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Error and fraud hounds HMRC’s annual accounts

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HMRC received another audit qualification for its 2022-23 accounts, as the level of error and fraud in R&D tax relief claims was found to be significantly higher than previous estimates, rising from £336m to £1.1bn.   

18th Jul 2023
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The two key takeaways from HMRC’s annual accounts were the increasing level of fraud and error rampant in R&D tax reliefs - which accounted for over £1bn - and the falling taxpayer satisfaction with HMRC’s customer service levels since the pandemic. 

Despite customer service performance falling below expected service standards and error and fraud significantly higher than expected, HMRC reported in the 2022-23 annual report and accounts a 13% increase in the total revenues of £814bn (up from £731.1bn in 2021-23) - the highest on record. This demonstrated the impact inflation has had on the value of taxable goods and services and also the effects of the freezing of tax bands.  

The £34bn compliance yield figure was also up by 10% on the previous year but it still missed its target by £2bn which HMRC put down to reduced compliance activity during the pandemic. The auditor said HMRC must improve its compliance yield if it’s going to maintain the tax gap.  

Elsewhere, the tax debt came in at £43.9bn, which is lower than the £68.5bn reported during the pandemic but still higher than 2015-16’s £14bn. 

Customer service performance

Statistics around HMRC’s customer service performance illustrated the frustration felt by taxpayers and agents attempting to speak to an adviser. The report found that taxpayers on average waited 16 minutes 24 seconds to have their calls answered, compared to 12 minutes and 22 seconds in 2021-22 an increase of over 30%.  

In his forward, HMRC CEO Jim Harra expressed his disappointment that the Revenue didn’t hit its customer standards this year and admitted that 2022-23 was “a challenging period for us across many of our traditional phone and post services”. 

Harra pinned the blame on a growing customer base who have “increasingly complex needs”. He was also more forthright about the budgetary constraints the Revenue has been under. “We face an ever tighter departmental budget, creating significant operational challenges for us. Put simply, it’s getting harder to meet our service standards using the same approaches that may have worked in the past,” he said. 

He used this as reasoning for HMRC’s drive towards creating “quicker and easier online services". As such, Harra confirmed that HMRC is looking to reduce the number people contacting them by telephone or post by 30% over the next few years. He claimed this would enable more taxpayers to “resolve their issues quickly and easily online, and freeing us up to help those who need extra support”.

In response to customer service levels falling below expected service standards, and with HMRC closing two helplines (temporarily closing self assessment helpline for three months and permanently closing the VAT registration helpline), the auditor concluded: “Taxpayers and their agents are still not receiving the support they expect”.

The auditor added: “HMRC’s plans to move more customer enquiries onto digital channels may address this in the longer term, but it will need to improve how it services current demand while those plans are being implemented and have a contingency should they take longer than anticipated.” 

Error and fraud

Aside from customer performance issues, error and fraud in R&D relief, corporation tax and personal tax credits was highlighted as another concern for the comptroller and auditor general (C&AG). 

The accounts were qualified again - as they have been since the introduction of tax credits - and the auditor expects this to remain the case until the closure of tax credits. Adding to the amount of error and fraud swirling around the tax credit system, there were further sources of material uncertainty around R&D tax credits and corporation tax.

The accounts reported that the level of R&D tax relief error and fraud was significantly higher than expected, finding the rate of error and fraud in 2020-21 was 16% (equivalent to £1.13bn) - which was more than three times higher than the original estimation of £336m for this period. 

The majority of non-compliance was assigned to SME relief. The accounts stated that £1.04bn of this error and fraud was attributed to the SME scheme, while £90m was for the R&D expenditure credit (RDEC) scheme. The high number of error sand fraud comes as the Chartered Institute of Taxation (CIOT)  raised concerns about HMRC’s crackdown on claims and how it discourages legitimate claims.  

The same uncertainties surrounded personal tax credits, with HMRC’s revised estimates finding error and fraud resulting in overpayments of 4.5% (£0.51bn) of tax credit expenditure. 

There was high error and fraud elsewhere too. The final estimates for error and fraud across the Covid schemes was £3.5bn for the furlough scheme and £1.5bn for the Self Employed Income Support Scheme, which at a total of £5bn is an increase on last year’s provisional estimate of £4.5bn. 

The auditor concluded that HMRC now “has a more realistic picture of the extent to which corporation tax research and development reliefs are being abused” and needs to now “carefully consider the adequacy of its current compliance approach and the case for inspecting more claims from the period before the point at which the scale of abuse became clear”.

Off-payroll hypocrisy?

Meanwhile, HMRC was accused of hypocrisy by off-payroll campaign groups as the accounts show that across HMRC, Revenue and Customs Digital Technology Services (RCDTS) and Valuation Office Agency (VOA) departments, 1,096 temporary off-payroll workers were engaged. The accounts said that these off-payroll workers earned £245 or greater a day. However, none of these workers was engaged outside of IR35, with the vast majority engaged via an umbrella company. 

Seb Maley, the CEO of Qdos, said: “It’s no secret that many businesses have needlessly stopped engaging contractors because of the off-payroll working rules. But instead of leading by example and showing others that these rules are perfectly manageable, HMRC is insisting that all contractors work on the payroll. This is hardly leading by example.”

Performance review

In the performance review, HMRC highlighted how it was ‘making it easy to get tax right’ by scoring a 4.8 rating for its HMRC app which has had 56.6m logins. It also noted that 99% of businesses over the VAT threshold are signed up to file returns under MTD for VAT, which resulted in eight billion returns submitted. 

Amidst the poor customer service feedback elsewhere in the report, HMRC pointed out that 72.7% of correspondence is turned around within 15 days and its digital services has a satisfaction rating of 82.7% in the last financial year. 

Looking ahead, Harra signed off by outlining the Revenue’s long-term aims of “Offering more and better online services so they simplify things for our customers, doing more to remove the causes of unnecessary customer contact and improving compliance.”

 

Replies (21)

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By Justin Bryant
18th Jul 2023 14:43

And for how many years have we all been warning of rampant R&D credit fraud here with no action whatsoever from HMRC (which in turn encouraged even more dodgy claims that went totally unpoliced)?

Only very recently have they woken up to this massive, widespread, obvious (to all of us at least) problem and clamped down.
https://www.gov.uk/government/publications/compliance-approach-to-resear...

Don't HMRC read Aweb?

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Replying to Justin Bryant:
By Ruddles
18th Jul 2023 16:38

Justin Bryant wrote:
Don't HMRC read Aweb?

Yes, but the only views that they respect are those of Richard and Jason ;¬)

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Replying to Ruddles:
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By Hugo Fair
18th Jul 2023 19:53

[.. ouch ..]

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Replying to Hugo Fair:
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By Wanderer
19th Jul 2023 07:52

Hugo Fair wrote:

[.. ouch ..]

'tis true ... apparantly.
Justin Bryant wrote:

Yes Richard, it’s really great to have you back with your sage comments (in case you don’t know, yours and Jason's views are the only ones that I respect on this forum – even though we occasionally disagree).

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Replying to Justin Bryant:
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By Hugo Fair
18th Jul 2023 19:57

"And for how many years have we all been warning of rampant R&D credit fraud .. "

... well not ALL of us apparently ... someone got quite worked up in its defence at https://www.accountingweb.co.uk/comment/981774 (or at least I think it was in its defence - it became increasingly hard to tell as the 'comments' proliferated)!

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Replying to Hugo Fair:
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By Justin Bryant
19th Jul 2023 08:57

Entertaining comments from RandDTaxUK there. Reminds me of a similar amusing tetchy discussion here between WP and a certain tax author defending his misleading online SDLT guidance. Perhaps HMRC should be asking for their client list (although apparently HMRC ignore my comments here)?

https://randduk.com/about-us/meet-our-experts/

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Replying to Justin Bryant:
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By Hugo Fair
19th Jul 2023 10:51

Wow, IF that is the company from which RandDTaxUK operates then I certainly can now see the amount of vested interest being defended!

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Replying to Hugo Fair:
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By Justin Bryant
19th Jul 2023 10:56

Then again, it could be these guys: https://www.randdtax.co.uk/our-team/

Or pretty much anyone else for that matter.

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By Hugo Fair
18th Jul 2023 20:11

Most of the stats are (as always) somewhere between laughable and transparently wrong (in any world other than HMRC's where definitions are fluid, as are criteria from one set to another set of measurements).

But just occasionally the truth reveals itself
... Harra signed off by outlining the Revenue’s long-term aims of “Offering more and better online services so they simplify things for our customers, doing more to remove the causes of unnecessary customer contact and improving compliance.”

I guess that they're ahead of schedule with "removing the causes of unnecessary customer contact" ... by losing the post / closing the human-handled call-lines / limiting options for form downloads!

Thanks (4)
Replying to Hugo Fair:
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By Latinaid
19th Jul 2023 10:54

Hugo Fair wrote:

Most of the stats are (as always) somewhere between laughable and transparently wrong (in any world other than HMRC's where definitions are fluid, as are criteria from one set to another set of measurements).

But just occasionally the truth reveals itself
... Harra signed off by outlining the Revenue’s long-term aims of “Offering more and better online services so they simplify things for our customers, doing more to remove the causes of unnecessary customer contact and improving compliance.”

I guess that they're ahead of schedule with "removing the causes of unnecessary customer contact" ... by losing the post / closing the human-handled call-lines / limiting options for form downloads!

Unnecessary from whose point of view? I don't know about you, but I have NEVER phoned HMRC if there was an alternative way of dealing with the issue.

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By taxdigital
19th Jul 2023 08:39

Well, it’s no brainer, with inadequate resources and all the focus on the magic bullet (MTD) this will get worse, at least in the short-term. Meanwhile, billions of taxpayers’ money will reach the hands of fraudsters via R&D, SEIS, EIS ….claims. Why can’t HMRC share their burden with regulated accountants and advisers by getting the claims certified by them? Rather than leaving everything to HMRC’s incompetence and inertia, there will at least be one hurdle to pass? ‘Tax audit’ can be a poor political message to businesses particularly smaller ones though.

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By seonaid anderson
19th Jul 2023 10:17

Tax take in 22-23 was also surely higher because of the timing of the taxation of covid grants.

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By ralan
19th Jul 2023 10:18

A typical example of do as I say not as I do

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By Karen whitehead
19th Jul 2023 10:28

This comes from introducing a relief but not policing it properly. Why claims were paid out when not accompanied by a full report I have no idea. The problem is now that they are questioning all claims which is enough to put off legitimate claimants.

I do not believe that HMRC are turning around 72.7% of correspondence within 15 days. In May this year I have had a reply to my letter of 17th January 2022 (17 month delay), I received a letter in October 2022 which was in reply to my letter some 10 months earlier.

Amendments to CT600's for carry back loss claims are not being processed

VAT aplications are a complete joke. With clients waiting months to receive a vat number.

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By Justin Bryant
19th Jul 2023 11:05

Interesting also how there's potential £1m fines/imprisonment re DoTAS, yet you can flog these dodgy R&D claims with impunity.
https://www.gov.uk/government/consultations/consultation-tougher-consequ...

No wonder it's been so rampant.

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By sherodwilliams
19th Jul 2023 12:08

It surely comes as no surprise whatsoever to anyone in the profession that the annual report / audit on HMRC has highlighted once again the huge disparity between what HMRC convinces itself is reality and the experiences which agents & the general public endure on a daily basis.
Telephone calls are being answered on average within 16 minutes - perhaps this is when they finally pick up a call when the caller has previously spent 59 minutes on hold on 3 separate occasions ! I have all too often this calendar year waited on hold for over 30 minutes on the agents dedicated line.
HMRC have now re-allocated resource from elsewhere to a dedicated team who will deal with post over 12 months old where no response has been sent. They clearly know this problem exists but they are unable to identify it unless an agent or a taxpayer writes in on a set format to alert them.
We all recognised that the Covid assistance schemes would quickly become a hotbed for fraud yet HMRC had no systems in place to either identify or counteract it.
And then it is revealed that off payroll working is only an issue it would seem for the likes of the NHS & the BBC. together with many other larger employers. HMRC has over 66,000 "employees / workers" but seems to ride rough shod over the their own rules.
HMRC has a crack the size of the San Andreas Fault running through it & until someone with basic commercial common sense takes control of this organisation, MTD should be postponed indefinitely.

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By Finacta
20th Jul 2023 10:55

"Put simply, it’s getting harder to meet our service standards using the same approaches that may have worked in the past,” JH

Yes, as a start:

1) Drop letter based communication
2) Build or implement a single unified online ticketing/request tracking system for all cases (VAT registrations, Corporation Tax queries, everything) that can be quickly allocated to the right department and tracked online by the requestor and HMRC- track everything back and forth within the online case. Something like Zendesk or an equivalent tool.
3) If 2 is implemented, drop phone comms too if they want.

That would be a start!

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Replying to Finacta:
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By Jdopus
20th Jul 2023 16:22

The Irish Revenue have a fully functioning version of point 2 here and communicating with them is incredibly efficient, I can very quickly reply to queries from their end when they have problems and the same is true when I have problems. HMRC could stand to learn a lot from that model.

I wouldn't be a fan of dropping letter based communication, but it's absurd that we frequently have no digital alternative.

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Replying to Jdopus:
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By Finacta
21st Jul 2023 13:04

Of course they do, because it's a logical solution for any organisation managing a high volume of queries. This isn't even on the agenda at HMRC, rather it seems we're only just at the point of realisation that there is an efficiency problem!

Just curious, what benefits do you get by letter that you couldn't get digital?

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Replying to Finacta:
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By Jdopus
24th Jul 2023 08:59

No real benefits, but I deal with a lot of large inspecti0ns and I often have issues passing large bundles of data to HMRC e.g. requests for multiple years of bank statements. They recently refused to deal with drop box anymore and seem to have tried launching their own workaround file upload service. I've used it once but it didn't work very well.

In particular, once you upload files on there it (very conveniently for HMRC) doesn't allow you to see them anymore, they just vanish with no receipt or proof that you sent them and I long ago learned never to trust to HMRC's honesty on matters such as these.

Being able to send physical post gives me a backup to be able to prove that I have passed this information over given the restrictions of email attachments. It means they can't play stupid and pretend I have not passed information to them.

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On The Spot Accountants - Local Accountant - Tax Experts
By onthespottax
25th Jul 2023 09:54

Interesting that error and fraud are combined. They are very different. But this approach shows a bigger number with which to blame businesses. In any event, error may just mean the SME gave up arguing with HMRC due to time and cost reasons.

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