HMRC transformation: 2006 progress report. By John Stokdykby
Since the merger of the Inland Revenue and Customs in 2004, HMRC has publicly embraced business values and undertaken a major internal transformation.
A central tenet of the HMRC's reform drive is that it should reduce the administrative burden on taxpayers. Research carried out by KPMG and published as part of the 2006 budget statement estimated the tax system imposed costs of around £5 billion on UK businesses. In response, HMRC was set a target to reduce the burden by at least 10% by 2010-11.
A key part of bringing the business perspective into tax policy-making and delivery involves harnessing new technologies, and the core text on this subject is Lord Carter's review of HMRC's online services, also published with the 2006 budget.
Sage strategic relationship manager Kevin Hart explains: "Carter has had a major impact across the whole business engagement and drives into HMRC's core systems."
Hart, who also chairs the software trade body BASDA, has worked closely with HMRC officials on many of these issues over the past 18 months to share best practice ideas and work out how the department can work with Sage and other software developers to provide information that will drive even more efficiencies.
"The efficiency and restaffing announcements depend on smart and effective business processes, so electronic delivery is crucial, as is having more integrated customer management systems." says Hart. "That's a key thing. Any large organisation needs to have fairly smart, integrated back office systems. Because of the merger, HMRC still has disparate systems."
This article sets out to catalogue the different elements of the HMRC's transformation strategy and, borrowing from the project management disciplines common to many technology-driven projects, attempts to set out a framework to assess the likelihood of success.
Tax lecturer and AccountingWEB contributor Rebecca Benneyworth says the various initiatives are part of a major cultural change underway within the department. "Everything needs to be viewed in the round, as this is a quite coherent approach to a whole range of issues that represents a much more transparent approach to compliance," she says.
What are the specific initiatives that are feeding into this corporate overhaul? Brief summaries are set out below:
- Completion of the Revenue-Customs merger The waves caused by the merger are still rippling through the organisation as it seeks to rationalise the contrasting enforcement, communication and management regimes of the Inland Revenue and Customs & Excise. The merger created a lot of internal movement and confusion. A year on, there are still multiple overlaps and legacy processes and systems in place.
- The new Taxes Management Act A lot of the elements of the new HMRC compliance regime will be codified in a new Taxes Management Act. The Act will set out to "simplify tax law wherever possible so that the burdens on taxpayers are minimised", based on the assumption that a simpler and more consistent legislative framework will be easier for taxpayers to understand and comply with, and easier for HMRC to administer. Draft clauses were published in November 2006 covering notification and registration, returns and assessments for public consultation in the run up to the 2007 budget. Draft clauses, commentary and a partial regulatory impact assessment are available from the HMRC website.
- Risk-based compliance regime As originally proposed by the 2004 Hampton review and confirmed in November 2006 by Sir David Varney, HMRC is implementing a risk-based approach to enforcement target its resources more effectively. Large and medium companies will be assessed against a risk framework, which is likely to include an examination of their internal controls and IT systems. There is also a strong likelihood that this approach will be extended to tax agents, and the possibility of "pre-return assurance" is being discussed. HMRC is setting up a joint working group with private sector organisations to collect suggestions for the framework, which will be published at the time of the 2007 budget.
- "Lighter touch" tax enquiries In tandem with the risk-based approach, HMRC encounters with low-risk business taxpayers will focus on correcting common mistakes in the preparation of tax returns, discussing risks and, where necessary, putting things right. HMRC will provide advice on record-keeping procedures and coach taxpayers through a self audit system
- Carter improvements for HMRC online services Lord Carter's March 2006 review of online services is the hub around which much of HMRC's upgrade work revolves. His aspiration is for universal adoption of online engagements for business taxpayers, with a set of mandatory deadlines for online PAYE, VAT and Corporation Tax filing between April 2008 and 2010. An enhancement to the site in November 2006 means it can now accept attachments along with returns and a pilot redesign of the HMRC website will be tested in 2007. A full relaunch of the Self Assessment portal is planned for 2008 which will allow individual taxpayers to file details of capital gains details online and some areas of the tax return will be pre-populated. A shared online workspace is planned to enable business advisers and agents to correspond with HMRC online during investigations. For a more detailed outline of the proposals, see Implementation of Lord Carter's Recommendations – Consultation.
- Single statutory filing Work is underway internationally to agree a standard audit file (SAF-T) in text format that will make accounts data available for HMRC auditors and investigators. A similar project is also underway to provide data on PAYE contributions. Lord Carter's ultimate vision is an information pack that could be delivered in XBRL (the Extensible Business Reporting Language) to enable HMRC to import and analyse accounts submitted via the Companies House web filing service. Ideally this should be in place in time for the beginning of mandatory online filing for companies in 2010. While the audit file projects are progressing well, software companies are privately expressing doubts that the single XBRL filing pack will be available by then.
- Remote audits With the right data exchange standards in place, HMRC thinks it is feasible for its inspectors and auditors to carry out the majority of their tests and checks without having to visit the business's premises - and a successful pilot remote auditing project has been carried out on PAYE systems. Sage's Kevin Hart is both "aware and wary" of this initiative. "With some sizeable employers or intermediaries, in some circumstances some form of remote access might reduce the overhead burden. But one would have to proceed with a real eyes-wide-open approach and look to see what was best for the business." Hart focuses instead on the benefits to businesses of providing audit file data for pre-checks, to reduce preparation time on site and improve their overall risk profile. "That has got to be a good thing and the underlying principles are sound, but as always, the devil's in the detail," Hart says.
- Alignment of tax and company account filing dates This was one of Carter's bright ideas that went awry as practitioners and larger businesses vehemently lobbied HMRC that this was a reform too far. As Simon Sweetman of the Federation of Small Business explains, "Having consulted they finally got the message that aligning filing dates was not a good idea. Aligning the dates was effectively a shortening of the deadlines, and large businesses said they needed the interval between finishing the accounts and doing the tax computations. [HMRC and Lord Carter] had the sense to listen."
- Whole customer view Among its IT developments, HMRC is planning to pilot a customer relationship management system that will provide tax officers with a detailed history of previous contacts with taxpayers and their advisers. Agents may not have the same personal relationships with local tax officials they enjoyed in the old days, but as Simon Sweetman puts it, a CRM system would make it less likely that agents encounter "an ill-trained and ill-paid call centre operative trying to guess an answer from a screen".
- Single account Lord Carter expanded on the whole customer view and advocated a "single account" approach. By 2010-11, HMRC plans to develop an holistic view of each business's liabilities and payments across the main taxes, allowing them to view their tax accounts online and set off different liabilities and allowances against each other. The single view will also enable HMRC to spot businesses in financial trouble and improve its debt management. The information collected will feed into the risk models that underpin its new approach to investigations and enforcement.
Making sense of the consultation processes
To ensure the business perspective is brought into tax policy-making and delivery, HMRC insists that all these changes are subject to full and proper consultation. In this case, the government is living up to its promises. The HMRC transformation programme encompasses so many consultation processes and discussion papers that it is easy to confuse them and their objectives. This article attempts to distil the contents of several of these documents - full references and links are included at the end if you wish to delve further.
AccountingWEB members also have the opportunity to participate in an online consultation on the Carter proposals - complete our survey now to ensure that your views are considered.
Consultations around the new relationship have taken a two-prong approach, catering separately for large and small businesses - as reflected in the two separate reports issued just before this month's pre-budget report: the Varney review covering big business and 'Delivering the new relationship', which focused on small business.
As Simon Sweetman points out, there are a lot of overlaps. "To a considerable extent, what the Varney report offered large businesses will also be good for small businesses, but it will need adaptation because HMRC does not have the manpower to deliver it. They can't offer pre-return clearances to everyone, but realise there are possibilities."
There is also an "intermediary" programme. Following on from six years of the Working Together programme, HMRC has established an Agent and Adviser Steering Group to expand its partnership with tax practitioners. Sage's Kevin Hart says, "When it comes to what's top of mind, accountants were very high."
Sweetman expands on this by highlighting several "olive branches" in the recent 'Delivering the new relationship' discussion paper. The Delivering section "looks anodyne" he says, but pilot schemes planned for 2006-07 hold out the promise of a proper technical helpline, better liaison thanks to the the CRM "concierge" service and the possibility of taking a lighter touch to enquiries involving clients of agents who do well in risk assessments. "Some agents don't like that idea, so it is likely to be voluntary," Sweetman says.
Another group to pay attention to is the Administrative Burdens Advisory Board chaired by former Baker Tilly partner Teresa Graham. The board's terms of reference are limited to basic issues surrounding forms and enquiries, but these represent £3.4 billion worth of the potential savings identified by KPMG earlier this year.
From her limited engagement with the department, Graham is willing to give good marks to the red-tape reduction programme. "We're seeing a lot more activity in this area and there's no nonsense about not hitting the targets. They're getting the right level of resource to hit those targets and I'm quite happy with what my lot are doing."
Several issues have emerged as potential threats to the overall programme. In keeping with accepted risk management principles, these need to be considered in light of the impact they could have on the overall project and the likelihood of their happening.
1. Senior management vision and capability: HIGH impact, LOW likelihood
PLUS: The strategic challenge has been clearly laid down at board level and senior executives have an understanding of what they need to achieve. Varney left behind a team that blends external apointees with capable, old guard civil servants.
MINUS: The appointment of Varney's deputy Paul Gray as a caretaker chairman does was not a convincing move. Gray is not as dynamic as his predecessor and the question remains whether the government might bring in someone new to to shake it all up again.
2. External Communication - HIGH impact, MEDIUM likelihood
PLUS: Varney encouraged the focus on "customers" and opened the department up more to business and professional bodies. The result is a better public understanding of what the programme is trying to achieve.
MINUS: Elements of the transformation programme are at risk if the department does not fully appreciate the impact it will have on customers. With all of its consultations exercises, HMRC needs to develop that commercial analysis and sell the benefits effectively to businesses, intermediaries and tax payers.
3. Internal Communication - HIGH impact, HIGH likelihood
PLUS: The goals have been clearly stated and it is widely understood that the success of the merger depends on bringing about a major cultural shift within both legacy departments.
MINUS: Old habits die hard - especially among civil servants who see that many jobs will disappear as part of the transformation programme. Industrial unrest suggests that HMRC managers have failed to keep troops on the ground informed of the big picture and a recent report by the Work Foundation complained that many government IT projects are insufficiently piloted before being rolled out, are overly complex and ignore the advice of the staff who will use the systems. Meanwhile, offices are closing, settled work patterns have been thrown into chaos and local management structures and relationships with agents have eroded. Morale is low and unlikely to get better. This remains one of the biggest threats to the programme's success.
4. Infrastructure - MEDIUM impact, MEDIUM likelihood
PLUS: Technology is recognised as a key enabler for many of the Carter reforms. The department has gone some way to overcoming problems in the past and is developing a clearer sense of its technology priorities. Major investments are underway in the government gateway and other services. Hardware costs are low enough that some bottlenecks can be solved by boosting the available backroom horsepower.
MINUS: Software compatibilities and complex project management issues are not so easily solved. The department and its IT partners still run something in the region of 200 disparate systems, some of which are running on hardware that dates back to the 1980s. HMRC's IT project teams are working flat out, and as Lord Carter noted in his review, failing to test late-running system developments is asking for trouble. If the online experience isn't satisfactory for all users, as has been the case in the past with self assessment, PAYE and Tax Credits, the entire package could be jeopardised.
5. Project complexity - LOW impact, HIGH likelihood
PLUS: The Carter strategy and overall transformation programme is still on track and broadly in line with market needs. So far, several new features have arrived on schedule.
MINUS: The programme comprises so many elements that unanticipated interdependencies could derail it. HMRC's approach to different project components is not always consistent and emergency interventions to fix problem issues - CIS, eVAT and carousel fraud meaures spring to mind - could suck resources and focus away from the strategic objectives. Success of the overall five-year plan depends on HMRC getting all of its ducks lined up in a row.
Two questions emerge from our risk analysis of HMRC's transformation programme. The first relates to internal and external communication issues, which are crucial to the success of these reforms. The department's commitment to consultation is very public, and very strong, yet instances communication and co-ordination still fall down on a regular basis.
Like Sage, the tax and practice software house Digita has extensive contacts with its counterparts in HMRC. Digita business development manager Nigel Powell, an Inland Revenue veteran, highlights some examples where communication could be improved: "There are things they are trying to do where they make decisions and announce them at the last minute - notably the Construction Industry Scheme and the new four-page tax return - but there are no discussions with the software developers.
"HMRC is expecting Self Assessment to be completely online, with a single point of filing from April 2008. To achieve this, every piece of the jigsaw has to be assembled. It still needs a master designer to cut the pieces. I haven't seen them and I don't believe HMRC has consulted about them."
Digita managing director Jeremy Rihll adds: "One of my concerns about the Carter project is that the guys who build the IT systems do not work closely enough with external people who plug into it, and most gravely of all do not give us enough time to get our systems bedded in. What that tells you is those guys are working to such tight deadlines, with such little advance warning and minimal contingencies, that they aren't able to [consult]."
Rihll's comment highlights the second key question - how well equipped is HMRC and its IT partners to deliver all the planned improvements? Project managing all of the different components will be a huge challenge, requiring considerable investements in time, money and planning.
Teresa Graham of the Administrative Burdens Advisory Committee comments: "Where businesses go wrong is when they start half-cocked and then go past the point of no return because they haven't planned properly. I hope that anyone involved in government transformation programmes understands that."
Graham adds that the government has created a "wonderful mechanism of regulation" and in her view the biggest risk factor for the HMRC transformation is the shift required to embed a culture of deregulation. "Alternatives have to be explored to ensure that admin burdens and regulation are the last resort and not the first instinct of government."
AccountingWEB's rough risk assessment suggests that HMRC's chances of bringing off the planned five-year transformation are no better than 50:50. Their hearts are in the right place, but the feeling remains that the management team hasn't fully scoped out all the costs, complexities and contingencies - and the department has a chequered record on previous projects. It is also hard to overlook the existing organisational inertia and levels of hostility that remain within both internal and external audiences.
This assessment is not a hatchet job, but a straightforward compilation of the available documentation and views of interested parties. Very clearly HMRC's managers and their partners are setting out on the right road. Even if they don't achieve all their targets, they are likely to end up in a better place. The five-year transformation should be encouraged and supported by all taxpayers. If the department's "customers" take advantage of the opportunities to consult and communicate, the likelihood will improve that they will reap benefits from this programme.
To help HMRC gain a fuller view of the views of key customers, AccountingWEB is running an online survey to collect feedback on the Carter proposals. The department has agreed to consider and respond to the points raised in the New Year. Take part NOW!
HMRC consultation documents
Delivering a new relationship with business (PDF 221K) - Dec 2006
Review of HMRC Online Report by Lord Carter (520k PDF) - Mar 2006
"New relationship" page - 2005-06 discussion papers
New Taxes Management Act - Draft clauses, commentary and a partial regulatory impact assessment
2006 Review of Links with Large Business aka the "Varney review" - Nov 2006
Administrative Burdens - HMRC Measurement Project - KPMG research Mar 2006
The Whole Customer Vision, Practice and Design Principles (67Kb PDF - Nov 2005)
Small Business Consultations: Summary of Responses - Mar 2005
Findings of the Review of Links with Medium-Sized Businesses (307kb PDF - Nov 2005)
Hampton Review - Reducing administrative burdens: Effective inspection and enforcement (Dec 2004)
And , not to be forgotten, Sir Peter Gershon's 2004 efficiency review and Sir David Varney's 2006 PBR follow-up, 'Service Transformation: a Better Service For Citizens and Businesses, a Better Deal for Taxpayers'