Report on management of tax debt
9 June 2009 (updated on 22 April 2010)
The Public Accounts Committee publishes a report looking at the management of tax debt by HM Revenue & Customs.
Edward Leigh MP, Chairman of the Committee of Public Accounts, today said:
"Nearly a third of all tax payments are late and the amount of money owed to HM Revenue & Customs (HMRC) is enormous – over £17 billion at the last reckoning. The number of tax debts also increased over 2007-08 by 22 per cent. The department must try every means it can to tackle what is likely to become a growing problem of tax debt, while making allowance for people and businesses in temporary financial difficulties.
"HMRC has been slow to take advantage of the key techniques used by other organisations to manage debt owed to them. It has started to make more methods of payment available to taxpayers – such as credit cards and direct debits - but it could take advantage of the latest developments in payment technology. Its debt collection activities also tend to be conducted on a 9 to 5 basis which is not always the best way of contacting tax debtors.
"The department has decided that it cannot afford a new IT system to link all the tax records of an individual taxpayer. But linking of debts is crucial to effective debt management and HMRC should introduce a staged programme towards that end.
"The arrangement by which the contractor EDS would pay compensation for its underperforming tax credits computer system – on the basis of installments contingent on winning new business from the government – was always highly unsatisfactory and in practice did not work. It should never be repeated."
Mr Leigh was speaking as the Committee published its 26th report of this Session which, on the basis of evidence from HM Revenue & Customs, examined getting taxpayers to pay on time, improving debt recovery and managing tax debt in a recession. The Committee also considered the Department’s recent settlement with EDS on the compensation for the Tax Credit computer problems.
In 2007–08, HM Revenue & Customs (the Department) collected around £450 billion in tax and National Insurance contributions from 35 million taxpayers. At 31 March 2008 the Department was owed £17.3 billion in outstanding tax, interest and penalties, £4.5 billion of which was more than a year old. Debts arise when people or businesses forget to pay, do not understand the need to pay or deliberately try to avoid or delay payment.
Most tax payments are made on time, but during 2007–08 30 per cent of tax payments were made after they were due. In 2007–08, the number of tax debts increased by 22 per cent, and the level and age of debt increased on some taxes. The Department has improved the quality of information provided to taxpayers about arrangements for payment and debt recovery, and has provided more ways for taxpayers to settle their tax debts. But the Department needs to change the behaviour of taxpayers who persistently pay late.
The Department could do more to encourage prompt payment, for example, by offering newer methods of payment used by other organisations. It also lags behind best practice in recovering debt. For example, it does not risk score its debtors. Risk scoring would allow it to tailor the help it gives to those who do not understand their obligations or are in financial crisis, while dealing promptly with debtors who deliberately pay late. Other organisations and tax authorities have significantly improved their performance by using risk profiling.
The Department is also unable to automatically link debts owed on different taxes by the same taxpayer, which is a barrier to effective and efficient debt management. The Department estimates that it would cost more than £250 million to develop IT systems which would link all of a taxpayer’s records, which are currently held on its different tax systems.
In managing tax debt, the Department must balance the need to maximise revenue for the Exchequer with that of offering support to individuals and businesses in temporary financial difficulty. Balancing these objectives becomes more difficult in a recession. Since launching the Business Payment Support Service in November 2008, the Department had—by February 2009—agreed over 60,000 'time to pay' arrangements with individual businesses, worth £1 billion in deferred tax.