Amyas Morse, the Comptroller and Auditor General, has today issued a report on the 2016-17 accounts of HM Revenue & Customs. Each year he chooses parts of HMRC’s business to report on in more detail. This year’s report has four parts:
Tax revenues and spending in 2016-17
HMRC raised £574.9 billion of tax revenues this year1, an increase of £38.1 billion (7.1%) on 2015-16 and paid out £39.1 billion in benefits and credits (approximately one-fifth of the government’s total benefit expenditure). The taxes that contributed to most of this increase were Income Tax and National Insurance Contributions which together increased by £14.9 billion (5.3%); Corporation Tax which increased by £5.6 billion (12.3%); and VAT which increased by £8.4 billion (7.2%). The annual cost of running HMRC was £3.3 billion in 2016-17.
Tax credits and Child Benefit error and fraud
The C&AG has qualified his regularity audit opinion on the 2016-17 Resource Accounts because of material levels of error and fraud in the payments of Personal Tax Credits. He has qualified the accounts on these grounds every year since Tax Credits were introduced in 2003-04. HMRC’s central estimate of error and fraud in 2015-16 (the most recent available) is £1.57 billion of overpayments (5.5% of total spending on Personal Tax Credits) and £0.21 billion of underpayments (0.7% of total spending on Personal Tax Credits).
HMRC’s estimated increase in error and fraud within Tax Credits is contrary to the significant reductions achieved in previous years, and the rate is expected to increase further. HMRC analysis shows that during 2015-16 the increase in estimated error and fraud was associated with the income, work and hours, childcare and undeclared partner risk categories. HMRC also expects the level of error and fraud to increase when reported for 2016-17, due to the impact of introducing the “Commercial with a view to a profit” self-employed test as well as the impact of the ending of the Concentrix contract.
HMRC will face further challenges in administering Tax Credits as claimants transfer to Universal Credit. Some 95,000 claimants have transferred to Universal Credit (62,000 in 2016-17), with a further 220,000 expected to transition in 2017/18. Full transition and migration of claimants to Universal Credit is not expected to be completed until 2022. Due to the long timeframe for the transition of Tax Credits claimants to Universal Credit, and relatively small numbers of cases transitioned so far, it is too early to conclude on HMRC’s performance in meeting the challenges this transition presents.
The 2016-17 estimate of error and fraud overpayments of 1.0% (£110m) of total spending on Child Benefit is a reduction from previous years (1.4% (£170m) in 2015-16). HMRC has carried out detailed analysis of the cases where claimants do not respond to contact and their award is counted as error or fraud. This work indicates that the rate of error and fraud may be lower than estimated. HMRC has identified further interventions that it is planning to introduce both over the next twelve months and in the longer term that will seek to reduce the rate of error and fraud further.
HMRC is one year into a major transformation programme which seeks to move to a fully digital tax system by 2020. Transformation as originally scoped, and its intended benefits, will be challenging to deliver within the timescale. In Spending Review 2015 HMRC secured a budget of £1.8 billion for its transformation for the period 2016-17 to 2019-20. In return it committed to achieving total efficiencies of £1.9 billion by 2019-20 and to collect £920 million of additional tax revenue by 2020-21. It estimates that its 15 transformation programmes could cost £2.2 billion, including additional elements that HMRC is able to fund from existing budgets such as the costs of changing IT contracts, programme staff, redundancy costs and contingencies.
HMRC forecasts its 15 transformation programmes may contribute fewer efficiencies than expected, but it still aims to achieve its efficiency target from change activity elsewhere in the business. In 2016-17, HMRC fell behind its planned profile for achieving sustainable efficiencies from transformation, reporting £78 million of savings against £189 million originally expected. HMRC made other operational savings and one-off cost reductions which helped to compensate, reporting efficiency savings of £254 million against a target of £203 million. Only £181 million of these efficiencies were sustainable, hence HMRC will need to make additional savings in future years.
This scale of transformation will be challenging to manage, and the U.K.’s exit from the EU presents an additional challenge. HMRC has improved the way it is managing transformation. It has developed its leadership capacity, improved its accountability arrangements and its financial forecasting. It is managing the programmes as a single portfolio, providing increased visibility of programme risks and interdependencies and enabling better management of cost and delivery pressures. Early requests for funding based on business cases totalled £710 million in 2017-18, exceeding that year’s transformation budget of £457 million. HMRC recognised that it needed to slow, stop or de-scope activity to live within its budget. It reduced the difference between planned activity and budget to around £60 million for 2017-18. However, many of the programmes are interdependent and some are implementing necessary changes, such as the new customs system. HMRC must ensure that any changes to scope or timing of programmes do not jeopardise the delivery of benefits.
Customer service performance
Over the past five years the National Audit Office and the Committee of Public Accounts have reported several times on the performance of HMRC’s customer services. We highlighted that poor service can have adverse consequences: the cost to customers from waiting on the telephone can be significant; and the quality of service experienced by personal taxpayers may have an impact on tax compliance.
HMRC significantly improved its performance against its customer service targets in 2016-17 by deploying over 800 new staff and using its workforce more flexibly. In 2016-17 their telephone advisers had to handle 34 million calls (29 million in 2015-16) which was eight million more than forecast. HMRC reported its best performance for five years against both its key telephony measures: the percentage of calls to its helplines that it handled (92% in 2016-17 compared to 72% in 2015-16); and the average speed to answer calls from when a caller enters a queue to speak to an adviser which fell from 12 minutes in 2015-16 to under four minutes in 2016-17. HMRC’s set of performance measures could be improved to better reflect customer experience. Its current approach to measurement could overstate calls handled, and understate the time to answer as experienced by the customer. There is also opportunity for HMRC to improve some of its other performance measures to better reflect customer experience, including whether it resolves customers’ queries first time, and the quality of its advice.
"HMRC collected more tax revenue in 2016-17 and improved its service levels for taxpayers. However error and fraud is rising within Tax Credits and HMRC needs to make it easier for claimants to get help. HMRC is part-way through an ambitious programme to bring in digital services and reduce its costs. In doing so HMRC must ensure it maintains adequate services if it is to protect revenue and tackle error and fraud”.Amyas Morse, head of National Audit Office
Read the full report
Notes for editors
- HMRC records revenues in the Trust Statement on an accruals basis (tax due rather than actual cash received). Of the £574.9 billion of total revenue in 2016-17, £127.8 billion relates to amounts that had not been collected at the year-end. £99.6 billion of this balance relates to accrued revenue.
- Press notices and reports are available from the date of publication on the NAO website. Hard copies can be obtained by using the relevant links on our website.
- The National Audit Office scrutinises public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Sir Amyas Morse KCB, is an Officer of the House of Commons and leads the NAO. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund have used their resources efficiently, effectively, and with economy. Our studies evaluate the value for money of public spending, nationally and locally. Our recommendations and reports on good practice help government improve public services. Our work led to audited savings of £734 million in 2016.