HMRC faces long road to recovery

HM REVENUE & CUSTOMS has few fans. That much can be seen by browsing through the written evidence submitted to the House of Commons committee looking at the taxman’s performance.

In fact the casual reader would be hard put to find anything positive said about the department in the documents posted on the Treasury committee’s website, a state which would leave many believing the department is close to collapse.

It is not, course. But it does face significant criticism as well as demands for significant change, not just to improve its conduct and service with taxpayers and advisers but to save a huge chunk of its annual running costs. And whatever happens in this week’s Budget, the department is bound to face even more challenges.

And that is the conundrum facing HMRC. At one and the same time it is being asked to transform its service, significantly increase the revenue it recovers and yet sustain a hammer blow to its spending. The government has placed it on the frontline of fighting for its austerity measures, but also in the vanguard of making painful spending cuts.

Evidence submitted to the inquiry from business has been particularly impassioned, as might have been predicted.

The CBI’s submission sums up its members frustrations in dealing with the taxman. It insists there is a “lack” of appreciation of taxpayers’ compliance costs; scant appreciation of “materiality” or commercial awareness and that staff turnover is too rapid. The business body laments the loss of HMRC staff being dedicated to specific clients or companies and observes there is poor co-ordination between elements within the department.

On HMRC’s budget settlement the CBI says: “There is a general perception that HMRC are under-resourced, leading to cutbacks that simply displace the work involved without increasing efficiency.”

The Forum of Private Business echoes the CBI saying its members believe HMRC is “not an efficient organisation” and find HMRC’s helpline system frustrating.

In fact the Forum places improved communication among its key conclusions for how the department can up its game alongside the major strategic aim of simplifying the tax system.

Former HMRC staffers took the opportunity of the inquiry to turn on their former employers. Martin Lewis, now retired, insisted brutally: “HMRC is run poorly on a command and control basis.”

And he goes on to blame a culture in the department where middle managers are expected to implement policy but discouraged from providing negative feedback up the organisation to senior staff.

“Thus at the top senior managers are largely unaware of the difficulties, problems, and obstacles that the bulk of the organisation faces. They know little of the scale of unanswered phone calls, and the unopened letters, the data quality of taxpayers’ records and perhaps most importantly the nature and quality of the service provided on a daily basis to the taxpaying public.”

Lewis prescribes a change in mindset at the top if HMRC is to improve.

“So long as senior managers turn a blind eye to many of the risks that its staff (and middle managers) know about, the prospect is bleak. Cultural reform involving empowerment and accountability is needed and it starts at the top.”

But he adds a more strategic solution. HMRC should be much better at identifying the risk to tax revenues and reorganising its staff in accordance with those risks. In other words, become more efficient at dealing with routine enquiries and resources can then be devoted to more difficult cases.

Lewis raises another point. Tax inspectors can bring in five to ten times their salary in tax revenues. Reduce the number of inspectors and trained offices and you begin to eat away at the departments revenue-raising capabilities. Appropriate numbers also mean an appropriate deterrent.

“Fewer staff collecting less additional tax begins a vicious cycle where the honest taxpayers begin to feel less inclined to be honest if his perception grows that ‘everyone’s at it’,” says Lewis.

The Commercial and Public Services Union makes a point of highlighting the changes at HMRC that have already taken place. When the department was formed through merger in 2005 it had more than 100,000 staff. More than a quarter of those have now gone. It is now in the process of cutting 25% from its budget. Over the course of the current spending review that’s around £3bn.

The PCS echoes Martin Lewis when it says: “Cutting a further 11,500… staff by the end of this spending review period will exacerbate an already unsustainable staffing and resourcing problem. Income to the Treasury can only be put further at risk in the event of further job cuts.”

Indeed, the PCS believes that in some offices tax staff fail to receive the protection they need because of a recruitment freeze reducing the amount of security at offices. Not surprisingly the PCS believes cuts to HMRC budgets should be halted or risk problems becoming “irreversible”.

Others take budget cuts as inevitable but argue forcibly that they cannot take place without a major rethink of HMRC’s mission. The Chartered Institute of Taxation in its submission argues for a review of the fundamentals.

“If resources are to be cut, then we think that the way forward must include a fundamental reappraisal of the tasks HMRC carries out.

“It may be that some of these are unnecessary and can be dropped without significant problems; some re-engineered and delivered in a different manner; some may even be deliverable by others.”


And as a potential solution the CIoT is not the only one to float the idea that many HMRC service could be provided by someone else.

One senior former HMRC official told Accountancy Age there were two major areas that the department could look at as part of a cost reduction and efficiency programme that could potentially leave frontline resource reasonably unmolested.

That would be to look at further shared services and potentially outsourcing some services.

A shared services strategy would see a hunt for areas internally that could be shared. A more radical step could see the department looking to share with other government departments.

Outsourcing is also a clear option. The question would be, however, whether only support services could be outsourced of whether innovative steps could see some frontline services put out to service providers.

Both strategies would have to make sense in terms of HMRC’s aims and its mission. There’s no point in taking any such step if it threatens tax revenues, or fails to make savings or, most importantly, complicates matters for taxpayers.

But managers at HMRC face one of the most difficult challenges of any government department. There is broad agreement that the department is under funded and it must make huge cost savings while improving tax collection. At the same it must combat the perception that it is failing in significant areas.

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