In 2009, HMRC announced a target to reduce error and fraud to 5 per cent by 2010-11, down from 9 per cent. HMRC missed this target. Error and fraud losses for 2010-11 were just over 8 per cent, amounting to almost £2.3 billion, around £850 million higher than if HMRC had achieved the target. Today’s report concludes that, while HMRC has made improvements to its approachand increased the amount of error and fraud it prevents, HMRC is not yet achieving value for money.

The target prompted HMRC to introduce a new approach to tackling error and fraud. From April 2009, it increased the number of checks on claims, targeting claims at greatest risk of containing fraud and error. HMRC has been innovative in how it tackles error and fraud, developing a wide range of activities to tackle specific types of risk and monitoring their effectiveness.

HMRC believed it was on track to meets its target, but had overestimated the impact of its activities to tackle error and fraud. It estimated that it had prevented £1.4 billion of error and fraud in 2010-11, but has revised this to under £500 million.

HMRC has not yet developed an effective response to stop error and fraud recurring after it has corrected a claim. It has also been less effective in tackling certain types of risk, such as the misreporting of hours worked by claimants.

Despite HMRC increasing the number of checks to tackle error and fraud, there remain a substantial number of incorrect awards at the end of each year. In 2010-11, in the case of 1.4 million awards, claimants were paid more than they were entitled to.

The NAO found that HMRC has strengthened its approach during 2011-12 through the better use of data analysis, but the outcome of this work cannot be fully assessed until the next set of error and fraud data is available in summer 2013.

The challenge for HMRC will be to make more and deeper reductions over the spending review period while increasing tax revenues, improving customer service and introducing its ‘real time information’ project and changes to benefits and credits.

HMRC made £296 million of savings in 2011-12, exceeding its target by 19 per cent. This is about a third of the total savings it is required to make over the four years of the spending review period. HMRC exceeded its overall 2011-12 target for collecting additional tax revenues, maintained tax collection and reduced the level of tax debt. It restored customer service performance from a low point in 2010-11, but did not meet all of its customer service targets.

HMRC is spending £376 million in total on change projects across the four year spending review period to make sustainable savings of £411 million a year by 2014-15. However, HMRC expects these projects to save £162 million less over the spending review period than when the NAO last reported on this subject, in July 2011. This is partly because its forecasts are now more refined and realistic, and partly because, as some projects took longer to start, the benefits will take longer to be realised.

HMRC has strengthened how it manages its change programme in ways that address NAO recommendations and those of the Public Accounts Committee. The Department has also started to address the recommendations that it should improve its understanding of interdependencies between projects and of the cost and value of its activities though it has more to do in these areas.

HMRC needs to make new savings of £585 million a year by 2014-15 as well as maintain those savings already made. At September 2012, HMRC was on track to exceed its 2012-13 cost reduction target by £29 million. However, the reduction in planned savings being delivered by change projects means that HMRC needs to find £66 million more savings than it originally planned through other initiatives. As at July 2012, HMRC had not fully worked out where these additional savings in 2013-14 and beyond would come from.

A report by the National Audit Office into the customer service performance of HM Revenue and Customs has concluded that, while the department has made some welcome improvements to its arrangements for answering calls from the public, its current performance represents poor value for money for customers. 

Today’s report recognizes that HMRC has restored customer service levels from a low point in 2010, when problems with the new National Insurance and PAYE system increased the number of queries. HMRC has now dealt with long-term backlogs by employing 2,500 temporary staff, enhancing phone technology and improving productivity.

In 2011-12, HMRC answered 74 per cent of phone calls, against an interim target of 58 per cent. This level of service is nevertheless low. For example, 20 million calls (including calls where customers rang back because they did not get through first time) were not answered.

So far in 2012-13, HMRC has improved its handling of post but its performance in handling calls has been varied. However, in October 2012, HMRC answered 91 per cent of calls, its highest monthly performance since December 2009.

Customers who got through to HMRC in 2011-12 had to wait on average 282 seconds to speak to an adviser. Between April and September 2011, 6.5 million customers waited more than ten minutes to have their call answered. Depending on the tariff they pay their phone company, customers are charged from when their call is connected even if they are held in a queue. The NAO estimates that it cost customers £33 million in call charges while they are in the queue. The estimated value of customers’ time while they are in the queue is £103 million.

Most of HMRC’s numbers are still 0845 numbers which result in high call charges for some customers. It is investigating alternatives as it negotiates its new telephony contract. HMRC estimates customers would save £13 million annually if all 0845 numbers were replaced with cheaper 03 numbers.

HMRC has plans to achieve service targets but they are ambitious, given previous performance and the need to reduce staff. NAO analysis indicates that, by the end of 2012-13 and through 2013-14, HMRC could achieve its target of answering 90 per cent of calls. However, by 2014-15, HMRC will have reduced numbers of contact centre staff so will need to redeploy large numbers of back-office processing staff to answer telephones. There is also uncertainty about the impact on call volumes of large-scale changes, such as the introduction of Real Time Information and the transition to universal credit.

The tax avoidance disclosure regime introduced in 2004 by HM Revenue and Customs, DOTAS, has helped the department make some important headway in reducing the opportunities for avoidance. However, there is little evidence that HMRC is making progress in preventing the sale of highly contrived tax avoidance schemes to a large number of taxpayers.

In each of the last four years, over 100 new avoidance schemes have been disclosed under DOTAS. While HMRC believes most of these would be defeated if tested in the courts, there is no evidence that their usage is reducing.

Today’s National Audit Office report recognizes, however, that DOTAS has helped HMRC to change tax law and prevent some types of avoidance activity. Since the introduction of the regime, HMRC has initiated 93 changes to tax law designed to reduce avoidance. DOTAS has also helped to change the market of tax avoidance schemes, and the larger accountancy firms are now less active in this area.

Tax avoidance is not illegal and is therefore inherently difficult to stop. A potential avoider can use a scheme to gain a tax advantage until HMRC can prove that the arrangement is not consistent with tax law. This is a resource-intensive process which can take many years and often requires litigation.

HMRC has increased its focus on the tax affairs of high net worth and affluent individuals. While its high net worth unit set up in 2009 brought in £200 million of revenue that would otherwise have been lost in 2011-12, there are still 41,000 open avoidance cases relating to marketed schemes used by individuals and small businesses, and HMRC has yet to demonstrate how this number will be reduced.

The large number of users of mass-marketed schemes presents a challenge to HMRC. It has identified around 30,000 users of ‘partnership loss’ schemes and disguised remuneration schemes. It has sought to tackle such schemes by litigating a few ‘lead cases’ to demonstrate to other users that the scheme will not succeed in the courts. While HMRC has a good success rate when it litigates, its investigations can take many years to resolve and it cannot always successfully apply the rulings in lead cases to other cases.

HMRC has an anti-avoidance strategy, but does not monitor its costs and has not yet identified how it will evaluate its effectiveness. This limits its ability to make informed decisions about where to direct its avoidance activity.

• The department’s responsibilities and how it spends its money
• Financial management
• Reported performance
• Issues identified in NAO reports

October 2012

Our examination of the data systems used to report performance for this department involved a detailed review of the processes and controls governing:

• the selection, collection, processing and analysis of data;
• the match between the department’s stated objectives and the indicators it has chosen; and
• the reporting of results.

Our conclusions are summarised in the form of a score between 0 and 4. The ratings are based on the extent to which departments have:

• put in place and operated internal controls over the data systems that are effective and proportionate to the risks involved; and
• explained clearly any limitations in the quality of its data systems to Parliament and the public.

Our assessment does not provide a conclusion on the accuracy of the outturn figures included in the Department’s public performance statements. This is because sound data systems reduce but do not eliminate the possibility of error in reported data.

2011-12 is the first year in a rolling programme which will present a complete picture over the next three years.

August 2012

Amyas Morse, the Comptroller and Auditor General, has today issued a report on the 2011-12 accounts of HM Revenue & Customs. The report details progress by the Department in stabilising the PAYE service since the serious problems that emerged when it introduced the new National Insurance and PAYE service (NPS) in 2009. The report also covers HMRC’s performance in managing tax debt; and its progress in tackling fraud and error and in managing debt in respect of tax credits.

In 2011-12, the Department received total revenue of £474.2 billion, an increase of £4.5 billion (0.96 per cent) more than in 2010-11. Tax revenue has continued to recover from the effects of the recession in 2008-09 and 2009-10. VAT revenue has increased by £9.3 billion, largely because of the VAT rate increase and increases in revenue from the oil, gas and business services sectors. Revenue from corporation tax has decreased through turbulence in the financial sector, offset by increased revenue from offshore companies because of higher oil and gas prices.

The Department is part way through its plan to stabilise the administration of PAYE. It has met its target to process 6.7 million end-of-year reconciliations relating to the 2008-09 and 2009-10 tax years. In addition, it is on track to reconcile the 2010-11 and 2011-12 tax years by March 2013; and, by December 2012, to clear outstanding reconciliations predating the introduction of NPS relating to 2003-04 to 2007-08.

Today’s report points out, however, that stabilising PAYE has come at a cost, in terms of the amounts of tax the Department has decided to forgo to keep workloads manageable. In 2011-12, it remitted an additional £12.7 million relating to claims from taxpayers, bringing the total of those claims to £53.7 million.

The NAO recommends that, as a step towards forecasting its overall work load and the operational resources required, the Department complete its review of its PAYE operating model, taking account of the findings from the pilot for testing its new ‘real time information’ (RTI) system.

The value of tax debt at 31 March 2012 under active management stood at £13.3 billion, compared with £15 billion in the previous year. The Department has made progress in implementing its debt strategy through tailoring its approach based on the characteristics of the debt. The Department’s records show a large increase over the last two years in the amount of tax which the Department has decided not to pursue, especially for income tax which was £756 million in 2011-12. This is in part owing to PAYE stabilisation work but also as a result of improvements in the recording of remissions.

The NAO recommends that the Department identify the full cost and evaluate the cost-effectiveness of each of its debt collection activities. It should also accelerate its work to undertake full risk profiling and customer segmentation of its debt balance, as recommended by the Public Accounts Committee in 2004 and 2008.

In 2010-11 (the latest year for which figures are available), the Department overpaid between £2.08 billion and £2.46 billion to claimants as a result of error and fraud and underpaid between £0.17 billion and £0.29 billion to claimants because of error. The Department has not met its target to reduce the level of tax credits error and fraud to no more than 5 per cent of entitlements.

The Department met its target to reduce tax credit debt to £4 billion at 31 March 2012 (down from £4.7 billion a year earlier), but only after writing off old debts of £1.7 billion during 2011-12. It estimates that £2.3 billion of the £4 billion is unlikely to be recovered. The Department’s campaign approach, aimed at collecting tax credits debts more promptly, has had limited success.

The National Audit Office has concluded, on the basis of an examination by former High Court tax judge Sir Andrew Park of five large tax settlements, that all five settlements were reasonable and the overall outcome for the Exchequer was good. However, the spending watchdog has expressed concerns about the processes by which the settlements were reached and over poor internal communication of the reasons for settlement.

The NAO review of the settlements followed serious concern by the Public Accounts Committee about how HM Revenue & Customs had handled them or overlooked governance arrangements. The NAO also examined the basis of concerns expressed by whistleblowers.

According to today’s report, all five settlements were reasonable for the Department to have reached under the circumstances and at least one may have been better than reasonable. These large settlements are complex and there is no clear answer to what represents the ‘right’ tax liability. In each case, there was a range of justifiable positions the Department might have taken. The NAO’s examination included consideration of whether the settlement in each case was as good as or better than the outcome that might be expected from litigation, taking into account the risks, cost, uncertainties and timescale of the latter option.

Specialist staff were sometimes excluded from the final settlement negotiations and the Department did not always ensure that these staff involved understood the reasons for settlement. Poor internal communication of the reasons resulted in a loss of confidence in the settlements, both internally and externally.

It is not clear that all settlements were fully compatible with the Department’s Litigation and Settlement Strategy. For instance, there are some disputes where the only possible outcomes are either that the taxpayer owes nothing or that it owes the full amount. In these circumstances, the Department’s Litigation and Settlement Strategy does not permit ‘splitting the difference’. In one settlement, the Department settled for less than if it had won in litigation.  This was reasonable, given the costs and uncertainties of litigation, but was not clearly compatible with the Strategy.

In most cases, there was no need to seek legal advice before agreeing settlement terms. In one case, the Department did not consult its lawyers when it should have done because there was ongoing litigation.

The findings of today’s report confirm the NAO’s concerns regarding the governance arrangements operating in these cases. The Department has acknowledged that its governance processes need strengthening and is introducing new arrangements, including the appointment of an assurance Commissioner, who will approve all large settlements.

A major HMRC programme to improve the way it tackles evasion delivered £4.32 billion of additional tax yield between 2006 and 2011. It also reduced staff numbers and introduced a range of improvements in its compliance work. The Department has introduced new capabilities, notably the use of IT to identify incidences of evasion more effectively, although it is not yet exploiting the full potential of the new systems. It also had to defer and reduce the scope of projects to keep within annual budgetary limits, leading to reductions in benefits.

The Compliance and Enforcement Programme cost £387 million to 2011-12 and was made up of over 40 projects. It aimed to increase compliance yield - the measure of additional tax arising from compliance work – by £4.56 billion between 2006-2011.

The Programme reported additional yield of £4.32 billion over the five years to March 2011. HMRC forecasts that it will generate an additional £8.87 billion of yield between 2011-12 and 2014-15. However, HMRC will not achieve all of the Programme’s forecast benefits because of changes to scope or slippage in delivering projects, as well as over-optimism in its forecasts.

HMRC reduced staff numbers by the planned amount of 3,374 full time equivalents by the end of 2008-09, two years ahead of schedule. It also generated an improvement in productivity – defined as the level of yield generated by each full time equivalent – of approximately 36 per cent, below its forecast of a 42 per cent improvement. HMRC did not routinely measure the impact of the Programme on customer experience.

HMRC exercised disciplined budgetary control over annual Programme spending. It prioritised funding to deliver the Programme’s key projects, including new IT systems to improve risk targeting.

HMRC’s renewed strategy for dealing with alcohol duty fraud, now covering wine and beer as well as spirits, is a significant improvement on the previous strategy and the Department has achieved some of its early objectives. However, a report released today by the National Audit Office has found that there has been no tangible success achieved in working with industry to disrupt the illegal diversion of duty-unpaid alcohol back into the UK market. There has also been a low level of criminal sanctions against fraudsters.

The Department estimates that the amount lost to alcohol duty evasion could be as much as £1.2 billion in 2009-10, a significant rise from £850 million in 2008-09. HMRC launched its current strategy in April 2009, to take effect from 1 April 2010, but it has no explicit objective to increase the number and impact of criminal investigations and prosecutions. There is also insufficient quality, depth and analysis in the performance information used to inform delivery of the strategy.

HMRC exceeded its key financial objective for 2010-11. The Department set itself a number of key performance outcomes for the year and achieved a number of these, including its principal financial target, achieving £433 million of financial benefits against a target of £390 million. But analysis by the NAO indicates that £43 million of the total £476 million reported as financial benefits were not defensible because of poor quality assurance processes.

According to today’s report, there has been no success in reducing the volume of alcohol legally moved to other EU countries with excise duties unpaid, but then diverted back into the UK for illegal sale. The Department has recorded increased revenue from agents participating in the new Registered Consignee scheme. However, its scheme requiring traders to provide financial guarantees for the duty on alcohol being moved has been less successful as the guarantees required by the Department are far lower than the value of the duty on goods being moved. HMRC has made minimal progress working with industry to secure alcohol supply chains.

In each of the four years to 2009-10, there were convictions in just six cases or fewer for suspected alcohol duties fraud. The Department considers civil sanctions more effective in some cases. During 2010-11, the quantity of alcohol seizures increased to almost 10 million litres – an increase of 61 per cent.