NAO highlights HMRC transformation risks
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.”
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.