This report is The National Audit Office’s (NAO) commentary on HM Revenue and Customs’ (HMRC’s) performance in 2015-16. We report findings from all our statutory audits of HMRC this year including audits of HMRC’s financial statements, the adequacy of its systems for collecting revenue and the value for money it achieved from its spending.
The audit of HMRC covers the tax revenues the government raises and the benefits HMRC pays out. HMRC raised £536.8 billion of tax revenues this year (some 80% of total revenues raised by government) and paid out £40 billion in benefits and credits (approximately one-fifth of the government’s total benefit expenditure). The annual cost of running HMRC, which is the second-largest government department in terms of staff numbers, was £3.2 billion in 2015-16.
Each year, the NAO choose parts of HMRC’s business to report on in more detail. Last year’s report considered: how HMRC measures compliance yield; its assessment of the tax gap and tax risk; and its plans for tax administration. This year’s report has four parts:
Part One considers HMRC’s objective of maximising revenues and looks at the main components of the £536.8 billion raised during 2015-16 and the robustness of HMRC’s estimate of £26.6 billion in compliance yield, the additional revenues it has generated through its compliance and enforcement activities; Part Two looks at HMRC’s progress in transforming the way it administers taxation; Part Three considers how well HMRC manages tax reliefs; and Part Four examines progress in managing fraud, error and debt in Personal Tax Credits and Child Benefit and explains the basis of the Comptroller and Auditor General’s qualification of his regularity audit opinion on HMRC’s Resource Accounts.The full report amounts to some 79 pages but of interest to payroll professionals are the sections relating to Parts 1 and 2.
Part 1
The total revenue HMRC reported in its Trust Statement in 2015-16 was £536.8 billion (£517.7 billion in 2014-15). HMRC prepares the Trust Statement on an accruals basis. This means that the revenue figure reported relates to tax due on earned income or activities during the financial year, regardless of when the cash is received.
In 2015-16, HMRC received £530.0 billion in cash (£513.1 billion in 2014-15), net of cash repayments of £105.9 billion (£97.7 billion in 2014-15).
The revenue of £536.8 billion was 3.7% greater compared with 2014-15. The taxes that contributed to most of this increase were:
Income Tax and National Insurance Contributions, which together increased by £10.3 billion (3.8%); Corporation Tax, which increased by £4.1 billion (9.9%); and VAT, which increased by £2.1 billion (1.8%) Capital Gains Tax and Insurance Premium Tax also recorded significant increases, by 28.1% (to £7.3 billion); and 27.6% (to £3.7 billion) respectively.Therefore, the biggest increase in monetary terms was tax and NI, though not in percentage terms.
So, how much does it cost to collect these taxes. The revenue collected per £1 of spending on administration has increased slightly to £167.06 (2014-15: £166.95). HMRC’s biggest cost is staff expenditure of £2.3 billion. The level of staff cost is relatively consistent with 2014-15 as are staff numbers (2015-16: 59,900; 2014-15: 57,100).
Other matters:
In November 2015, HMRC announced that it would reduce its estate from 170 locations to 13 regional sites and four specialist sites by 2027. By 2021, 137 sites will be closed. We would expect to see the impact of this decision in future years’ financial statements, for example the reduction in the number of buildings and associated changes to accommodation costs, and the recognition of the costs of staff leaving HMRC. In July 2015, HMRC set up a new company, Revenue & Customs Digital Technology Service (RCDTS), a limited company set up, and wholly owned, by HMRC to support and deliver HMRC’s digital and technology services. The services transferred to RCDTS in 2015-16 were previously supplied under the Aspire contract, the largest technology contract in government due to expire in 2017. On 1 December 2015, HMRC transferred 138 staff from Capgemini, who work under the Aspire contract, to RCDTS. These staff provide the same service to HMRC but through an HMRC-owned company rather than through external suppliers. RCDTS’s costs are consolidated into HMRC’s Resource Accounts. Its main costs are permanent staff (£2.2 million) and spend on contractors (£3.9 million). Expenditure will increase in future years as more staff are transferred to RCDTS and it provides more services to HMRC. RCDTS’s own detailed audited financial statements will be available in the autumn. Both of these two points have relevance to the matters in Part 2 and HMRC’s digital transformation aspirations.Lastly in this section is the compliance yield which is an estimate of the additional revenues that HMRC considers it has generated, and the revenue losses it has prevented, from its compliance and enforcement activities. It is one of HMRC’s main performance measures and is used to agree targets with HM Treasury for spending on compliance work. Compliance yield is a more direct and timely measure of the impact of HMRC’s compliance and enforcement work than the tax gap, which is subject to long reporting delays and other factors outside HMRC’s control
HMRC’s performance in this area is measured under 5 headings:
In 2015-16, HMRC achieved £26.6 billion of compliance yield against a target of £26.3 billion. HMRC had achieved the same amount of yield in 2014-15 against a target of £26.0 billion.
Cash collected of £9.0 billion (34%), which is an estimate of the extra tax HMRC expects to collect by identifying and challenging non-compliance. Revenue losses prevented of £6.8 billion (26%), which is tax revenue HMRC has protected each year either by refusing or reducing repayment claims because they are in error or fraudulent or by disrupting organised criminal activity. Future revenue benefit of £6.2 billion (23%), which is HMRC’s estimate of the revenue benefits where it considers it has changed the behaviour of the taxpayers and can be claimed for up to five years. Product and process yield of £2.1 billon (8%), which is the annual impact of legislative changes made since April 2011 to close tax loopholes and changes to HMRC’s processes which reduce opportunities to avoid or evade tax. Accelerated payments of £2.4 billion (9%), which is the net amount of disputed tax (£2.1 billion) that users of avoidance schemes have paid upfront to, and have received back from, HMRC and £340 million of estimated behavioural impact.Part 2
Payroll professionals are all too familiar with the problems resulting from HMRC’s move towards a more digitalized service over the last 4 years:
Closure of some 137 of its 170 offices with the consequential loss of expertise built up in the years preceding the closures Centralisation of services at Longbenton, near Newcastle, with the resultant: recruitment of support staff with little or no expertise, massively long waiting times for phones to be answered and overall extremely poor service for its “customers” HMRC effectively moved from a professional organisation providing good support to a poorly managed call centre in one quick move.The problem was that all this took place before HMRC were able to deliver.
HMRC are in the process of developing their Digital Strategy and in January of this year they produced a document entitled HMRC Information Technology Strategy. The purpose of which is designed to “ensure our digital services and enterprise systems have a modern technological footing. We will ensure the next generation of services are first-rate through the delivery of a world-class architecture, driven by real business transformation”.
HMRC’s stated vision is to have “one of the most digitally advanced tax administrations in the world”.26 The vision is not just about more online services. HMRC will need to transform its whole organisation to achieve its aim, making significant changes in parallel. By 2021, it expects to employ 16% less staff who will mostly be working in 13 regional centres. More of its processes will be automated, and a higher proportion of its staff will undertake specialist work to challenge those taxpayers who seek to avoid or evade their tax liabilities. HMRC will fundamentally change how it buys its IT services as it replaces its Aspire contract. HMRC expects most taxpayers will be using new online systems to manage their tax affairs by 2020.
Examples of the ways that HMRC’s plans will affect taxpayers
The NAO report goes on to say that HMRC’s past experience demonstrates that there are serious risks if major assumptions underpinning its strategy do not prove realistic. For example, achieving HMRC’s vision relies on the critical assumption that taxpayers will move over to online services and reduce the demand for telephone and postal services. In the last Parliament, HMRC made over-optimistic assumptions about how much change it could make all at once.
To live within its spending plans, it released customer service staff before it had reduced the demand from personal taxpayers for contact by phone. This significantly impaired the quality of its service for some 18 months.
HMRC has since recovered its overall service levels. It ended the year with calls answered at 72% of the total calls received over the year; and in the last quarter, it answered 87% of calls with an average speed of answer of less than six minutes.
HMRC has adjusted its future resource plans in light of this experience. It is now monitoring closely the way taxpayers respond to changes in the way services are provided, including how demand for online and telephone services is changing. HMRC also needs to model the impact of different scenarios and monitor leading indicators of the success of its strategy. This is so that it can intervene early to ensure that any setbacks in implementing new services do not damage its service to customers or its ability to collect tax.
