As befits a large and important organisation in which we all have a stake, HMRC’s Annual Report and Accounts 2015-16 run to 292 pages. The document includes a 75-page report by the Comptroller and Auditor General (CAG). The relative length of these two parts – 75 per cent HMRC, 25 per cent independent scrutiny – is interesting in itself. Reading the two parts together demonstrates that the picture is not as rosy as HMRC would have us believe.
It’s not possible to do justice to the entire report in our weekly tax brief, so we thought we’d have a look at four areas.
- How much tax is HMRC collecting? It’s not all about the money…
- What about the tax gap? Compliance revenues struggle to match 2014-15 bumper year.
- How does the report address poor service levels? Without a word of apology.
- And does the notorious complexity of the UK tax system hold any financial pitfalls for HMRC? We’ve found a £49bn contingent liability…
How much tax is HMRC collecting?
Total tax revenues for 2015-16 were £536.8bn, an increase of £19.1bn (3.7 per cent) over the previous year. This increase is spread across all the taxes collected by HMRC and reflects the overall level of activity in the economy and the rates of taxation, allowances and reliefs set by parliament. Unsurprisingly HMRC is rather pleased about that but the CAG’s report contains references which, when translated into plain English, read something like 'don’t forget that it’s not all about the money'. HMRC seem to have recognized this because, while their brutal two-word key objective for 2015-16 was indeed all about the money (maximize revenues), the 2016-17 key objective is now 'maximize revenues due and bear down on avoidance and evasion'. We welcome the focus on maximizing only the revenues which are due, and shifting the focus to avoidance and evasion. That brings us to the results of HMRC’s compliance activities and the tax gap.
What about the tax gap?
HMRC’s efforts to combat tax evasion and avoidance yield what HMRC describes as 'compliance revenue'. Compliance revenue includes not only cash collected but also an estimate of the amount of revenue HMRC prevents from being lost, together with an estimate of the impact of their current compliance interventions on future taxpayer behaviour. The figure includes accelerated payments, which allow HMRC to demand up-front payment of tax in disputed tax avoidance cases. These amounts are only repaid to the extent the dispute is eventually resolved in the taxpayer’s favour.
Total compliance revenues for 2015-16 were £26.6bn, exactly the same as the previous year. However, closer scrutiny shows that cash collected from compliance activities, revenue losses prevented and future revenue benefit all fell. If the £2.436bn collected under accelerated payment notices had not come to HMRC’s aid, compliance revenues would have dropped when compared with the bumper year 2014-15.
You’d expect HMRC’s compliance activities to reduce the tax gap, and they do, but the relationship between the tax gap and compliance revenues is not simple. The tax gap is the difference between the amount of tax that should in theory be collected by HMRC against what is actually collected. HMRC’s latest estimate, for 2013-14, shows that over the past nine years the cash tax gap has reduced from around £37bn to around £34bn, at a time when total revenues collected have grown substantially, from around £405bn in 2005-06 to £506bn in 2013-14. While HMRC is pleased with the result, the CAG report makes clear that Parliament’s Public Accounts Committee (PAC) sees considerable room for improvement in this area.
How does the report address poor service levels?
The CAG reported what so many taxpayers, claimants and professionals throughout the UK have experienced to their cost 'HMRC…saw the quality of its service to personal taxpayers collapse in 2014-15 and the first half of 2015-16'. The CAG’s use of the word 'collapse' emphasises the gravity of the situation, partly due to HMRC’s excessive expectations as to what could be achieved by their flagship digital agenda, and the PAC grilled former HMRC head Lin Homer about this.
Following a change of leadership at HMRC, you’d have thought that a sincere apology would be forthcoming from an organisation whose second key objective for 2015-16 was 'to improve the service that we give our customers'. Although service levels began to improve during the second half of 2015-16, unless I’ve missed something the report contains a couple of brief references to service problems but not a single word of apology. HMRC even goes so far as to reject some of the PAC’s findings in respect of tax credits.
One of HMRC’s key objectives for 2016-17 is to 'design and deliver a professional, efficient and engaged organisation'. Surely it should be obvious to those at the top of HMRC that engagement is a two-way street? It’s very difficult for taxpayers to feel engaged with an organisation which won’t say sorry after such monumental failures.
Does the notorious complexity of the UK tax system hold any financial pitfalls for HMRC?
Due in part to the complexity of the UK tax system, and the fact that not every business or individual taxpayer agrees with HMRC’s interpretation of the law, HMRC is involved in a number of legal and other disputes which can result in claims by taxpayers against HMRC. These may take years to resolve.
The accounts show that HMRC currently has 23 cases estimated at £49.1bn (24 cases £35.6bn as at 31 March 2015) where the maximum potential tax revenue, before losses, capital allowances and other reliefs, is over £100m. In other words, if HMRC lost all these cases, it would have to pay out the better part of £50bn. And then there are the smaller cases….
There will always be disputes between taxpayers and tax authorities, but the sheer scale of these numbers should remind MPs of the absolute need to enact clear, unambiguous legislation to achieve specific policy objectives.
In conclusion, HMRC and the CAG are to be commended for producing such a thorough, clear and informative document. If you’d like to read it yourself, here’s the link.
If you would like any more information on this issue please get in touch with George Bull or your usual RSM contact.