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HMRC 2016 accounts set out change plans

19th Jul 2016
Head of Insight AccountingWEB
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HMRC plans for making tax digital star in 2015-16 accounts

HMRC’s annual report and accounts for 2015-16, released last week, show steady progress at raising revenue - up 3.7% from last year to £536.8bn - while wrestling with massive organisational changes and continuing material uncertainties around the cost of tax credit errors and fraud.

Both executive chairman Edward Troup and chief executive Jon Thompson celebrated the department’s success at raising its returns from efforts to stem tax avoidance, evasion and fraud. This “compliance yield” was set at £26.6bn for the year and included amounts protected through legal action and other efforts to stop tax avoidance, evasion, fraud and non-compliance.

According to Troup, “Our ability to deliver six consecutive years of increased tax revenues led to the Chancellor’s 2015 Spending Review announcement of an additional £1.3bn investment in our transformation and confirmed the Summer Budget 2015 announcement of an additional £800m million for investment in compliance activities.”

But there’s a downside among the pictures of happy, smiling taxpayers and all the the optimism on show.

The HMRC annual report and accounts acknowledged the service quality failings that dogged the department in the summer of 2015, and in its report on the accounts, the National Audit Office (NAO) questioned the “compliance yield” estimates HMRC uses to measure its progress.

Qualified again

For the 16th year running, the NAO qualified HMRC’s accounts for 2015-16 due to the lack of evidence to substantiate estimates for errors and fraud in tax credits. According to the government auditor, the time it takes HMRC to finalise its awards means its best estimate of fraud and error relates to the year prior. Since there was no evidence to substantiate a lower estimate this year, the NAO reached back to 2014-15 to calcuate a net overpayment in the region of £1.09bn-£1.26bn.

Taxes income rises

The proportions for individual taxes raised in 2015-16 were:

  • Income tax, representing just under a third (32%) of total revenue, and national insurance contributions increased 3.8% in the year due to higher levels of employment and higher wages. This was almost exactly in line with the department’s overall increase of 3.7%
  • VAT (22% of total revenue) up 1.8%, thanks to bigger receipts from the automotive, business services and utilities sectors as well as greater general household spending.
  • Corporation Tax (8% of total revenue) up 9.9%.
  • Hydrocarbon oils (5% of total revenue) increased 1.8%; although petrol prices have been dropping, lower prices at the pumps apparently increased the amounts purchased.
Main sources of HMRC tax revenue 2015-16
HMRC 2015-16 Accounts, p15

Compliance yield quibbles

Elsewhere in the report, HMRC revealed that its £26.6bn compliance yield included £2.4bn raised through accelerated payments notices (APN) that demand up-front amounts within 90 days from people using disputed tax avoidance schemes. This figure, which ultimately depends on tribunal decisions, also includes a £6.2bn “future revenue benefit” estimate for the amounts saved by behavioural change resulting from the APN crackdown.

The rest of the compliance yield total was made up from:

  • £9.0bn in cash collected
  • £6.8bn of revenue loss prevented, for example by stopping fraudulent repayment claims and compliance work to disrupt criminal activity
  • £2.1bn estimated impact of product and process improvements that reduce opportunities to avoid or evade tax.

The NAO has flagged up doubts and inaccuracies in HMRC’s compliance yield figures before, most notably in the 2013-14 annual accounts, where an artificially low baseline helped inflate the savings claimed by nearly £1bn. This time around, the auditor considered compliance yield “a reasonable proxy” for HMRC’s internal decision-making, but emphasised to readers of the annual report that it “does not equate to revenues received during the year arising from HMRC’s enforcement and compliance activities”.

In urging HMRC to improve the transparency of its reporting, the auditor recommended further research to sharpen the accuracy of compliance estimates and to explain the uncertainties inherent within the figure. “This would help to better inform readers of the estimations and assumptions that underlie HMRC’s reporting of its performance,” the auditor concluded.

More cuts planned

The annual cost of running HMRC was £3.2bn in 2015-16. The second-largest department in terms of staff employed, HMRC boasted 58,600 full-time equivalent positions on 31 March 2016, based in 167 offices across the UK.

The report makes clear that HMRC aims to further reduce operating costs over the next five years, starting with £203m in 2016-17 and rising to £717m by 2020. The cumulative total of by that point should be £1.9bn.

During the past year, HMRC “lost” more than 5,400 full-time equivalent positions, spending £5.9m on exit packages compared to £39.3m the year before. But it is clear that to continue to achieve its targeted savings the department will spend more on technology while taking more people and buildings out of the equation.

By 2021, it expects to employ 16% fewer people, most of whom will work in 13 regional centres. This rationalisation will see the completion of its progamme to close 137 local offices, although a number of “transitional sites” will be retained  to “manage the impact of the changes”.

HMRC is aware of the risks it faces in cutting staff while trying to rationalise and increase its revenue. The formula came a cropper in 2015-16 as service quality levels plummeted, the report acknowledges.

It brought in nearly 3,000 extra staff to make sure phone calls were answered more quickly. The phone issues were addressed, but as the NAO noted previously, this shift in emphasis allowed the RTI error backlog to grow. But extra investment in customer service announced in the 2016 Budget “will enable us to enhance our customer services further”, HMRC said. The funding will underpin new workforce planning systems that will help it “build flexibility into our customer support model”.

Transformation risks

Making tax digital is expressly presented in the report as the mechanism that will enable HMRC to achieve its ambition to become “one of the most digitally advanced tax administrations in the world”. The annual accounts explain that 2016-17 will see the greatest activity for both spending and reaping the benefits HMRC expects from transformation.

Since last year, HMRC has put plans in place to spend £2bn on the transformation programme to achieve the £700m running cost reductions and boost tax revenues by £1bn by 2021.

2016-17 will see the greatest activity around making tax digital

HMRC has a strong rationale for these plans, the auditor noted while drawing attention to the department’s patchy track-record at delivering change so far. “HMRC’s past experience demonstrates that there are serious risks should main assumptions underpinning its strategy not prove realistic,” the audit report noted.

The most recent NAO report on service quality, for example, found that HMRC misjudged the impact of releasing customer service staff before it had reduced the demand from personal taxpayers for its telephone helpline.

HMRC has also not produced any estimates of the costs or benefits individual taxpayers will get when they make move to online services. The proposed quarterly reporting regime will force some companies to buy new software to work with the new systems. “Based on our consultation with stakeholder groups, we found that some businesses are sceptical of HMRC’s evaluations of the costs and benefits of previous changes to the tax system,” the NAO said.

Looking back at the business case for HMRC’s last great digital adventure, real time information, the NAO pointed out that HMRC estimated the payroll reporting mechanism would save businesses £300m a year in compliance costs. On further examination by the Administrative Burdens Advisory Board, that savings claim was reduced to £292.5m. “Some businesses remain sceptical that access to real-time information has reduced their costs at all,” the NAO added.

As with previous years the annual report and accounts reflect an organisation in transition. Accountants will be used to all of the optimistic departmental claims and background static about unrealistic and unfulfilled expectations for HMRC’s change programme.

HMRC has been an organisation in permanent transition since the Inland Revenue and Customers were merged in 2005

But it might be worth remembering that HMRC has been an organisation in permanent transition since the Inland Revenue and Customers were merged in 2005, and what we are seeing are successive waves of rationalisation being imposed on top of previously unresolved problems with personal tax credits, legacy computer systems and plunging staff numbers and morale.

The assumption has taken root within Whitehall is that making tax digital will be the big fix that finally puts all these problems to bed. In its own quiet way, however, the NAO reminded us that major transformation projects can only succeed if they’re built on solid foundations.

The auditor continued to highlight some of the over-optimistic assumptions and confusing figures presented by the tax department to demonstrate its progress so far. With uncertainties rampant from turmoil over Brexit, the evidence within the 2015-16 HMRC annual report pointing to a smooth digital transformation is hardly reassuring.

Replies (8)

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By JCresswellTax
20th Jul 2016 11:50

For goodness sake, the graphic at the top of this article nearly killed my eyes! Total overkill!

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By Comptable
20th Jul 2016 12:49

"The auditor continued to highlight some of the over-optimistic assumptions and confusing figures presented by the tax department to demonstrate its progress so far."

But be warned, if you do that with your tax return they will have your guts......

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By Echo761
20th Jul 2016 12:56

Future Revenue Benefit (FRB) is like saying I sold a customer a tractor this year so I will sell a tractor to the same customer every year in the future... its a made up nonsense figure and HMRC should only be measured by "money in the bank"... not "cheques in the post". As everyone in business knows you cannot be judged on sales you may make in the future....

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By mydoghasfleas
20th Jul 2016 13:02

Biggest increase in yield on income tax and NICs resulting from higher employment levels and wages, almost entirely worked by employers on behalf of HMRC, so "“Our ability to deliver six consecutive years of increased tax revenues" is essentially nothing to do with HMRC rather the employer's abilities - the unpaid HMRC workforce.

As for £26.6 billion additional compliance yield, £9 billion is cash and £2.6 billion comes from forcing payment of disputed tax. £15 billion is wishful thinking partly caused by refusing to deal with claims and allowing enquiries to languish for years as an encouragement to others into thinking, if I try and reduce my tax, my grandchildren will still be arguing it in their dotage.

I take Messrs Troup and Thompson are now off the the subsidised civil service club bar, triples all round then calls out to the Big 4 to see what packages they will be on this time next year.

At least when he is up before the PAC as Chairman of the Board of HMRC he will not be able to use the Homer defence of, "I am not a tax expert". I still cannot believe that did not meet the response of,"then why are you in the job?"

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Replying to mydoghasfleas:
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By johnjenkins
20th Jul 2016 14:13

Does anyone actually believe HMRC figures anymore?

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Replying to johnjenkins:
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By Echo761
20th Jul 2016 14:57

In a nutshell... No. They still say they are getting on top of things. I have been waiting since February to get a reply to a letter regarding one of my clients. I have sent an e-mail enquiry to follow up, they told me a letter had been sent last week... it arrived. It was basically saying HMRC had not received a reply to their letter of January. I called and the person who answered was the officer who had sent the chasing letter. Eventually after he found my 64-8 (which was attached to my letter of February...) he found I had responded..... Jeeeees Oh! What was perhaps even worse, there was no hint of apology and he tried to read a complex letter and give an instant answer. I stopped him and said I wanted a written reply. Need an appealable decision or where does my client go then.

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By rogertax
20th Jul 2016 15:56

On making tax digital JS reports " The annual accounts explain that 2016-17 will see the greatest activity for both spending and reaping the benefits HMRC expects from transformation." I am struggling to see how HMRC will benefit before it is introduced, assuming it is in this decade.

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By AndrewV12
19th Nov 2016 13:57

Both executive chairman Edward Troup and chief executive Jon Thompson celebrated the department’s success at raising its returns from efforts to stem tax avoidance, evasion and fraud. This “compliance yield” was set at £26.6bn for the year and included amounts protected through legal action and other efforts to stop tax avoidance, evasion, fraud and non-compliance.'

The trouble is, with a national debt of 1.6 Trillion, 26.6 billion seems a little bit on the small size.

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