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HMRC 2011-12 accounts qualified for 12th time

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29th Jun 2012
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For the 12th year in a row, the comptroller and auditor general qualified HMRC’s accounts for 2011-12 for the lack of verifiable evidence concerning tax credits error and fraud.

Ever since it first started pumping out billions in tax credit overpayments (estimated at £2.2bn a year in 2003-4), the Revenue has failed to produce accurate figures for erroneous payments and related fraud. The 2010-11 figures were only published this month and showed it had failed to reduce the figure to a targeted maximum of 5% for the year. The latest available estimate was 8.1%, equating to £2.3bn.

The NAO’s assessment for 2011-12 was that HMRC “has inadequate management information” on the recoverability of tax credits debt. The NAO assessment of the tax credit debt balance at 31 March 2012 indicated that the level of irrecoverable debt could be substantially higher than HMRC was estimating and led to a £638m increase in the provision for irrecoverable debts to £2.3bn by the time the final versions of the accounts were published.

Aside from that continuing multi-billion pound niggle, and £5.2bn of debt write-offs swelled by £81m for small PAYE underpayments that will not be collected following the botched National Insurance and PAYE Service (NPS) implementation, the department is showing signs of emerging from the torments of recent years.

New chief executive Lin Homer struck a breezy tone in her introduction, accentuating the positive achievements and neglecting to mention the negatives. Among their achievements, she and chairman Mike Clasper highlighted:

  • £474.2bn of tax raised in 2011-12, £4.5bn up on the previous year.
  • Compliance activities yielded £16.7bn, a 20% increase on 2010-11. Homer said HMRC’s progress in this area “puts us well on course to bring in an extra £20bn per year by 2015”.
  • Around 12m open PAYE cases cleared (there are discrepancies in the numbers quoted), with the department “on track to clear all remaining legacy cases by the end of 2012”.
  • Written off tax held to £5.2bn - a mild improvement on the figure of £5.5m last year.
  • 74% of calls to contact centres answered compared to 48% in 2010-11; also improved processing times for post (63.7% handled within 15 working days, up from 36.8% last year, but still short of 80% target) and tax credit/child benefit claims.

HMRC’s annual accounts statement is a big document - 200 pages (2.1MB PDF) detailing the department’s resource accounts, accounting policies, internal functions, risk management strategy and including the auditor general’s report. It is possible to put many different interpretations on the information provided, and many accountants might see a rueful irony in positive accounting figures that don't appear to reflect their personal experiences of the entity. This overview looks at some of the areas that have attracted the most attention and controversy on AccountingWEB during the past year.

Overview (governance statement)

Homer’s bright outlook sits a little uncomfortably at the head of a document which includes figures and analysis from the NAO indicating some significant underlying problems. Much of the accompanying material was prepared by other hands and as the third responsible accounting officer to serve during the financial period (after Dame Leslie Strathie and Dave Hartnett), Homer may not have been in the role long enough to grasp the scale of the challenge that lies before her.

The department’s governance statement reveals an increased emphasis on the HMRC’s risk management strategy during the past financial year, and highlights problem areas such as customer service, which has “fallen short”, employee relations and fraud. 

The overall employee engagement score increased to 40% per cent in 2011 compared to 34%, but is still well short of the civil service benchmark of 56%. Acknowledging the high risk of disruptions that could undermine operational improvements, HMRC has an industrial action working group to monitor those risks. It has put effort into business continuity planning to cope with strikes and other disruptions.

Fraud by organised criminals is estimated to be costing £5bn-£6bn a year, mainly from alcohol and tobacco smuggling (£3bn) and repayment scams including missing trader intra-commuity (MTIC) fraud. The latter is being targeted with £100m of extra investment, and a new counter fraud strategy that is supported by online transaction monitoring and a new cyber crime team.

The risk profile statement claims that the department is on track to clear its PAYE backlog by the end of 2012 and addressed the tax credits debt as a major control issue, but paid little heed to NAO warnings about persistent problems in these areas.

Debt management

Partly due to the tax credits issue, debt management has been a problem for many years, but showed signs of improvement in 2011-12.

The NAO noted with approval that the value of tax debt under active management at 31 March 2012was £13.3bn, compared with £15.0bn the previous year. The amount of overdue tax collected during 2011-12 was up nearly 14% to £37.9bn. This increase was achieved in spite of the £756m tax liabilities the department decided not to pursue (referred to as “remitted”) in the year. A portion of the losses are because the NPS underpayments below the recovery threshold as revenue losses, which was not done before 2009-10. Another £92m of the overall remitted figure was due to PAYE penalties that HMRC judged were not cost-effective to pursue.

At the same time, the department increased its use of debt collection agencies, which collected £111.3m of debt in 2011-12, which HMRC said was £70.5m more than it would have collected without the additional capacity.

Staffing levels and costs

For all the planned job cuts and redundancies, HMRC managed to reduce its core permanently employed numbers by just 744 during the past financial year. During the same period it took on 2,521 temporary staff at a cost of £49.3m.

Ironically, the total net savings on employment costs for the year of £22.3m, (less than 1% of a total expenditure exceeding £2.3bn) were offset by £29.8m in costs for exit packages - up £11.4m on the previous year.

Within its management accounts, HMRC noted a 50.6% increase in its “people” function and corporate communications costs to £37.3m (50.6 per cent). The increase was explained by the inclusion of corporate communications within this total, an increase in severance payments and increased contracting out.

Technology problems

The shortcomings of HMRC’s computer systems is a recurring theme in the NAO report, much of it stemming from the NPS system that was supposed to cure these ills. When it was installed, inadequate data cleansing generated a huge number of mismatched records.

Even with an on-going strategy to minimise the number of NPS actions required, the system produces some 20.5m work items per year. This is more than HMRC staff can handle, even with the addition of 2,500 extra temporary employees who will continue to help deal with the backlog (and answer the phones) until March 2013.

By 2014-15, HMRC expects to be able to deal with around 13.5m, still short of the reduced annual workload of 15.5m.

The NAO noted: “The department faces resourcing pressures which add to the challenge of dealing with this large volume of work. While stabilising PAYE and implementing Real Time Information (RTI), the department must also reduce staff numbers… from 24,900 to 16,400 and reduce costs by £209m by 2014-15…

“If the project does not deliver the anticipated reductions in work items, the department will have an ever increasing backlog of work items to clear as volumes will continue to exceed clearance capacity…”

The NAO was concerned that HMRC had no contingency plans for such eventuality and repeated its concerns that RTI is going to be imposed on top of an unsustainable IT workload. This has been the SNAFU scenario for years, with policy and technology changes and corporate transformation programmes making it impossible to put an effective IT strategy in place.

Homer acknowleded shortcomings in HMRC’s older tax systems when it comes to financial reporting and anticipated that a new Enterprise Tax Management Platform offers an opportunity for improvement. But, she noted, “It is unlikely that we will be able to address all weaknesses within present funding constraints which focus investment on legislative requirement or enhancing capacity to close the tax gap.”

So, don’t be surprised if HMRC continues to rack up audit qualifications in the years to come.

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Replies (5)

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By Trevor Scott
02nd Jul 2012 13:17

Aren't any HMRC apologists...

... going to speak up for the useless management?

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By Sherlock
02nd Jul 2012 15:52

HMRC Accounts

Taxpayers ought to be assured that the vast sums of money they pay into the Public Exchequer are dealt with and disbursed efficiently.. I do not agree with tax evasion and much of tax avoidance, but I can understand why some people do it, in the light of this report.

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By chatman
02nd Jul 2012 16:13

"corporate communications"

Does "corporate communications" mean PR (i.e. propaganda)?

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By AlMiles
04th Jul 2012 09:50

More horrors to come?

No doubt things will improve when they get rid of the next 10,000 personnel in the planned staff reductions.  (Yes, I'm being sarcastic.)  Will we see the tax take go up as well?

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By mikefleming3028
04th Jul 2012 14:24

HMRC Accouts Audit report

HMRC are paying Aspire (Capgemini) on average £70m to £75m per month forIT support of various description and they still cant get their systems sorted out and working, what on earth is going on? 

The Audit report makes 37 recommendations and obsevations and the most startling is number 37 which states " the Department does not have an organisational-wide operational strategy" With the levels of expenditure being incurred on on the introduction of RTI I would have thought that HMRC would be clear as to how their core functions could be changed but here again it appears from the Auditors comments that there is uncertainty on how RTI and Universal Credit will fit into HMRC future operational model. I for one am staggered that we now have evidence supplied by C&AG that there is a lack of clarity at top level as to where all these changes will lead.

Finally one last quote from the report (point 15 if you are interested enough to read it) which states:- "The Department has yet to decide how far it will use RTI to improve the PAYE service and will use the pilot to inform this work" Sounds to me like making  up policy as you go along. Just what are these eye watering amounts of public money being spent on?

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