“HMRC has three strategic priorities: to improve customer experience; to reduce its operating costs; and to reinvest money from efficiency savings to generate increased tax revenue. There are inherent tensions in reconciling these priorities. We have found good progress by HMRC in reducing costs and meeting its revenue targets. In respect of raising customer service levels to an acceptable standard, it has a much longer way to go. HMRC faces a considerable management challenge if it is to meet its commitments to increase revenue by stepping up its anti-avoidance and anti-fraud activities. It needs to strengthen its own efforts in tackling avoidance. But it also requires the help of legislators and changes in international tax rules, if it is to respond effectively to the ‘borderless’ internet world.”
Amyas Morse, head of the National Audit Office, 2 July 2013
Amyas Morse, the Comptroller and Auditor General, has today issued a report on the 2012-13 accounts of HM Revenue & Customs. The report details progress by HMRC in stabilising and operating the PAYE service and its progress towards the implementation of its new Real Time Information service. The report also covers HMRC’s performance in tackling VAT fraud, and in reducing error and fraud in personal tax credits.
In 2012-13, HMRC received total revenue of £475.6 billion, £1.4 billion (0.3 per cent) more than in in 2011-12. Corporation tax revenue decreased by £0.9 billion. VAT revenue increased by £1.4 billion. Tax revenues for income tax and national insurance decreased by £0.8 billion. The value of debt either written off or ‘remitted’ (not pursued by HMRC for reasons such as hardship or value for money) during the year was £5.3 billion.
PAYE and Real Time Information
HMRC has met its target to be operating a normal PAYE service by March 2013. In line with its commitment to the Public Accounts Committee, HMRC successfully cleared the remaining 6.7 million outstanding end-of-year reconciliations for 2008-09 and 2009-10 by 31 March 2012, cleared the historic open cases relating to 2003-04 to 2007-08 by 31 December 2012, and reconciled the 2010-11 and 2011-12 tax years by March 2013.
The stabilisation of PAYE has cost less than HMRC expected, £78.9 million against an initial estimate of £80.9 million. However, an estimated £953 million of tax has been foregone, relating to tax years 2003-04 to 2009-10, to keep workloads manageable.
HMRC has successfully piloted its new Real Time Information (RTI) system, which enables PAYE information to be captured when payments are made rather than annually. However, limitations in the scope of the pilot mean that some of the system functionality, such as end of tax year reconciliations, are being tested in 2013-14. The RTI system is being rolled out to employers from April 2013 and the RTI programme budget does not include contingency for any significant extra development costs.
The financial and accounting systems supporting RTI are not yet fully accredited because a number of issues were identified during the pilot. The issues identified do not affect an employer’s ability to submit data to HMRC but do weaken its ability to produce and report financial information on PAYE. The NAO recommends that HMRC urgently address these weaknesses.
Tackling VAT fraud
HMRC has estimated that the tax gap for VAT in 2010-11 was £9.6 billion (30 per cent of the total estimated tax gap of £32 billion). HMRC has made good use of intelligence to respond to the risks of VAT fraud and its checks prevented £579 million of erroneous and fraudulent repayments in 2012-13, but it does not carry out comprehensive real-time checks across all VAT returns. The NAO also found that HMRC has yet to produce a comprehensive plan to react to the emerging threat of VAT losses due to online trading. It has helped to ensure legislative change to close existing VAT loopholes and launched a series of initiatives, but overall HMRC has shown less urgency in developing its operational response to this threat.
The NAO recommends HMRC considers the costs and benefits of enhanced risk profiling of VAT payment returns, and also recommends that HMRC increase the urgency with which it is responding to the fraud risks posed by internet traders.
Personal tax credits
The C&AG has qualified his audit opinion on HMRC’s 2012-13 resource accounts because of material levels of error and fraud in the payments of personal tax credits. In 2011-12 (the latest year for which figures are available), HMRC overpaid between £1.9 billion and £2.3 billion to claimants because of error and fraud, and underpaid between £170 million and £360 million to claimants because of error. The 2011-12 estimate of error and fraud is 7.3 per cent, the lowest since the current personal tax credits scheme was introduced in 2003-04.
Tax credits debts stood at £4.8 billion at 31 March 2013 (up £0.8 billion from a year earlier). HMRC has undertaken a detailed analysis of its success in pursuing debts and believes that only 31 per cent of the balance is likely to be recovered.
The NAO recommends that HMRC build on its successful approach in tackling error and fraud in tax credits. It also needs to look closely at the collectability of its debts and, where it is not value for money to pursue these, write them off.