Government endorses PAC recommendations to improve HMRC Performance

The PAC report published in February concluded that the Treasury needs to invest more in HMRC customer services.

The report quoted the CIOT that HMRC’s service levels are the “single greatest concern expressed by its members, and that they are having a detrimental impact on cash flow, the costs of doing business, attitudes to tax compliance and trust in the tax system”.

As well as customer services the report makes recommendation around R&D credits, IR35 and other issues.

The committee’s report, HMRC performance in 2022–23, set out six conclusions and accompanying recommendations to improve performance across all levels of HMRC. These are set out below along with a summary of the government’s response on each.

1 - PAC Conclusion: HMRC’s customer service levels are at an all-time low because of conscious choices made by HMRC and HM Treasury.

PAC Recommendation: HM Treasury and HMRC should ensure HMRC’s customer services are sufficiently resourced in the short as well as the longer-term so that it can meet its service standards until its digital services adequately address the needs of taxpayers and their agents.

The government have agreed but claim that this recommendation has already been implemented. They have highlighted that, as per the 2021 Spending Review, HMRC will receive a £0.9 billion cash increase over the Parliament. This includes over £130 million of investment to enable HMRC to enhance its digital services.

(NB. The government’s response here appears out of line not just with the views expressed by the PAC in its February report but with the National Audit Office’s 15 May report which states, among other things, that “HMRC is not expecting to meet its telephone performance target in 2024-25 and it has not made clear what level of service customers should expect”. Both the government response and the NAO report predate the announcement on 13 May of an additional £51 million for HMRC’s telephone helplines; CIOT has noted, however, that this is less than half of the savings HMRC has committed to make from its customer service budget this year.)

2 - PAC Conclusion: While we recognise the progress HMRC is making to tackle tax debt, we are concerned that it should have sufficient checks to protect taxpayers from being pursued too forcefully.

PAC Recommendation: HMRC should establish a clear, easily accessible route for taxpayers to report issues they face when dealing with debt collection agencies working on behalf of HMRC, and report back to the committee with a summary of any issues raised and how HMRC have dealt with them.

The government have agreed and set a target date for implementing this of September 2024. The government stated that HMRC have been using private sector Debt Collection Agencies (DCAs) since 2009 to provide extra capacity, and they are “expected to meet standards of service” set by the department. The government has encouraged taxpayers who have concerns about the service they receive from HMRC DCA to raise a complaint.

3. PAC Conclusion: HMRC are not taking seriously enough the distress caused to innocent citizens when companies use the wrong address to register their business.

PAC Recommendation: We expect HMRC to take serious action against companies registering with the wrong addresses. HMRC should report back to the committee on the scale of the issue and the level of tax at risk. As well as on its plans for ensuring innocent people do not suffer from bogus registrations and HMRC’s demands for tax from the wrong people.

The government said that HMRC will provide the committee with a written update on the tax risks associated with deliberate hijacking of addresses for fraudulent purposes by the summer of 2024. They also highlighted that HMRC have processes in place to identify fraudulent tax registrations and will take action where they are linked to incorrect addresses.

The government has acknowledged the distress that misdirected letters can generate for innocent people and argued that HMRC will take immediate action to correct this when identified. They suggested that HMRC would only “use its enforcement powers against the taxpaying entity and would not pursue the true owner of the address in the case of a bogus registration”.

4. PAC Conclusion: We are concerned that HMRC’s approach to serious abuse is not deterring criminal activity sufficiently, while at the same time its approach to tackling IR35 is deterring legitimate economic activity.

PAC Recommendation: HMRC should provide the committee with further detail of:

a) the value of tax at stake in cases of criminal prosecutions in recent years

b) how HMRC is using fewer prosecutions to achieve greater deterrence of egregious non-compliance

c) the number of active litigation cases for IR35 and the amount of tax at risk

d) the impact of HMRC’s approach to administering IR35 reforms on the use of contractors in different sectors.

The government highlighted that HMRC publish compliance yield information, from HMRC’s Fraud Investigation Service, along with the prosecution figures each year. While this information is not broken down further at the moment, HMRC will explore the “potential of disaggregating” by the summer of 2025.

In regards to point B, the government agreed with the committee's recommendation and promised to provide further explanation by the summer of 2024. They added that the data to support this work is currently being collected and will provide HMRC with a “refreshed view” of the deterrent impact of tax crime prosecutions.

The government reported that, as of the end of March 2024, there were 26 active litigation cases for IR35. As disputes are costly for HMRC and its customers, the department will not usually persist with a tax dispute unless “it would secure the best practicable return for the Exchequer”.

On point D, the government argued that this recommendation had already been implemented and various research had been conducted. The government added that: “HMRC remain committed to understanding the impacts of the off-payroll working reforms”.

5. PAC Conclusion: HMRC have been too slow to identify the scale of error and fraud in research and development tax reliefs and its approach to tackling offenders does not sufficiently target those committing serious fraud over those making honest mistakes.

PAC Recommendation: Now that it understands the true scale of error and fraud, HMRC should ensure it goes back over previous years. This should involve going back sufficiently far to tackle egregious fraud and telling those businesses who made honest mistakes to correct their returns or risk investigation.

While agreeing with the committee’s recommendation, the government has highlighted that where there is evidence of deliberate non-compliance, HMRC can look back up to 20 years. HMRC have increased their resources for addressing non-compliance in R&D and in spring 2024 HMRC’s R&D Disclosure Facility will go live on GOV.UK. This will enable customers or agents to inform HMRC if they may have overclaimed, or claimed in error and are out of time to amend their tax return.

6. PAC Conclusion: HMRC’s reliance on the tax gap measure is not providing a sufficiently stretching target for its compliance performance.

PAC Recommendation: HMRC need to demonstrate that its compliance yield target is sufficiently ambitious to provide a stretch in HMRC’s performance each year and to take account of inflation in the tax base.

The government said that HMRC’s annual compliance yield target is set at a level that aligns with the Office for Budget Responsibility’s assumption that core compliance activity maintains a stable tax gap. The government added that the current methodology ensures the compliance yield target increases in line with tax receipts and “this target is highly stretching, and it is forecast to increase year on year”.

You can read the full report here. To read CIOT’s analysis of PAC’s original report please click here.