In one of Whitehall’s least surprising announcements, the tax department’s report and accounts for 2017-18 carry a qualified opinion from the National Audit Office.
The qualification highlights material levels of error and fraud in personal tax credits expenditure, as it has done for the past fourteen years since tax credits were introduced in 2003-04. The National Audit Office (NAO) report on the accounts noted that as far as HMRC’s figures can be relied on, error and fraud in tax credits and child benefit payments increased again in 2017-18.
Tax credit overpayments increased to 4.9% (£1.3bn) of tax credits expenditure during the year, while child benefit fraud and error accounts for an estimated £155m, just 1.3% of total expenditure.
While the underlying trends are not good for the department’s reputation for financial competence, help is at hand in the shape of the universal credits programme. Some 123,000 tax credits claimants transferred to universal credit during the year and another 2.7m will move across between now and 2023, when they will become the responsibility of the Department for Work and Pensions – along with £6.8bn of tax credit-related debt.
The universal credits roll-out is itself raising numerous questions about payment delays and processing glitches, but back on the HMRC side of the fence, the head of the NAO warned: “There are a number of uncertainties around these transfers that HMRC will need to balance against its continuing tax credits responsibilities, including delivering good customer service and addressing error and fraud.”
Since the introduction of annual resource accounts, HMRC and other government departments like to present themselves and their accounts in the manner of a public company. As shareholders, the UK population would probably accept a 5.4% increase in turnover to £605.8bn as adequate.
The income tax/NIC division, representing 52% of total turnover, increased its net contribution 6.8% to £315.6bn. VAT, which contributed 21% of total revenue, was up 4.3% to £128.6bn thanks to strong receipts for the oil, gas, mining, leisure and general business sectors. Corporation tax increased 4.3% to £53bn, 9% of total revenue.
The online executive summary of the accounts accentuated other positive points, including:
- A downward trend in the tax gap to 5.7% of estimated tax due in 2016-17 (compared to 7.3% in 2005-06). HMRC attributed 41% of the £33bn tax gap estimate to small businesses, much of it due to failing to take reasonable care, and 21% to large businesses
- Overshooting its 2017-18 “compliance yield” by more than 10% to £30.3bn, £1.4bn up on 2016-17
- Protecting £37bn of tax revenue through litigation
- Saving £6.2bn in revenue losses by tackling non-compliance, such as stopping fraudulent repayment claims.
The tax gap and compliance yield figures have been questioned by the NAO and other observers in the past. The compliance yield includes legislative changes that made up 11% of the total revenue protected, including £290m in revenue during the year by blocking disguised remuneration schemes where people were paid by loans instead. HMRC also estimated that and an additional £410m was collected in income tax and NICs following the introduction of off-payroll working rules for personal services companies in the public sector at the beginning of the 2017-18 tax year.
Client service measures
Client service featured in the annual report too, and while payments have been overhauled to make it “more straightforward for people and businesses to pay the right tax and claim the right entitlements”, the more basic measure for answering phone queries dropped back to more than 4mins during the past year from 3mins 54secs in 2016-17 – despite a 10% decrease in calls handled.
Another customer satisfaction measure concerned tax agents, of whom only 47% who took part in an HMRC survey felt they had a positive overall experience dealing with the department. To support them, HMRC said was investing in a new digital service and strengthening its engagement with professional bodies. It also published a revised HMRC standard for agents.
What’s less obvious from the corporate style presentation is HMRC’s assessment of current market conditions and the risks posed to the enterprise. Buried at the back of the annual report are five pages outlining the department’s risk framework and what it is doing to mitigate the top 10 risks identified by its executive committee.
The impact of EU negotiations on tax administration is in the list, but surprisingly no mention of the potential impact on tax receipts if the economy slows after March 2019 (probably too political an issue to mention in a departmental document). Instead, the main challenge being tackled on this front is to develop detailed plans to cater for different exit scenarios and how they would affect HMRC’s systems.
HMRC’s £1.8bn transformation programme and its flagship initiative, Making Tax Digital, have also been through the EU wringer during the past year, going through a reprioritisation exercise to ensure enough resources will be in place to handle the Brexit challenge. But apart from a traffic light presentation in chief executive Jon Thompson’s progress overview showing amber alerts for becoming “digital by default” and delivering the expected £1.9bn of cumulative savings, there is little detail about the transformation project’s prospects.
It’s down to the NAO to correct this oversight in its report on the accounts. Last year the audit office was one of the more influential voices urging HMRC to review its transformation plans, prompting the incoming financial secretary to the Treasury to revise the MTD roadmap shortly after he was appointed in July 2017.
HMRC acknowledged that its assumptions had been “over-ambitious” and subsequently adjusted its transformation plans to accommodate the additional demands of Brexit work. It cut down the number of transformation projects from 267 to 128 and trimmed £191m from its project budget for 2018-19 and 2019-20, the NAO noted.
HMRC’s revisions reduced its forecast annual efficiency savings from £717m to £675m for 2019-20 and beyond, although HMRC ultimately expects to meet its original target.
HMRC’s revised delivery timeline may be more realistic, but the transformation plans remain highly challenging, noted Amyas Morse, head of the National Audit Office: “I welcome HMRC’s recognition of the need for prioritisation, to balance Brexit pressures and other elements of its change portfolio. It is too soon to determine how effective the execution of these plans proves to be in terms of value for money.”
The NAO is rarely characterised as a fire-breathing enforcer, but when it starts to raise queries and point out uncertainties (not to mention the qualification), it’s no surprise that accounting professionals reviewing HMRC’s accounts respond with rueful cynicism to the breezy claims and positive spin.
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.