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NAO highlights HMRC transformation risks

21st Jul 2017
Head of Insight AccountingWEB
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HMRC headquarters
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HMRC’s annual accounts for 2016-17, released last week, cast new light on the challenges and risks the tax department faces in overhauling its processes.

To start with the headline figures, HMRC generated £574.9bn in tax revenues in 2016-17, up £38.1bn (7.1%) on 2015-16. It paid out £38.8bn in benefits and credits, which accounted for roughly a fifth of government benefit expenditure. The annual admin costs were £3.8bn in 2016-17, up from £3.58bn last year.

For the 17th year in a row, HMRC’s accounts were qualified due to material errors and fraud in tax credit accounting figures. HMRC can only provide estimates for the previous year in its annual accounts, and showed overpayment levels of 5.5% for 2015-16 compared to 4.8% in the previous year. This equates to overpayments of £1.57bn and underpayments of £0.21bn.

The tax credits situation is improving, the auditors noted, but remains a festering sore that compromises HMRC’s reputation for financial competence. It is also a known unknown, to borrow Donald Rumsfeld’s timeless phrase.

The NAO report is most interesting for what it reveals about HMRC’s digital transformation programme. Given the circumstances, the auditor’s conclusions may have influenced Treasury ministers to lessen the pressure on HMRC to go live with Making Tax Digital in April 2018.

“HMRC is part-way through an ambitious programme to bring in digital services and reduce its costs. In doing so HMRC must ensure it maintains adequate services if it is to protect revenue and tackle error and fraud,” said National Audit Office head Amyas Morse in his overview of the accounts.

The audit office appreciated that HMRC had a strong rationale for using technology to modernise services and reduce costs, but had already warned in last year’s accounts that the plans “carried a significant delivery risk” and were based on questionable assumptions about taxpayers’ take-up of new online services.

“It is becoming clear that transformation as originally scoped, and its intended benefits, will be challenging to deliver within the timescale,” this year’s audit report noted.

The expected costs for the 15 different transformation programmes were already creeping up from the original £1.8bn budgeted in 2015 to £2.2bn this year – with an extra £457m requested for the transformation budget in 2017-18 – subsequently reduced by £60m.

HMRC originally committed to achieving total efficiencies of £1.9bn by 2019-20 and to collect £920m of additional tax revenue by 2020-21, but the expected returns are beginning to unravel, the NAO suggested.

While HMRC surpassed its £203m efficiency target by £51m in 2016-17, “only £181m of these were sustainable”. The longer-term, sustainable efficiencies target “fell behind its planned profile”, achieving £78m of savings against £189m originally expected, the NAO said.

“HMRC assesses that recurrent transformation savings are more likely to fall below target than to achieve it, and HMRC is actively managing a number of risks to delivery,” the NAO reported.

The conversations taking place at HMRC headquarters revolved around ensuring HMRC could deliver the transformation project within its budget without compromising customer service. For example, while it was investing heavily in technology to lessen telephone queries from taxpayers, HMRC handled 50m calls in 2017 – 8m more than the original forecast. In spite of rolling out personal tax accounts to deal with simple tax enquiries, HMRC received 1.6m more calls from taxpayers and agents asking for pay, tax and employment records.

Call handling improved last year following an injection of £28m extra to recruit call centre staff. More funds will be forthcoming to continue this effort, and the NAO describes more flexible recruitment and management practices to enable the department to direct enquiry staff to areas of most need.

With some prescience, the NAO called on HMRC to review its plans for the transformation programme to ensure it could stay within its budget and “turn efficiency gains into cash savings without adversely affecting performance”.

“HMRC recognised that it needed to slow, stop or de-scope activity to live within its budget,” the NAO noted. “This is difficult as many of the programmes are interdependent and some are implementing necessary changes, such as the new customs system. The UK’s exit from the EU will add further pressure to the programme and timetable.”

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Tornado
By Tornado
21st Jul 2017 23:53

“HMRC is part-way through an ambitious programme to bring in digital services and reduce its costs. In doing so HMRC must ensure it maintains adequate services if it is to protect revenue and tackle error and fraud,” said National Audit Office head Amyas Morse in his overview of the accounts.

From April 2019, it will be mandatory for ALL VAT registered businesses to be using MTD compliant accounting software.

Looking at the current state of play, this will be impossible to achieve and poses a clear threat to the continuity of VAT income to the Government, especially as there will be much confusion anyway as we leave the EU at that same time.

I cannot see the April 2019 being a realistic date to try and introduce MTD for VAT and fully expect this to be deferred to 2020 or later.

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Morph
By kevinringer
24th Jul 2017 13:30

"For the 17th year in a row, HMRC’s accounts were qualified due to material errors and fraud ...." HMRC and shareholders would find this completely unacceptable if we were talking about a taxpayer and not HMRC so why do we taxpayers "accept" it of HMRC. Heads should roll at HMRC for their inability to get it under control. HMRC are a disgrace and a national embarrassment. I wonder if other national tax authorities are as rubbish.

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Replying to kevinringer:
Wild Billy Hickok
By Wild Billy
24th Jul 2017 21:46

Do you actually understand what "error and fraud" means here?

To be classified as fraud, HMRC needs to have found evidence that the claimant deliberately set out to misrepresent their circumstances to get money to which they are not entitled (e.g. claiming for a child that does not exist). Error on the other hand covers cases where there is no evidence of the claimant deliberately trying to deceive HMRC, including cases where a claimant inadvertently overclaims because they simply provided HMRC with the wrong information. And this could happen because tax credits are based on household circumstances (and so can be claimed jointly by a couple or by singles) and entitlement is based lots of different factors, e.g. on age, income, hours worked, number and age of children, childcare costs and disabilities.

But it could also cover a situation where the correct information has been provided but this information has been incorrectly processed by HMRC. It's this that MIGHT justify (some of) your angst but ONLY if it is anything more than a negligible contribution to the overall fraud and error rate, which I think is about 5.5% according to the report.

So does it make any more than a negligible contribution?

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By justsotax
27th Jul 2017 14:20

eek 5.5%....looks small doesn't it...but if you are multiplying it by a big number....it makes well erm a big number.

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