PAC questions HMRC on child trust funds and VAT compliance

The participants in the session were:

• Jim Harra, First Permanent Secretary and HMRC’s Chief Executive
• Emily Antcliffe, HMRC’s Director of Individuals Policy
• Gavin Oldham OBE, Chairman and Founder of the Share Foundation
• Anthony Walker, Director of Operations of the Share Foundation

The Chair of the committee, Dame Meg Hillier (Lab) began the session by explaining that child trust funds were set up between 2002 and January 2011, and the government paid more than £2 billion into these funds for 6.3 million children born in that time. They can access that when they turn 18. Most children received £250 into their original account, though those from low-income families received an additional £250 from the Government, so £500 in total.

Those child trust funds became legacy financial instruments after January 2011, so some people will have converted them or taken the money out, Hillier continued, but many of them have not been accessed by the young people concerned and they are reaching maturity from now over the next few years. “We are really keen to know how HMRC is now having to enliven itself to deal with what is now a live policy issue, making sure that those young people get the money in the accounts that they deserve to have,” she explained.

Gavin Oldham explained that the Share Foundation is a registered charity that was established in 2005 with the initial purpose to provide additional funds to child trust funds for young individuals in care. However, when the government changed in 2010, the child trust fund program ended, and junior ISAs were introduced as an alternative. Oldham added that the Share Foundation, along with Barnardo's and Action for Children, advocated for young people in care to still receive a starter capital account, which led to the implementation of the junior ISA for this group.

For the past 11 years, the Share Foundation has been managing the junior ISA scheme on behalf of the Department for Education, and their contract has recently been extended for another four years. They have collaborated with 211 local authorities across the UK, Oldham explained.

VAT compliance

Before turning to the main business of the session, the committee questioned Jim Harra on some issues around VAT compliance. They were joined in this by Plaid Cymru MP Ben Lake who had a relevant constituency case.

Lake’s constituent was receiving a large number of letters from VAT-registered businesses that had changed their registration to his address. Harra had stated in a letter to the committee that HMRC’s “investigations have found no evidence of fraud or fraudulent intent”. Hillier noted that it appears odd that approximately 11,000 VAT-registered businesses have modified their registration to this particular address and as a result the committee was now seeking further clarification on this matter.

In response, Harra said that the incident in question was quite unusual, but he was confident that there was no fraud being committed against HMRC. He explained that these are overseas businesses that sell their products in the UK through online marketplaces. However, since 2021, the responsibility for VAT accounting on such sales lies with the online marketplace. There is therefore a risk that an overseas business may pose as a UK business to avoid VAT accountability. However, to mitigate this risk, HMRC have established guidelines and checks that online marketplaces must perform to determine a business's location. Simply registering at a UK address is not sufficient. HMRC have looked into businesses registered at this address and found that, for the vast majority of their sales via online marketplaces to UK customers, VAT has been accounted for by the online marketplace.

Lake asked Harra why these overseas businesses would ‘suddenly’ want to register a UK address as a flat in Wales.

“That is a mystery”, said Harra. He observed that out of the 11,000 businesses involved, around 2,300 of them owe HMRC a debt that predates the 2021 online marketplace rules. Due to the unresolved address issue, HMRC lacks a valid address to correspond with these businesses regarding their debts.

Harra said that HMRC recently sought feedback through a call for evidence on strengthening their powers to collect debts from overseas businesses, particularly in light of e-commerce. The responses to this call for evidence have been published, and HMRC is considering options to address these issues. He stated that while HMRC currently have some powers to take control of goods there is a “need to modernise the debt collection process”.

Peter Grant (SNP) shared a story about a legitimate business in his constituency which its Companies House details were stolen and misused to set up VAT registration for a criminal business. He said the initial advice they received from HMRC was that “you do not have to collect the debt”, and they even denied involvement with the debt collection agency altogether. Grant expressed concern and asked whether the public and legitimate businesses can truly have confidence that they will not become victims of significant fraud.

“The VAT system is clearly a target for fraudsters” who attempt to bypass taxes or obtain fraudulent VAT repayments from HMRC, said Harra. He informed the committee that since April 2022, there have been multiple waves of suspected fraudulent attacks on the VAT system, starting with unusual applications for VAT registration. In response, HMRC has strengthened its verification processes, although this has resulted in some delays for individuals and businesses in need of rapid registration. Since 2016, HMRC has either refused or caused the withdrawal of 120,000 VAT registration applications.

Harra argued that combating fraud is an ongoing challenge, as it has become a “constant arms race” between HMRC and fraudsters.

Sir Geoffrey Clifton-Brown (Con) noted that collecting debts from overseas businesses, especially those without assets or presence in the UK, can be difficult and as the debts are often small amounts making enforcement challenging. So he wondered whether there are cases where it becomes not worth pursuing the debt, leading to write-offs from HMRC.

Harra agreed with Clifton-Brown’s comment and said that’s why HMRC introduced legislation in 2016, 2018 and 2021 to shift the liability away from these businesses and collect it from more reliable intermediaries. “We have certain powers… in certain circumstances, if they have goods in the UK, we can take control of those goods”, Harra stated.

Clifton-Brown asked if the implementation of these increased powers will be retrospective to these businesses. Harra answered that this decision lies with Parliament and HMRC has not formulated the specific proposals. He outlined that HMRC is engaged in pursuing debts through overseas courts and operates within a “network of treaties whereby foreign tax authorities give us assistance and we give them assistance”. This mutual assistance can involve assisting in tracing businesses in foreign jurisdictions and even supporting the enforcement of debts through the courts.

Harra also noted that in order to addressing fraud, particularly from China, HMRC has provided Mandarin language guidance to educate businesses, which has resulted in a very large number of voluntary VAT registrations and compliance.

Child trust funds

Peter Grant sought Gavin Oldham’s opinion about the reason young people do not claim their money from child trust funds – “Is it simply that they do not know that the money is there and nobody quite knows where the young person is to tell them”, he asked.

Oldham agreed with Grant’s comment, and clarified that the main problems were identified in HMRC-allocated accounts, specifically in two aspects: the number of accounts with the “addressee gone away” status and the number of accounts where families had “never registered”. It was found that over 85 per cent of the money in HMRC-allocated accounts fell into these two categories.

Additionally, Oldham said that the analysis highlighted that 51 per cent of these accounts belonged to low-income families or families receiving child tax credit, indicating that the issue primarily affects disadvantaged individuals. These families may not have received adequate communication or follow-up from HMRC regarding the opened accounts, leaving them ‘unaware’ of their existence.

Grant raised concern regarding the possibility of some businesses not actively seeking to track down the account holders of revenue-allocated accounts and allowing the funds to “basically run down to nothing”. Therefore, he questioned whether there are firms motivated solely by the fees they receive and not interested in preserving the funds – asking if the Financial Conduct Authority (FCA) was playing any role in this.

Oldham expressed his disappointment at the suggestion in a National Audit Office (NAO) report that funds could be declared dormant. He highlighted the importance of these accounts for young people from low-income families and suggested inviting the FCA to focus on this issue.

HMRC’s Emily Antcliffe said that, even as these accounts mature, they continue to generate growth as they are savings accounts. Despite the presence of fees, the account growth typically exceeds the cap on fees. Therefore, accounts within the fee cap would continue to accumulate growth and would not simply run down to nothing.

Meg Hillier suggested that the NAO's work on child trust funds may encourage other providers to take action. Oldham appreciated the interest and mentioned a debate in Westminster Hall in 2019 when John Glen, now Chief Secretary to the Treasury, told him “There are no lost child trust funds” , while they were walking out of the Hall.

He expressed his belief that the Treasury has not prioritised the matter sufficiently and limited the resources and budget allocated to HMRC.

Harra acknowledged the ‘budgetary constraints’ and stated that: “We will continue to monitor the extent to which maturing CTFs get accessed and what more we might need to do”.

Meanwhile, Oldham emphasised the value of the search register offered through the government gateway, which can provide information on account providers within 24 hours without troubling HMRC and at no cost.

Oldham emphasised that child trust funds are individual accounts in the young person's name, contrary to some misconceptions that they were ‘pooled’ accounts, and warned again against allowing the accounts to become dormant. “The communication maintained with families, particularly on revenue allocated accounts, is critical”, he believed.

Financial education

Jill Mortimer (Con) noted that one of the policy objectives of child trust funds was to help people to understand the benefits of saving and investment. “What difference has the child trust fund scheme made to people’s understanding of finances and their ability to manage them?” she asked.

Responding, Emily Antcliffe referred to an interim evaluation conducted in 2009, saying that it found no statistically significant difference in the savings of young people overall. However, it did highlight a £600 increase in savings for those living in rented accommodation. In general, the evaluation indicated no “significant change” in financial behavior, she said.

Gavin Oldham highlighted the importance of evaluation and disclosed that a team from Bristol University is currently doing some research into young people who have found their child trust funds. “It is extremely important that we demonstrate that it [child trust funds] has worked”, Oldham argued.

Mortimer inquired whether the child trust fund scheme had made people more financially adept and aware. Oldham responded: “Absolutely not”. He emphasised the need for a financial awareness GCSE and said that relying solely on mathematics is insufficient.

Jim Harra told Mortimer that HMRC is primarily responsible for administering the scheme, ensuring that accounts and subscriptions were distributed. Additionally, he noted that there was an “aim for the child trust fund to be used in education” for financial education purposes. However, since 2010/11, there have been no new cohorts going through the scheme.

Oldham added to the discussion, emphasising the importance of using the insights gained through the Share Foundation to develop more effective and targeted schemes. He suggested that: “It could be much more targeted in terms of its application and bringing in things like incentivised learning alongside it, which will give it the real drive for giving young people the opportunity to achieve their potential”.

Mortimer wanted to know more about HMRC's involvement in building on financial education for young people and their parents.

Antcliffe responded that HMRC has not had a specific role in ‘managing education’ but has focused on raising awareness of the scheme's existence.

Mortimer asked about the responsible party for financial education, to which Harra noted the presence of ‘tax ambassadors’ who visit schools to teach young people about tax and how to manage it after leaving school.

Mortimer reiterated her question and asked again about the child trust fund scheme objective to improve education about saving and investment.

Harra acknowledged that while the tax ambassador program primarily focuses on tax education, resources related to child trust funds are provided to ambassadors and other stakeholder groups for use in schools. He explained that the aim is to “raise awareness of CTFs” and ensure young people understand their existence.

Oldham also highlighted the role of the Money and Pensions Service (MaPS), particularly in Wales, in supporting financial education efforts. “They have a low-income section within the government in Wales, which has been very vibrant in its interest”, he said.

Geoffrey Clifton-Brown asked Oldham to provide details about his proposals for improving financial education in schools, particularly regarding the introduction of a GCSE in financial education.

Oldham explained that he has analysed GCSE results and found limited financial awareness content, except for mathematics. “You only have to talk with your children or your grandchildren about taking maths, and they will say that there is a very limited amount of financial awareness that comes through with that”, he concluded.

You can read the full transcript here.