’

PAC: HMRC transformation plan has ‘potentially catastrophic consequences’

The Public Accounts Committee has expressed concern over HMRC's handling of its transformation programme, its pace of response to the Paradise Papers release, and its ability to maintain customer service following the introduction of Making Tax Digital

The Public Accounts Committee (PAC) has published a report on HMRC’s 2016-17 performance, which highlights concerns that the tax authority’s decision to pursue 15 major transformation programmes at the same time will have an adverse impact on ordinary taxpayers.

The committee said that HMRC faces “tough decisions” on resource allocation as it juggles operations to boost tax revenue, tackle tax evasion and implement the transformation programme, as well as adapting to changing priorities as a result of Brexit.

Committee chair Meg Hillier said the transformation programme would have been “less risky had it not attempted to do everything at the same time”.

“What was already a precarious high-wire act is now being battered by the winds of Brexit, with potentially catastrophic consequences.

“Action arising from allegations in the so-called Paradise Papers could also significantly increase the authority’s workload,” she added.

Transformation programme ‘highly ambitious’

HMRC plans to transform the tax system by 2020 have come under heavy fire from the committee. The 15 major programmes include the closure of national offices and relocation to 13 large regional centres; implementing the Making Tax Digital initiative for businesses and individuals; and introducing Universal Credit.

While HMRC said that the programme was the “right strategic approach”, the additional workload stemming from Brexit would hamper its ability to deliver the programme’s 250 projects. It acknowledged that the programme would have been more achievable had it implemented the projects in sequence rather than at the same time.

As a result, the tax authority said that it did “not believe it is credible…to continue with the transformation programme as it is” and that it would carry out a “reprioritisation exercise” to accommodate the extra workload.

The committee had already requested HMRC to report by March 2018 on how it will deal with the Brexit challenge and ongoing transformation programme. It has now also asked the revenue authority to amend its forecasts and report on the financial implications by April this year.

The PAC also flagged that HMRC has recently signed six long-term leases for regional centres, against committee recommendations. The PAC had noted in its report in early 2017 that two 25-year leases already signed by HMRC could force the government into holding property for a longer period than necessary, and that a combination of medium and long-term leases was the best approach.

Although HMRC originally agreed to the recommendation, it now said that the leases were “good deals”, despite having no break clauses. The PAC said it was “not convinced” that HMRC would get “value for money” from the leases and that the tax authority should use its “strong negotiating position” to obtain “sufficient flexibility” in the remaining four leases yet to be signed, as well as building in “greater flexibility” in the leases already completed.

Tax evasion, error and fraud, and the tax gap

The PAC review also focused on the release of the Paradise Papers and HMRC’s response. The committee said that it was “frustrated” with the pace of the HMRC response to the leak and that it was “far from confident” that the tax authority had sufficient resources to investigate the allegations.

HMRC has yet to obtain the documents and the committee said it should do so as a matter of urgency. The committee also requested HMRC to report back by March 2018 to set out its response to the papers.

In relation to tax credits, the committee said it was “alarmed” to hear that tax fraud and evasion resulting in overpayments had risen to 5.5% of total tax credit spending, and that HMRC expected the figure to increase to 7-8% in the coming years. The committee expressed concern that fraud and error would only rise following the transfer of individuals to Universal Credit, and recommended that HMRC outline the additional risks of the transfer.

Furthermore, the committee has asked HMRC to set target levels for reducing the tax gap, as it said that the tax authority was currently “unclear how it can close the tax gap with existing resources”.

HMRC has said that Making Tax Digital for business will help to address the SME tax gap, which accounts for nearly 50% of the total tax gap, and which HMRC said posed “particular challenges”.

John Cullinane, CIOT tax policy director, rebuked the focus on SMEs with regard to the tax gap, commenting that HMRC risks “stigmatising SMEs”.

“HMRC have clearly believed for some time that the impact of small and medium-sized enterprises on the Tax Gap is especially significant. The nature of this issue merits a more detailed explanation from HMRC than the tax authority shares at present. Without more granularity on the nature of the impact on the Tax Gap, HMRC risk stigmatising SMEs, which could be unfair and does not seem calculated to improving whatever underlying behaviour is the cause of the problem,” Cullinane said.

He added: “It is also unhelpful to the public’s understanding of tax. If more focussed information on SMEs and the Tax Gap is simply not available to HMRC, then more needs to be obtained, so targeted initiatives can begin, which we would be keen to support.”

Customer service

The committee recognised that HMRC had made improvements to its customer service since 2015-16, but voiced concern that the tax authority would not be able to maintain the past year’s level of performance. HMRC has said that customer service budgets could be cut as digital services were introduced, yet the committee said it was “sceptical” that provisions to help vulnerable and digitally excluded customers were sufficient.

The committee also said it was concerned about “the disparity of service between how HMRC deals with high-net-worth customers compared with the ordinary customer”. As of the end of September 2017, the average waiting time for a customer calling HMRC was 4 minutes 37 seconds. Yet the HMRC calculations did not include the time spent listening to automated messages, which could increase the total waiting time to 9 minutes. The committee said it was “unacceptable” for HMRC not to include automated messages in its average response speed time, particularly as high-net-worth individuals had their own dedicated customer compliance managers.

HMRC hit back at the committee evaluation, stating that it was not aiming to be a “world-class contact centre”, but rather a “world-class digital tax authority”.

Co-chair of the ATT’s technical steering group Yvette Nunn said: “HMRC need to realise that automated messages are a source of frustration, by making it hard to speak to someone they increase the risk of taxpayers guessing the answer and getting it wrong.

“There are serious concerns as to whether HMRC’s digital infrastructure can cope today. We have already seen unexpected system failures during the busy Self-Assessment tax season in January 2018, as well as delays in giving agents access to the Trust Registration Service.

“The PAC notes that HMRC’s original assumptions on the extent to which customer demand could be reduced were too aggressive in the past – there are concerns this could be the case for the introduction of MTD also. Taxpayers are likely to need significant support when MTD is first introduced. We suggest it is unlikely to result in a lack of demand for phone calls in the short term, at least.”

Report conclusions

Commenting on the HMRC report and recommendations made by the committee, Hillier said that HMRC had to take action to respond to existing and future challenges.

“These are serious, pressing challenges for HMRC, requiring swift and coordinated action in government. As a matter of urgency the authority must set out a coherent plan and demonstrate it is fit for the future,” Hillier said.

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