IT HAS BEEN ten years since HM Revenue & Customs was created out of the merger of the Inland Revenue and HM Customs and Excise, which the Financial Times colourfully described at the time as “mating the C&E terrier with the IR retriever”.
Much has changed since Sir Gus O’Donnell, the former cabinet secretary, set out what he wanted from the new department in his blueprint for HMRC. One thing that has remained constant is the taxman’s ability to divide opinion.
Supporters laud its attempts at tackling tax evasion and avoidance through laying bare tax havens, initiating new ways of linking the information at its disposal, and increasing the tax take for the Exchequer.
Critics, however, claim the department is in the lap of the corporate world, providing decreasing levels of service for ordinary taxpayers yet spending billions on white elephant IT projects, while new powers handed to HMRC have raised concerns the enforcement agency has become too powerful, undermining the balance between public and the state.
Following the decade anniversary since the merger took effect on 18 April 2005, the verdict on the enlarged department’s relative success or failure realistically lies somewhere in between. Combining the two old departments to create HMRC was intended to improve customer service and compliance, align strategies and create efficiencies through economies of scale. The latter point has clearly been a success, the former point arguably less so.
Taxman becomes the axe man
Immediately, the new department was forced to contend with a cut in staffing numbers, from a combined 100,000 to around 90,000. Staff numbers have since been cut to around 65,000 – almost four times as many cuts as originally envisaged. Indeed, HMRC has had funding cut at a time when it has been asked to increase its tax collection and modernise the way it interacts with taxpayers.
The coalition government’s 2013 Spending Review brought about a further budget reduction of £166m from this year. Tax professionals are critical of the government’s cuts to the department.
George Bull, senior tax partner at Baker Tilly, says: “The government doesn’t get much money from anything but taxes, so to cut the resources of HMRC has been inexplicable.”
However, despite the job losses, the number of tax specialists has remained the same – at around 17,000. But the loss of clerical jobs is being felt on the ground by tax professionals. As a result of the Spending Review settlement, HMRC announced swingeing cuts a year later, confirming the closure of 14 offices by December 2015, while 690 administrative staff were invited to take voluntary redundancy. There have even been recent claims from the FDA union that there could be a further 15,000 losses.
These cuts – confirmed and potential – are only likely to continue a trend that tax professionals know only too well: that of the difficulties in contacting the Revenue, which seems to have worsened since the formation of HMRC.
Asked to do more with less, the department’s headcount has been cut by around 40% over the years, but the levels of customer service HMRC provides is someway short of what is acceptable. HMRC’s own chief executive, Lin Homer, described its customer service record as “not good enough”. Public Accounts Committee chair Margaret Hodge – a scourge of the department – said its level of call service, where a third of calls to the HMRC helpline were going unanswered and the average waiting time for a call had trebled to 11 minutes, was dire.
Patrick Stevens, tax policy director at the CIoT, says there will be “lots of practitioners who will say they have not [cut clerical staff] in a particularly clever way because things still don’t work terribly well. For example, the huge waits you often get on telephone enquiry lines. It is a problem in a wider sense in that there is a danger you will lose respect for HMRC.”
Richard Murphy, director at Tax Research UK, says problems with the public-facing side of HMRC are inherent in its structure.
“If we go back 30 years, the change in performance is extraordinary. We used to know who we are dealing with – this is something that HMRC, as opposed to the Inland Revenue, have restricted to the very largest taxpayers.”
Even more of a blow to HMRC’s reputation was the Goldman Sachs affair, when it was accused of agreeing a ‘sweetheart deal’.
Then-permanent secretary of tax Dave Hartnett agreed in 2010 to waive interest penalties of up to £20m on offshore bonuses paid to bank staff – in order to end a long-running and potentially costly dispute. Although the full facts were never revealed, it was thought to be due to a mistake made by HMRC.
For Murphy, this deal was a result of staffing issues: but this time at the top of the tree. At the time, Hartnett was the only tax specialist on the HMRC board. “There was insufficient control over him because he was the only tax specialist on the board. If he said something was right or wrong, there was nobody else with the experience to say ‘I’m not sure that is quite right’,” he explains.
This was part of wider criticisms that multinational companies were able to avoid tax in the UK quite easily. Murphy says HMRC have “refused to accept” that the likes of ‘Google, Amazon and Starbucks’ are avoiding tax, even “where there is no doubt in Parliament’s mind that they are tax avoiders”.
But HMRC has had some form of vindication. A review by Sir Andrew Park for the National Audit Office in 2012 found that four large settlements under scrutiny were ‘reasonable’.
Bill Dodwell, partner at Deloitte, adds: “The working methods adopted by HMRC to bring up to date the tax affairs of large multinationals have been very successful; HMRC is today up to date in a way that the Inland Revenue in 2005 certainly was not.”
Perhaps the biggest change in the approach to collecting tax, however, has been the disclosure facilities for individual tax evasion.
The Liechtenstein Disclosure Facility, introduced in 2009, will be seen as a “major turning point in HMRC’s strategy to tackle tax evasion”, says Sean Wakeman, tax investigations partner at Crowe Clark Whitehill.
The LDF – negotiated by HMRC and the Liechtenstein government – opened up the formerly secretive tax haven, giving HMRC access to names of bank account holders in Liechtenstein. It also gave people with offshore accounts the chance to declare unpaid tax with the promise of immunity and lower penalties.
This was a major step in a series of disclosure facilities and campaigns, giving people the chance to come forward but – at the same time – gathering more information to crack down hard on those who did not come forward. Controversially, they were not always legal means, with HMRC admitting to receiving stolen data from HSBC in Switzerland – which was followed by another agreement with Switzerland itself.
Dodwell says the “story of evasion is one of success”. And it could get better. “Who could have imagined the success of the various disclosure opportunities – and that, working with the US, the UK has led the introduction of global Automatic Information Exchange from 2017.”
However, he adds, the “story on tax avoidance is mixed”. HMRC has dealt very well with corporate avoidance but it has struggled with the large scale litigation needed to deal with individual tax schemes.
“Legislation means that those schemes won’t be repeated but there is still a backlog worth £7bn, according to HMRC,” he says.
The other problem with avoidance, posits Crowe Clark Whitehill’s Wakeman, is the “blurring of the lines where tax avoidance has come across to the area of tax evasion”. As a result, he says, “we are seeing people accused of tax fraud in all sorts of petty situations”.
Vote of no confidence
There has been another long-running battle for HMRC out of the courts – that with the Public Accounts Committee, and in particular the then-chair, Margaret Hodge.
The PAC has been critical of HMRC for some time. Its 2014 report, for example, was a catalogue of errors and followed stormy encounters between Hodge and Hartnett, and his effective successor Lin Homer.
It accused HMRC of misleading Parliament by getting its targets wrong to the tune of £1.9bn; not being sufficiently transparent about compliance yield; being ‘unacceptably slow’ in taking action against tax avoiders, including those in the Swiss HMRC files; and not doing enough to tackle companies which exploit international tax structures to minimise UK tax liabilities. As Murphy puts it: “There is no confidence from parliament in HMRC.”
But these criticisms were nothing on the PAC reports into large-scale IT projects. The introduction of the new National Insurance and PAYE Service (NPS) – described by Dodwell as the probably the most costly failure over the decade – was the focus of particular ire.
The report into HMRC’s 2009/10 accounts identified a year delay in processing PAYE for 2008/09 as a result of problems with NPS. The PAC said HMRC ‘did not tell taxpayers of the delay promptly, causing uncertainty and worry for millions of people’.
A failure to tackle a legacy of processing backlogs going back to 2004/05 left it out of time to collect all the tax due before April 2007, while leaving other taxpayers out of pocket. “The department has not delivered an acceptable standard of service to PAYE taxpayers,” it concluded.
IT procurement and outsourcing issues persist. In February, Accountancy Age exclusively revealed that millions of pounds were squandered on staff working on an outsourced HMRC tax credit contract who did no work for nearly three months because of a systematic IT failure.
However, HMRC has an unlikely defender in this. Murphy says: “They have made mistakes with IT procurement, but every organisation has made mistakes with IT procurement.”
Looking ahead, IT changes are likely to play a huge part in HMRC’s work.
HMRC’s business plan for 2014 to 2016 emphasised its work on real time information, which has seen employers report pay roll information in real time, rather than at year end.
It called RTI ‘the biggest change to PAYE since the system was designed 70 years ago’, adding: ‘It brings PAYE up to date with today’s employment patterns, where people change jobs more frequently than in the past and can have more than one job or pension.’
IT changes are also affecting returns for corporation tax, VAT, interaction with HMRC, the use of digital databases to fight tax evasion, and has seen HMRC set up new ‘digital centres’, Deloitte’s Dodwell notes. And, earlier this year, the government used the Budget to introduce online tax accounts for individuals and small businesses by 2020, signalling the end of the annual tax form.
Individuals will be able to submit accounts and pay their tax throughout the year – for example, by linking to a bank account so they pay in instalments or by Direct Debit – and see how their tax is calculated as HMRC automatically updates its information by bringing together details about earnings, pensions and savings in addition to new data from third parties. While many advisers see the move as a natural progression for a system in need of an overhaul, the timetable and other practical issues have caused serious concern.
Designing, testing and producing a functional system within five years is unrealistic, particularly in light of the problems that took place when real-time PAYE was introduced, while the government’s track record of failed large IT projects augurs badly for the effective roll out of online tax accounts.
More power looms
Advisers have also raised serious concerns over plans for HMRC to be afforded powers allowing them to deduct tax directly from debtors’ bank accounts. The powers, originally announced in the 2014 Budget, extend as far as to include building society accounts and ISAs, with the caveat that at least £5,000 must be left across all the accounts. Debtors must owe at least £1,000 to be pursued in this way and will have been contacted at least four times for the measure to be exercised.
“Most arguments against DRD boil down to HMRC’s lack of ability in administration to safely carry it out,” Devereux Chambers tax barrister Jolyon Maugham noted at the time.
Such changes are likely to dominate the coming decade. But, as the first decade goes, tax advisers have given HMRC a tentative thumbs up.
As Bull puts it: “HMRC has done a terrific job in difficult circumstances and it is now up to Parliament to ensure it is adequately resourced to do the job we expect it to do.”
April 2005 HMRC formed after merger takes effect
November 2007 Chancellor Alistair Darling reveals that HMRC lost two discs containing the personal details of all families in the United Kingdom claiming child benefit
September 2009 The Liechtenstein Disclosure Facility, which enables UK citizens to declare previously undisclosed assets, comes into force April 2010 HSBC receives stolen files exposing tax evasion and avoidance among HSBC Suisse clients.
October 2011 Dave Hartnett, the then head of HMRC, faces MPs over allegations he allowed investment bankers Goldman Sachs to escape £10m in interest payments.
June 2012 Government launches a formal consultation on a new general anti-abuse rule (GAAR) to tackle tax avoidance schemes
April 2013 Real Time Information (RTI), which sees PAYE reported on or before the date payment is made, is launched.
May 2013 High court clears HMRC over Goldman Sachs ‘sweetheart’ deal
January 2014 Treasury publishes plans to force users of tax avoidance schemes to pay their tax bills upfront while HMRC conducts investigations into their arrangements
April 2014 Taxation rules for limited liability partnerships come into effect
August 2014 Situations in which taxpayers can use the Liechtenstein Disclosure Facility for offshore liabilities are restricted amid concerns the system is open to abuse
September 2014 HMRC gains pay packet tax debt collection powers October 2014 HMRC confirms the closure of 14 offices by December 2015, while 690 administrative staff invited to take voluntary redundancy
November 2014 Highly-controversial plans to remove outstanding tax debts directly from people’s bank accounts are watered down in face of opposition
December 2014 HMRC completes switch to the GOV.UK web domain following more than 18 months rolling out the new platform January 2015 Lin Homer admits to the Public Accounts Committee that levels of customer service provided by HMRC were not good enough
February 2015 HMRC and HSBC bosses answer questions before Treasury Select Committee over Swiss tax evasion scandal
March 2015 Government introduces online tax accounts for individuals and small businesses, signalling the end of the annual tax form
HMRC has won its tenth successive case against tax avoidance schemes promoted by NT Advisors. The Court of Appeal has ruled that NT ... read more
HMRC is continuing to ramp up the number of raids on premises it carries out as part of criminal investigations, searching 761 properties in the last year
Five million taxpayers are ow using digital personal tax accounts (PTA) as part of the making tax digital strategy, HMRC said
Lord Howard Leigh of Hurley discusses the government’s initiatives to mitigate tax avoidance and evasion