HMRC's progress: improving tax compliance and preventing tax avoidance
18 November 2014
Public Accounts Committee publishes its report on HMRC's progress in improving tax compliance and preventing tax avoidance at 00.01am, Tuesday 18 November 2014.
- Report: HMRC's progress in improving tax compliance and preventing tax avoidance
- Report: HMRC's progress in improving tax compliance and preventing tax avoidance (PDF 192KB)
- Inquiry: HM Revenue & Customs Accounts 2013-14
- Public Accounts Committee
The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:
"HMRC’s action against tax avoiders continues to be unacceptably slow, putting tax revenues at risk.
The Liberty scheme, for example, began in 2005 and was closed down in 2009, but it has taken until 2014 for HMRC to take this case to a tax tribunal.
Up to £10 million of the total £400 million tax at stake from the 2,000 users of this scheme may not be recoverable because in 30 cases HMRC failed to start inquiries into personal tax returns within the 12 month statutory deadline.
This may be just the tip of the iceberg. Although HMRC says Liberty was an exceptional case among the 750,000 personal tax return inquiries each year, it was unable to tell us how much delays had cost across the different tax avoidance schemes.
HMRC says delays in recovering the tax withheld by those participating in tax avoidance schemes are partly due to delaying tactics by scheme promoters.
HMRC must do more, faster. It should report on the progress it has achieved by using new powers granted by Parliament to tackle tax avoidance and show that it is using its existing powers with sufficient urgency.
HMRC does not do enough to tackle companies which exploit international tax structures to minimise UK tax liabilities.
Recent changes to the UK tax regime, such as those for controlled foreign companies, have been challenged by international bodies like the OECD and European Commission as constituting 'harmful tax practices.'
These changes, including the introduction of the patent box relief, make it easier for global companies to avoid paying tax in the jurisdictions where they make a profit.
Some international tax experts believe that the UK’s tests for companies to gain tax residency are less rigorous than in other EU jurisdictions. Research into seven companies who have recently relocated to the UK for tax purposes showed very little inward investment was generated or jobs created in the UK in return for the tax benefits the companies receive.
HM Treasury and HMRC should provide the Committee with details of progress in identifying and addressing the ways that international tax structures are exploited, and set out the actual costs and benefits of recent changes to the UK’s tax regime.
It is amazing that HMRC made a £1.9 billion error when it established its baseline and set targets for its compliance work.
This means HMRC has been overstating the extent to which its performance on compliance yield has improved over the 2010 spending review period, and it inadvertently presented misleading information to Parliament about the improvement in its performance.
Astonishingly, this significant error in a key performance measure went undetected by HMRC’s own system of governance and internal audit for three years.
HMRC should make sure the governance arrangements around its performance are sufficiently robust. It should be more transparent about its compliance yield estimates and maintain a comparable measure of compliance yield over time so we are not comparing apples and pears."
Margaret Hodge was speaking as the Committee published its 18th Report of this Session which, on the basis of evidence from Lin Homer, Permanent Secretary and Chief Executive, Simon Bowles, Chief Finance Officer and Jim Harra, Director General Business Tax, HMRC, examined HMRC’s progress in improving tax compliance and preventing tax avoidance.
In 2013-14, HM Revenue & Customs (HMRC) reported exceeding its target for 'compliance yield' — the additional tax revenue it generates from its work to tackle those who do not comply with their tax liabilities. However, over the 2010 spending review period it has been overstating the extent to which its performance has improved. When HMRC agreed with HM Treasury (the Treasury) how it would measure performance over the period, it made errors which led it to set its baseline £1.9 billion too low. So the Department has been measuring its performance against a false baseline. As a result, its targets were easier to achieve, and it misreported its achievements. HMRC has also made significant changes to how it measures its compliance performance. When reporting performance in its Fast Facts publication it failed to acknowledge these changes and again overstated its performance. The changes mean that the measure currently lacks the certainty and clarity for Parliament and taxpayers to fully understand it or use it to hold HMRC to account over the longer term.
We welcome the action HMRC has taken to address some of our concerns around tax avoidance, for example by proposing the accelerated payments scheme. But slow progress in other areas has put tax revenues at risk at a time when pressures on the public finances are acute. HMRC assures us that it now has the right number and quality of staff to tackle tax avoidance, having invested in recruitment and training and brought its counter avoidance experts together in a new directorate.
Conclusions and recommendations
HMRC collects around £500 billion a year from UK taxpayers. Since the 2010 spending review, it has been specifically funded to do more compliance work to secure more tax revenues. HMRC measures the impact of its compliance work by estimating 'compliance yield' — the additional revenue it generates through its activities to identify and prevent tax losses, arising from avoidance, evasion and criminal attack. In 2013-14, it exceeded the target it had agreed with the Treasury, reporting compliance yield of £23.9 billion, £5.3 billion more than in 2011-12.
HMRC made a £1.9 billion error when it established its baseline and set targets for its compliance work. This meant it presented misleading information to Parliament about the improvement in its performance. HMRC made an error of £1.9 billion in calculating the baseline it used to agree targets for its compliance work over the 2010 spending review period. The error led to HMRC overstating the improvement in its performance, for example in its 2011-12 and 2012-13 Annual Reports, and in its Fast Facts publication of May 2014. HMRC reported it had exceeded its targets significantly when in fact it had only just achieved the anticipated level of performance. Astonishingly, this significant error in a key performance measure went undetected by HMRC’s own system of governance and internal audit for three years. Despite this, HMRC does not intend to change any of its internal quality assurance systems or governance around performance information. We are pleased that HMRC has invited the NAO to provide independent assurance in future about the quality of compliance data it reports, but it must not rely on such assurance as a substitute for effective internal checks.
Recommendation: HMRC should ensure the governance arrangements around its key performance indicators are sufficiently robust, and subject to adequate internal and external challenge, before they are reported publicly.
HMRC is not properly transparent and clear about the different levels of certainty around compliance yield that it reports. HMRC’s measure of compliance yield is complex and includes four categories that carry different levels of certainty and precision. For example, £5.5 billion of the £23.9 billion yield reported in 2013-14 relates solely to revenues HMRC expects to benefit from in future years. This is harder to estimate and more susceptible to errors but HMRC has not made this uncertainty clear when reporting publicly. It has improved its reporting in this year’s Annual Report in light of the NAO’s findings. However, it still has not done enough to explain the level of uncertainty in its estimates or to make clear that not all the £23.9 billion compliance yield reported in 2013-14 provides a real additional cash revenue benefit in that year.
Recommendation: HMRC should be more transparent about its compliance yield estimates by publishing more detail about how it calculates compliance yield, being clearer about how much it has actually collected in cash terms and explaining how uncertainty affects its estimates.
There has not been consistency in the way HMRC has measured compliance yield which makes it hard to hold HMRC to account for its performance over time. Compliance yield is one of HMRC’s key performance measures. It shows how much additional revenue HMRC generates from compliance work. HMRC has changed how it calculates compliance yield over time. For example, from 2011-12 HMRC introduced a new measure which estimated the revenue benefit from disrupting organised crime, and significantly expanded the measurement of "future revenue benefits" (a measure of how HMRC expects companies’ and individuals’ behaviour to change following a compliance investigation). These changes mean we cannot compare HMRC’s compliance performance in 2010-11 and before with what it has reported since. However HMRC produced a Fast Facts document comparing performance over time without being clear about the measurement changes. HMRC now accepts that it had been comparing "apples with pears" and that it had not made the impact of these changes clear. HMRC expects to make further changes to its measurement of compliance yield as its approach to compliance work continues to evolve.
Recommendation: HMRC should maintain a comparable measure of compliance yield over time and report clearly the impact of any changes it makes to its methodology in its key accountability statements to Parliament.
HMRC’s action against tax avoiders continues to be unacceptably slow, putting tax revenues at risk. The Liberty scheme began in 2005 and was closed down in 2009, but it has taken until 2014 for HMRC to take this case to a tax tribunal. We are also concerned about HMRC’s slow progress in acting on information from the Falciani list, which identified 3,600 UK individuals potentially avoiding tax using Swiss bank accounts. HMRC accepts there have been delays in recovering the tax withheld by those participating in tax avoidance schemes, partly due to delaying tactics and obstacles put in their way by scheme promoters. HMRC is introducing an accelerated payment scheme, which it described as a "game changer" because it requires those in marketed avoidance schemes to pay their tax bill up front if they want to dispute HMRC’s assessment of what they owe.
Recommendation: Parliament has granted HMRC new powers to tackle tax avoidance. HMRC should report on the progress it has achieved by using these new powers (for example, in its Annual Report) and demonstrate to Parliament that it is using its existing powers with sufficient urgency.
HMRC does not do enough to tackle companies which exploit international tax structures to minimise UK tax liabilities. HMRC reported that it was playing an important role in the OECD’s BEPS (Base Erosion and Profit Shifting) project, and had led the way on improving international transparency over the 'beneficial ownership' of businesses. But recent changes to the UK tax regime, such as those for controlled foreign companies, have been challenged by international bodies like the OECD and European Commission as constituting 'harmful tax practices' by making it easier for global companies to avoid paying tax in the jurisdictions where they make a profit. International tax experts believe that the UK’s tests for companies to gain tax residency are less rigorous than in other EU jurisdictions and research into seven companies who have recently relocated to the UK for tax purposes suggests that the economic benefits for the UK are minimal.
Recommendation: HM Treasury and HMRC should provide the Committee with details of progress in identifying and addressing the ways that international tax structures are exploited, and set out the actual costs and benefits of recent changes to the UK’s tax regime.