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MPs attack HMRC’s ‘soft on fraud’ performance

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Philip Fisher summarises the latest Public Accounts Committee (PAC) report on HMRC’s performance in 2020/21, and it’s not happy reading for HMRC or the Treasury.

11th Feb 2022
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The Public Accounts Committee’s (PAC) headline message is that HMRC’s approach to recovering fraudulent payments sends the wrong signals and risks encouraging abuse of tax and grant systems in the future.

“What signal does it send when HMRC rolls over on billions of pounds of fraud and error directly related to Covid support packages? With the current parlous state of the public finances we can ill-afford to be so cavalier over so much taxpayers’ money,” said Meg Hillier, chair of the PAC.

As a mitigation, it noted that beyond its traditional responsibilities for tax collection and administering personal tax credits, HMRC played a major role in implementing the government’s response to the Covid-19 pandemic by administering the Coronavirus Job Retention Scheme (CJRS) and the Self-Employment Income Support Scheme (SEISS).

HMRC was also responsible for key customs and border-related programmes and preparing for the end of the Brexit transition period on 31 December 2020.

Conclusions and recommendations

The report contained eight conclusions and recommendations.

  1. HMRC needs to take a number of actions to reassure Parliament and the public that it is serious about tackling error and fraud from the COVID-19 support schemes.
  2. HMRC does not understand the reasons for the growth in the cost of R&D tax reliefs including how much is due to abuse which has grown by 240% over the last four years.
  3. HMRC does not have a convincing plan for restoring compliance activity back to pre-pandemic levels.
  4. Resource constraints are limiting HMRC’s ability to get the optimum level of compliance yield.
  5. It is too easy for taxpayers to be unwittingly lured into tax avoidance schemes.
  6. Yet again customer service has collapsed and HMRC’s recovery plans are not clear.
  7. The benefits of Making Tax Digital to those with simple tax affairs are not clear.
  8. Changed working practices have left HMRC with more office space than it needs.

Managing error and fraud

The yield from tax compliance activities in 2020–21 was £30.4bn, compared to £36.9bn in 2019–20. HMRC did not set targets for its eight key customer service measures in 2020–21. HMRC’s performance declined against five of these measures.

Further, a workforce slashed from 100,000 staff in 2003-04 to 58,000 in 2020-21, was hampered as the staff was side-lined into work generated by Covid 19 and Brexit.

Pandemic grant schemes

This report identifies £5.8bn of fraud and error primarily from CJRS (£5.3bn), with SEISS generating £0.5bn of error or fraud, and the ill-conceived Eat Out to Help Out scheme adding £0.1 bn. These figures are only for 2020-21 (to 31 March 2021) so the totals will inevitably increase due to subsequent fraudulent activity in 2021-22 in Covid-support schemes.

These HMRC estimates of fraud exclude the issues that led to Lord Agnew’s resignation as Government Counter-Fraud Czar. He was in particular commenting on the Bounce Back Loan and other loan schemes where fraud estimates range from £5bn to £10bn.

The Financial Times reported in November 2021 that HMRC’s accounting officer had told it planned to finish recovery action at the end of 2022–23. However, HMRC expects to settle some of the more complex cases after 2022–23.

HMRC has already recovered £850m and expected to recover a further £1bn. HMRC would try to recover the remaining £4bn but did not expect to find any more.

HMRC observed that the increasing number of business insolvencies may affect its ability to collect overpayments from businesses facing genuine financial hardship. Shockingly, HMRC said that it would be targeting the most egregious behaviours and cases but it was not going to argue with people about fine judgements or try to find genuine mistakes that people made.

In response, the committee told HMRC that its answer reinforced the impression that it had written-off chasing fraudulent payments and errors as ‘too difficult’ and too resource intensive.

Tax compliance

Compliance yield from tax compliance activities in 2020–21 was down 18% from the previous year partly because HMRC redeployed an average of 6% of its compliance staff to its Covid-19 response. HMRC also took a sympathetic approach to those struggling to pay their tax in 2020–21, only opening an enquiry into those affected by the pandemic if it thought the customer could engage. HMRC opened 29% fewer civil compliance cases and closed 26% fewer.

More investment was recommended given that using HMRC figures on average it generates £17 of compliance yield for each £1 it spends, and £60 per £1 from large business activity.

Customer service

Performance in answering calls and responding to post in 2020–21 was well below the levels in each of the three previous years.

By the fourth quarter of 2020–21, the average time callers spent queuing to speak to an adviser in HMRC was over 15 minutes (compared to less than 5 minutes in 2017–18), and just 43% of post was responded to in 15 days (81% in 2017–18).

The reasons were predictable, if dispiriting. HMRC had diverted 5,000 customer service staff to work on Covid-19 support schemes. Also 3,000 more were diverted to work related to the UK leaving the EU so that, as another hidden cost of Brexit, it had to put other parts of tax activity to one side thus building a “bit of a backlog”.

Candidly, HMRC admitted that it was resourced to give a “decent” rather than “brilliant” service due to imposed “efficiencies”, i.e., funding cuts. Worryingly, if it does not achieve these efficiencies, customers were likely to experience an even poorer service.

The committee said “yet again customer service has collapsed and HMRC’s recovery plans are not clear”.

MTD downsides

The committee expressed concern about the impact of MTD on smaller taxpayers, such as a retired person with rental income from one property. It noted that other administrative tax changes, such as on-line self-assessment, have not provided expected benefits to taxpayers because of problems with software and worried that MTD might lead to small taxpayers serving HMRC rather than HMRC serving them.

Micro-businesses will also be alarmed to learn that HMRC would not be offering the software required to make quarterly returns, which will add to the burden.

Replies (25)

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Tornado
By Tornado
11th Feb 2022 16:07

You have supplied the detail (thank you for that) but I can provide the summary -

HMRC are incompetent and not fit for purpose

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By Hugo Fair
11th Feb 2022 17:03

If I'd ever received a school report remotely akin (in tenor and breadth of failures) to the 8 points in the PAC's 'Conclusions and recommendations' ... it would have been accompanied by a suggestion (aka edict) that I should go and find another playground to sully with my presence!

And that's the problem ... HMRC know that no-one has the power or the will to truly hold them to account (even as an organisation let alone individually), so its teflon city all the way.

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Chris M
By mr. mischief
12th Feb 2022 08:53

The way they behave towards small businesses is appalling:

1. One client's claim for CIS refund for 2020-21 was rejected due to some supposedly missing submission for 2019-20. This despite having paid out the 2019-20 refund. They insisted on an EYU despite having forced payroll software companies to scrap this functionality. I can't get their stupid basic tools to work so have asked the client to find another accountant. 10 hours spent on this.

2. Another client could not link up in MTD so I was submitting paper returns, with covering letter, for 10 quarters. 12 hours of my time I spent on this. HMRC insisted the problem was that my client had set up his Gateway account wrong, they refused to help fix it. I said I thought the problem was in the database since my client is good with IT and all my other MTD links worked fine, this fell on deaf ears. In December I suggested the client get another accountant. He did. Hey presto! MTD works fine. Clear evidence the HMRC guff about his Gateway account was pure drivel.

This is just the start of a litany of examples. HMRC will pull out every stop to avoid ever taking an action. They will never design a process with 2 steps where they can have one with 10 instead.

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By sanjay100
12th Feb 2022 10:39

Abuse is so widespread HMRC does not have the resources or skills to deal with fraud. Morale in HMRC is so low that the employees have stopped caring. CIS and VAT refunds are not even checked are made just like giving the recent fraudsters biggest bonanza. Criminals in UK and abroad are making billions.

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By JD
14th Feb 2022 10:22

Its simple...they have used IT (and automation) to replace people in a mass cost saving exercise, rather than in support of trained professionals. That combined with mad schemes (MTD) and the results are inevitable

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By bobsto12
14th Feb 2022 11:06

I'd have thought offering rewards linked to the tax recovered like in the US would encourage people to inform on the scams. Even if it costs as much to recover the funds as was lost I would like to see those responsible brought to justice. You either have law and order or you don't and stealing from the state is not tolerated from anyone else.

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By AndrewV12
14th Feb 2022 11:21

Extract above
'The Public Accounts Committee’s (PAC) headline message is that HMRC’s approach to recovering fraudulent payments sends the wrong signals and risks encouraging abuse of tax and grant systems in the future.'

Thinking about it, have HMRC been thrown under a bus by he Government, the Bounce Back loans fraud was always going to be vast is it really HMRC job to collect the un collectable.

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By North East Accountant
14th Feb 2022 11:52

No. 7 -The benefits of Making Tax Digital to those with simple tax affairs are not clear...........this is not surprising because there are none.

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By tedbuck
14th Feb 2022 12:24

Interesting that the 'savings' by reducing staff are probably more than used by the increase in computer systems which sometimes work.

I am glad it isn't a business and that it doesn't have to be 'profitable' because at the end of the day it will have no trained staff but just rely on computers so won't have a cat in hell's chance of 'closing the tax gap'.

Are they totally stupid? Can they not see that you need trained and knowledgeable staff to run a tax system? The tax system is now so complex that computers just won't cope with the clever people using computers to fiddle the system.

Hello HMRC - anyone alive in there? You need people who are trained to look at accounts etc. submitted to you and say 'Hang on a minute - that doesn't look right.'

Like the LLP's accounts I was looking at yesterday which was trading but had no fixed assets. Given that its business needed computers, printers etc. I found it strange and it had no associated businesses either. I am definitely missing something anyone got any ideas?

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Replying to tedbuck:
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By Sue Murby
14th Feb 2022 13:58

Back in the 80s all the assets the partnership (top 3) that I worked for had were leased - buildings, furniture computers etc. This was to avoid complicate calculations every time there was a change in the partners.

During the time I was there, there were 3 mergers and the partners in those firms owned their buildings. Every time one of those partners retired the buildings had to be revalued and and reapportioned amongst the remaining partners. It was fascinating work but sometimes a nightmare.

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Replying to Sue Murby:
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By ds
14th Feb 2022 15:02

This goes along with the WEF proposal that we will own nothing and be happy.

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By ds
14th Feb 2022 12:29

Is there no aspect or department of the UK Government that's not fit for purpose ?
It's almost as we are living through an Orwellian dystopian nightmare of incompetence and failure brought about by cost-cutting and complication.
Conspiracy theorists may want to argue this is being done deliberately to wreck the UK economy and further devalue our place in world rankings.
They may not be wrong.

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Replying to ds:
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By RickyRoark
15th Feb 2022 09:20

We're far closer to Brave New World than 1984.

It's not really a conspiracy theory when they tell you in advance what they're doing. The wonderful thing is that as technology improves - things like Government will simply be a problem in an equation to work around.

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By Sharland
14th Feb 2022 13:33

I feel sorry for HMRC, after all they are only trying to operate a system that has been created by the MPs who are sitting in judgement on them. They have had intolerable burdens of stupid legislation imposed upon them. I wonder if any of their staff would have voted for Brexit if they had realised how much additional work that would cause them. They are after all only trying to do what we are trying to do; comply with the legislation spewed out by parliament.

They should scrap MTD and concentrate on making the existing systems work efficiently and remember that we are now their “customers”.

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Replying to Sharland:
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By KenKLM
15th Feb 2022 09:00

I feel sorry for staff doing their best … but not those shirking and those at the top demoralising their staff and making consistently poor decisions and mismanaging the service . HMRC is not functioning as it should be … why feel sorry for those that run it ?

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Replying to Sharland:
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By spilly
15th Feb 2022 13:45

I don’t feel sorry for the staff when they hang up on me, when they make me jump through verification hoops (and then smugly tell me it failed due to me forgetting that they still haven’t managed to update our address for PAYE from 4 years ago), when they tell me they that they will only deal with one query per phone call.
I do feel sorry for those who haven’t been trained sufficiently so that they even know what I am talking about, or that they constantly have to refer to someone more technical during the call.

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Replying to spilly:
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By ds
15th Feb 2022 15:31

Is putting it in writing the best way? If they do not respond in a timely manner to the communique then they have blame for the delay.

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By Arbitrary
14th Feb 2022 17:11

On customer service, I cannot recall ever in the last ten years getting a reply within 15 days to a letter to HMRC (even by the date on the letter of reply), How on earth did they come up with 43% success rate? As to phone calls I had to give up trying in 2020 because after a half hour wait I abandoned the effort; would this register as a call to HMRC? The figures quoted are clearly nonsense.

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Replying to Arbitrary:
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By Rgab1947
21st Feb 2022 09:58

Agree.

I hate phoning them as such a waste of time.

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By Mr J Andrews
14th Feb 2022 17:26

The buck stops with the CEO. Unfortunately unlike industrial / business organisations a failed , incompetent head honcho within HMRC stays put until his/her massive pension is due and usually with a bong to boot.
The current farcical incumbent pushing MTD says it all. Sadly the whole of HMRC are taking the flak for this sheer stupidity.

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Replying to Mr J Andrews:
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By Hugo Fair
14th Feb 2022 19:16

Love the image you've put in my head ... of Jimboy, dressed in full flower-power finery, and gazing dreamily at the members of PAC - whilst clutching his 'bong'!

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Replying to Mr J Andrews:
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By Rgab1947
21st Feb 2022 09:59

And promoted to the undemocratic House of Lords to collect £300 per day to get a subsidised lunch.

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By KenKLM
15th Feb 2022 08:56

When key workers are allowed to work from home then you will get massive inefficiencies and when these guys actually get back to “work” are they going to be “fit for purpose” . The Bounce Back Loans were given out like confetti ..apply 1 day .. in your bank the next .. but banks were supposed to lend on “normal” lending criteria … no they didn’t … so why aren’t they being forced to prove they did and take some of the hit ? False claims should be pursued .. simple .. at least a strongly worded letter .. e.g. for those that formed companies just to claim .. the director is liable to repay any money taken out as it would have been impossible to declare a dividend … so official receiver pursue them personally . It’s s joke .. they know it .. we know it .. and government have to take responsibility too .

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By michael1958
15th Feb 2022 14:02

We have just concluded a VAT check done by scanning everything to the officer, 4 years worth of bank statements, sales invoices etc... it took in total 18 months to get through this. They were sent the sage backup (which he couldn't open using exel????) We reconciled every vat return back to the accounts etc.. etc.. This has cost a great deal of time, effort and the net result is they found £48 of errors. The clients turnover is £140,000 pa. A perfect example of well focused resources. When you think of the fraud with BBL and the various covid schemes...

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Replying to michael1958:
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By ds
15th Feb 2022 15:29

Perhaps a freedom of information request to find out how many hours of work they have put into this little exercise and then publish it and sent to mail on line? I suspect they go after the small fry to make it look like they are actually doing something, whilst the sharks continue to roam unfettered by HMRC.

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