HMRC’s annual report for 2018-19 promotes an optimistic set of headline achievements, but pays less attention to baggage that is holding it back from its long-term goal to become “the most digitally-advanced tax authority in the world”.
The new Comptroller and Auditor General Gareth Davies has lighter touch than his predecessor, but still qualified HMRC’s 2018-19 annual accounts for the chronic and deteriorating level of material error and fraud in paying out tax credits.
But first, let’s start with the good news, summarised by the annual report’s executive summary page.
- The total revenue HMRC reported in 2018-19 was £627.9bn, a 3.6% increase on 2017-18
- And additional £34.1bn in tax was generated by tackling avoidance, evasion and non-compliance – HMRC’s so called “compliance yield”
- 93.5% of the 11.5m self assessment tax returns for 2017-18 were filed online and 19m taxpayers have signed up for Personal Tax Accounts since they were launched
- 900,000 online tax credits renewals
- £576m sustainable cost savings since 2015-16 – this figure is HMRC’s estimate of the cumulative reduction in its base operating costs year-on-year; £166m in savings were delivered in 2018-19, building towards an ultimate target of £717m by 2019-2020
At the heart of this year’s annual report is the view that it is on track and accelerating towards an objective the department calls “channel shift” – encouraging taxpayers to use digital services while “optimising the effectiveness of customers using all HMRC services”.
But the detailed HMRC accounts and accompanying audit report offer some evidence that these plans are not progressing as smoothly as the department’s summary suggests.
Tax credit fraud and error
The annual qualification – the 19th in an uninterrupted sequence going back to the introduction of tax credits – is down to the annual estimate of tax credit payments still growing above 5% and not responding to any visible interventions or controls. The figure is expected to rise further in 2018-19.
The most recent 2017‑18 figures estimate that tax credit overpayments increased 5.7% to £1.46bn, exceeding HMRC’s 5% target. Underpayments amounted to £170m. As part of the transition to Universal Credit, HMRC is passing over responsibility for administering tax credits to the Department of Work and Pensions.
With the rollout of Universal Credit, fewer people are making claims for tax credits. Even so, by the end of March 2019, HMRC was still sitting more than £6.2bn of tax credits debt, after passing responsibility for some £1bn in debt to the Department of Work and Pensions as claimants transfer to the new system.
This transition is likely to continue until the end of 2023, when HMRC can start hoping it might get a clean bill of health on its annual accounts.
HMRC has put in place internal measures that both departmental critics and national auditors have queried and challenged in previous years. These measures include the £35bn tax gap, £34bn in reported compliance yield and £576bn “sustainable cost savings”.
The current size of HMRC’s annual tax gap, based on 2017-18 estimates, was £35bn, up £2bn from the previous year. The gap represents the difference between the amount of tax HMRC thinks should be paid and what is collected and represents 5.6% of the total theoretical tax liabilities.
In what appears to be a neat coincidence, the 2018-19 figure for compliance yield achieved was £34.1bn against a target of £30bn. These performance measures have been agreed with the Treasury, but have been consistently challenged by the NAO and critics such as Richard Murphy.
While these figures feature prominently in HMRC’s coloured charts and large print infographics, they pass without comment in this year’s audit report. Instead of investigating and explaining how the figures are calculated, and on what evidence, the auditors devote a dozen or so pages to explaining how the income tax and PAYE systems works.
The primer may not be necessary for many accountants and payroll managers who deal with these systems on a daily basis, but help to explain the measures the NAO uses to assess HMRC’s performance. Even here, however, the figures raise questions that are not answered – for example why the number of PAYE issues needing clerical review more than doubled from 102,487 in 2017-18 to 276,246 in 2018-19.
As HMRC and the government auditor acknowledge, the department was forced by circumstances (Brexit) to reprioritise its organisational overhaul.
HMRC decided to delay the rollout of the income tax and Corporation Tax elements of the Making Tax Digital and closed down projects to upgrade another internal system upgrade to redeploy people to EU exit-related programmes.
The NAO accepted that while still “ambitious”, the revised transformation delivery timetable “is now more realistic”.
One of the key figures affected by the reprioritisation of transformation work was the expected of “sustainable cost savings”. This is another of those non-GAAP measures that is not substantiated in the accounts. The £166m savings delivered in 2018-19 was less than the expected £186m and leaves a further £141m to achieve for the department to attain its target of £717m by 2019-20.
Aside from the origins of all these savings, the focus on digital transformation programme has seen a deterioration in basic service levels. “We slightly missed some of our customer service targets, including the average speed in answering calls and turning around our post,” HMRC admitted. The reasons for this shortcoming included “recruitment challenges” – without mention of the successive years of staff cutbacks - and the need to divert resources to EU exit work.
The department’s consistently maintain that technology will make it easier for taxpayers to get their tax affairs right – without the need to contact HMRC. The PAYE issues on hand figure raises some doubts here, as does the increase in taxpayers submitting self assessment tax returns – a far less cost-effective collection method than PAYE.
HMRC pointed to the increase in self-employed individuals and those with property income, an increase in those earning more than £100,000 and policy changes such as the Higher Income Child Benefit Charge introduced in January 2013.
These factors are all legitimate, but the reduction in basic service measures such as phones and post suggest two other possible interpretations: the tax system is still growing more complex; and that HMRC has cut back customer-facing resources too far in its rush to digitisation.
As is clearly acknowledged by all concerned, Brexit has had a significant impact on HMRC’s operations, with 5,400 full-time equivalent employees working on EU exit issues during 2018‑19. These efforts cost HMRC £261.7m, fractionally over the budget allocated for these efforts by the Treasury.
In the face of these underlying contractions and complications in HMRC’s accounts, the NAO concluded: “HMRC will need to continue to monitor and improve customer service performance and deliver the planned improvements to the effective administration of the tax system. This is set against the backdrop of a challenging programme of wider business transformation and the ongoing impact of EU exit.”
About John Stokdyk
AccountingWEB’s Head of Insight has been with the site since 1999 and likes to spend his time studying accountants’ technology habits. When not nerding out, you can find him exploring obscure indie music and searching for the perfect organic sourdough loaf from his base in Brighton, UK.