HMRC accounts gloss over underlying problems

Whitehall
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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.

Headline stats

  • 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.

Questitonable claims

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.

Transformation progress

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

John Stokdyk, AccountingWEB head of insight

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.

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25th Jul 2019 10:47

I would almost forgive them everything if only they would stop calling taxpayers 'customers'

Grrr...........

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to memyself-eye
25th Jul 2019 11:45

and when they call us customers they don't at all mean crooked tax evaders out to defraud the public purse at all ever.

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25th Jul 2019 12:47

As ever John thanks for the review... I wouldnt have the patience to get past the first 2 pages of ...how did Disraeli put it- 'Lies, damned lies and statistics'.
The comment that made me smile was "We slightly missed some of our customer service targets, including the average speed in answering calls and turning around our post,”
You cant get through to HMRC VAT dept. Dont even bother trying and I've lost count of the times I try to phone and then get the 'we are not taking any calls'.
Yesterday I had to calm down an irate CIS refund client who has been owed £4K for 4 months.
Where HMRC are going wrong (or rather one of the areas where they are going wrong) is that the people who answer the phone are not allowed to make their own decisions.... they have to ask 'back office or 'clerical review office' and you cant get through to this mysterious office - even the staff answering the phone to the pubic have to email.
Re my clients woe... in the end I told him to ring and have a row which he did. He got the phone number of a complaints person and £3K of his money arrived within 24 hours.. they are still looking into the remainder.

Thanks (3)
to Jennifer Adams
25th Jul 2019 13:25

A very balanced opinion, Jennifer, with which I agree entirely.

HMRC, like many other Government agencies, these days, doesn't hold the respect of the public and, therefore, it's open to ridicule.

Over the last few years I've taken the view that the "call-centre" regime must take a good deal of the blame for the lack of; quality service, good knowledge of the environment, in which they work and, good communication skills. Personally, I know it's not an environment I could look forward to going to, each and every day and, it isn't only the public sector, where these shortcomings are apparent. I imagine many of the incumbents become easily despondent.

HMRC's management must also take the major share of the blame, for its apparent lack of coherency. Education, training and pride are serious elements, which are seemingly overlooked. It's a shamefully badly organised public service and, in education parlance, requires improvement.

It's also a constant joke that HMRC provides a "safe-house" for any CEO who's looking for a national honour.

And, don't get me started on "customers". My a##e!

Thanks (1)
25th Jul 2019 13:19

Quote:
“We slightly missed some of our customer service targets, including the average speed in answering calls and turning around our post,” HMRC admitted.

Slightly? SLIGHTLY??? They weren't even in the same county, let alone the same ballpark.

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26th Jul 2019 15:33

I cannot believe that anyone reads the annual collection of "lies, damned lies.." or that any credibility is given to any of the said "lies...". The sole purpose is for one group of politically minded individuals (say, The Board) to tell their bosses (say the MPs) what they want to hear. Every now and again someone questions a meaningless bit and a committee is set up to spend months looking into it and then publishing some report with suggestions and so on. Hey presto, accountability demonstrated.
Sadly nothing improves and never will.
I know it sounds cynical but can anyone provide evidence of anything different in the last 50 years?

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By gordo
29th Jul 2019 13:17

HMRC claim to have met their first objective which was to "maximise revenues due and bear down on avoidance and evasion" and have outstripped their target of £30bn, achieving a claimed £34.1bn.

Now putting aside:
that HMRC have conflated avoidance & evasion
that HMRC quietly dropped the aggressive langue in the weeks before the report was published
that bear down appear to include removing peoples legal rights

Put all that to one side and just examine the claim to have raised £34.1bn yield

https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

Firstly, it would appear that the yield achieved includes Accelerated Payments (APNs), which by definition are amounts in dispute that could have to be returned.

Secondly, the figures themselves apparently include a substantial provision for "estimated effect of our compliance work on customer's future behaviour".

Say what!

HMRC are claiming to have achieved this years target by including an estimate of future income not lost due to claimed changes in customers behaviour through the use by HMRC of either behavioural psychology nudges or the outcome of bearing down on individuals (who might have a legitimate dispute with the tax authority).

This is extraordinary. Do HMRC simply mark their own homework and give themselves a pass? Do the NAO not do any auditing?

The HMRC CEO, who is now departing, was awarded a knighthood in the New Year Honours List

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to gordo
29th Jul 2019 14:51

Again forgive me for being surprised at your apparent surprise.
As I said in my last posting, the whole report is based on "lies, damned lies and statistics". Ever wonder how they purportedly do better year on year? Easy, they never count the same things two years running. You have identified some of the recent changes for yourself.
I would only suggest that no-one should waste time analysing the reported results. If you want to spend the time more productively, ask HMRC to set out exactly how the figures were calculated this year and last ( and next) etc, so you can see just how much "lies....." the report includes.

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to gordo
29th Jul 2019 14:59

As to knighthood etc. Can you recall a former CEO who didn't get one? It seems to go with the job however badly you do it.

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