At Outhwaite Associates we don’t go in for “HMRC Bashing” and generally find that at an individual level there are some very talented officers who are doing a good job – despite Government-imposed spending constraints. We may not always see eye to eye with them – that is the nature of the beast – but we do respect them.
However, at an institutional level we do have concerns about some of the tactics HMRC employ, and also their general direction. We have therefore noted with interest the views of the Public Accounts Committee this week – which reflect some of our concerns. The Committee highlighted serious and ongoing concerns about tax evasion, tax avoidance and tax collection.
The Committee described the number of prosecutions for offshore tax evasion as "woefully inadequate" and cited HMRC’s failure to gather intelligence on losses through aggressive tax avoidance as an obstacle to improving UK tax laws.
The Committee also raised fresh concerns over HMRC’s customer service, now considered so bad it could be having "an adverse impact on the collection of tax revenues".
The Committee published a report which commented upon the following: -
The achievement of HMRC in increasing the amount of tax collected, while also reducing its running costs over the last 5 years.
Despite its undoubted successes, HMRC still does not report on how much cash was received as a result of its compliance work or on the scale of aggressive tax avoidance which exploits loopholes in the law. HMRC also continues to avoid publishing information on the scale and nature of tax reliefs that would assist Parliamentary oversight of this area of the tax system.
The standard of customer service from HMRC remains unacceptable. The Committee stated that they were particularly disappointed by HMRC’s failure in this area given that people are more likely to pay the right tax when they find HMRC easy to deal with.
The Committee were also extremely concerned that HMRC’s work has led to too few prosecutions of individuals for tax evasion, and that there is therefore no credible punishment to deter people from breaking the law in this manner.
In terms of statistics, HMRC collected £517.7 billion from UK taxpayers in 2014-15, some £11.9 billion more than the previous tax year. Total tax revenue has increased in each of the past 5 years, during which HMRC reduced its running costs by £30 million to £3.1 billion. HMRC has thereby improved its ratio of revenue collected [per £1 of administrative expenditure] from £138.14 in 2010-11 to £166.95 in 2014-15.
In 2014-15, HMRC also reduced tax losses and the balance of tax debt while paying out more in benefits and credits.
HMRC estimates its compliance work (tackling those who do not comply with their tax liabilities) saved £26.6 billion in 2014-15. The July 2015 budget announced that HMRC would be given a further £800 million to collect an additional £7.2 billion in tax revenue from its compliance work between 2015 and 2020.
Summary of Committee Report conclusions and recommendations
HMRC does not report on the scale of aggressive tax avoidance, which means Parliament cannot assess whether tax law is working as intended. HMRC defines avoidance as exploiting the tax rules to gain a tax advantage that Parliament never intended. It involves operating within the letter but not the spirit of the law. The Committee remained concerned that HMRC has failed to act on the previous Committee’s recommendation from December 2013 that it should gather intelligence about the value of tax lost through aggressive tax avoidance schemes.
Recommendation: HMRC should identify and report the value of all tax avoidance schemes.
The number of tax reliefs continues to grow but the scale and nature is invisible to Parliament because HMRC refuses either to define them or list them comprehensively.
Recommendation: HMRC should define the different types of tax relief, which require monitoring and evaluation to enable Parliament to decide which reliefs may require further scrutiny or legislative change.
Customer service levels
HMRC is still failing to provide an acceptable service to customers. Previous Committee’s had concluded that HMRC had "an abysmal record on customer service", having only answered 72.5% of telephone calls received by its contact centres. The previous Committee considered that HMRC’s target of answering 80% of telephone calls within five minutes was "woefully inadequate and unambitious" and recommended that HMRC should set a more challenging short-term target for call-waiting times and a long-term target that is much closer to industry standards.
Recommendation: HMRC should identify what impact its poor level of service is having on tax revenues. This should include a clear plan for the efficient management of its change programme and introduction of new IT systems.
Offshore tax evasion
The number of criminal prosecutions for offshore tax evasion is still woefully inadequate. HMRC’s investigations do not lead to sufficient prosecutions to provide an effective deterrent, particularly for wealthy individuals who hide their assets offshore. HMRC needed to demonstrate that it deals robustly with individuals and companies who deliberately mislead it.
Regrettably, HMRC appears either to have ignored recommendation or made little progress. Only 11 prosecutions in relation to offshore tax evasion since 2010, and only one from the Falciani list (3,600 potential UK tax evaders whose Swiss bank account details were leaked by a former employee of HSBC).
Recommendation: As previously recommended, HMRC should strengthen its capability to investigate offshore tax evasion and make tougher the criminal and civil sanctions.
Additional tax revenue
HMRC’s public reporting of the additional tax revenue it generates from its compliance work (compliance yield) remains unnecessarily complicated and confusing. It annual report is a combination of measures, calculated in different ways and covering different time periods. It includes some cash that is owed, estimates of tax losses prevented and estimates of the impact of its work on tax revenue in future years.
Recommendation: HMRC should report its compliance yield in much clearer and simpler terms.
In conclusion, Meg Hillier MP, Chair of the Public Accounts Committee, said:
"HMRC must do more to ensure all due tax is paid. The public purse is missing out and taxpayers expect and deserve better.
We are deeply disappointed at the low number of prosecutions by HMRC for tax evasion. We believe it is important for HMRC to send a clear message to those who seek to evade tax that the penalties will be severe and public.
Too many avoidance schemes run rings around the taxman, operating legally but gaining advantages never intended by Parliament.
HMRC must also rapidly improve its customer service, previously described by the PAC as abysmal and now even worse – to the extent it could be considered a genuine threat to tax collection.
It beggars belief that, having made disappointing progress on tax evasion and avoidance, the taxman also seems incapable of running a satisfactory service for people trying to pay their fair share."
As we said at the outset, we have huge respect for the individuals working in HMRC, despite not always agreeing with them! We like to proactively engage with HMRC whilst always working in our clients best interests to secure the best possible outcome for them.
It is clear to us that HMRC at an institutional level does seem to shoot itself in the foot time and time again. As anyone knows who has tried to contact HMRC on a routine matter, the level of customer service can be very poor indeed, and this needs addressing urgently. On the tax avoidance front, HMRC has had undoubted success, but yet they never seem to publicise it. It can also be difficult to engage with HMRC on behalf of clients who wish to explore ways of exiting tax avoidance products, despite the number of “settlement opportunities” that seem to arise on a haphazard basis. A more coherent and transparent strategy would be welcome here.
If HMRC is serious about tackling serious tax evasion, a more robust Criminal Investigation policy would have a twofold effect – firstly in challenging the most abusive forms of tax evasion directly, and secondly acting as a deterrent for individuals and business entities who may think they can “get away with it”.
We will be monitoring HMRC to see how they react to this report. Surely they cannot ignore it? Or can they…… they appear to have done last time out!