Julia Irvine 12 Jan 2018 10:39am

HMRC on "high-wire act battered by the winds of Brexit"

HMRC has bitten off more than it can chew with its major transformation programme, including Making Tax Digital – and that’s without the additional demands that Brexit is making on the department, the Public Accounts Committee (PAC) has concluded

In a damning report out today, the influential House of Commons committee warns that the department will have to make tough decisions about where to focus its limited resources while at the same time maintaining its efforts to bring in more revenues, protect its performance levels, invest in measures to stamp out tax evasion, fraud and error, and push ahead with its transformation projects.

It will also have to take on board the heavy workload that the Paradise Papers, with their potentially serious and extensive allegations of tax evasion and avoidance, is likely to land on HMRC’s already overstretched staff and resources.

“HMRC’s transformation programme would have been less risky had it not attempted to do everything at the same time,” said PAC chair Meg Hillier.

“What was already a precarious high-wire act is now being battered by the winds of Brexit, with potentially catastrophic consequences.”

Hillier expressed her concern about the effects on the ordinary taxpayer. HMRC’s customer service had been improving but looks set to fall back to the “appalling levels of recent years”. “Any new deterioration would be wholly unacceptable,” she said.

“There are concerns too about the impact of changes in the welfare system, which could increase the financial risks faced by vulnerable tax credits claimants. At the same time, the level of tax credits fraud and error has gone up and is only going to get worse.

“These are serious, pressing challenges for HMRC, requiring swift and coordinated action in government. As a matter of urgency the authority must set out a coherent plan and demonstrate it is fit for the future.”

The report contains a number of recommendations, many of which will add to the pressure on the department by requiring it to report back to the PAC by March or April this year.

For instance, the committee is demanding that HMRC get hold of the Paradise Papers, which despite requests have so far not been forthcoming, and then plan how it will tackle any cases and how much it is likely to get back in additional revenue, by March.

It also wants to see updates to HMRC’s original assumptions and forecasts for its transformation programme, in particular those relating to customer demand for its services, along with the financial implications. The deadline for this is April.

According to the report, the programme – which involves 15 different projects – is just not deliverable “due to unrealistic assumptions” and Brexit which alone will add potentially an extra 15% to the workload.

All this threatens to undermine HMRC’s efforts to improve its service standards, which in 2016/17 resulted in its best performance for five years. As the report points out, HMRC’s plans to cut budgets will depend on reducing levels of customer demand through implementation of new digital services.

“HMRC’s original assumptions on the extent to which customer demand could be reduced were too aggressive, and HMRC’s call centre advisers had to deal with eight million more calls in 2016/17 than forecast.

“HMRC says it will support vulnerable and digitally excluded customers by continuing to provide phone services seven days a week and face-to-face ‘surgeries’ in 300 locations. However, we remain sceptical that this will be enough to help more vulnerable people, and are concerned about the disparity of service between how HMRC deals with high net worth customers compared with the ordinary customer.

“HMRC could not give a guarantee that it would wait for demand to fall before cutting its headcount, and warned of a potential risk to customer service performance in future years.”

The committee also says that HMRC’s claims about the time it takes for customers to speak to an adviser don’t stack up and recommends that it introduce a new set of measures better reflecting the actual experience of customers.

Another development alarming the MPs is HMRC’s admission that the level of tax credits error and fraud has risen and is only going to get worse. The department said it had gone up from 4.8% of total tax credits spent in 2014/15 to 5.5% in 2015/16 and was likely to peak in future years at between 7% and 8%.

They are also concerned about HMRC’s lack of clarity over much of the tax gap it could realistically close with its existing resources.

In response, HMRC said it was determined to maintain its service standards and would continue to follow published protocols and treat tax credits recipients “with respect and consideration”.

It said that it was continuing to look closely at the information in the Paradise Papers that had been disclosed publicly “to see if it reveals anything new that could add to existing leads and investigations”, and it pointed out that since 2010 it had brought in an extra £160bn by tackling tax avoidance, evasion and non-compliance.

As far as Brexit was concerned, the Revenue added, “We are fully focused on making the UK’s exit from the EU a success.

“The Customs Declaration Service is on track for delivery by January 2019 and has the capacity to deal with a significant increase in customs declarations at the border.”

The tenor of the PAC report came as no surprise to the tax profession, although as ICAEW Tax faculty head Frank Haskew said, it did make for “sobering reading”.

“It was clear from the evidence the chief executive of HMRC gave to the committee that there is serious concern that the new demands on HMRC could be the straw that breaks the camel’s back.

“HMRC is currently undergoing a huge transformation programme to a very ambitious timetable, but is now also having to deal with Brexit and a myriad of other pressing matters such as Making Tax Digital and the fallout from the Paradise papers. The Committee is rightly concerned about the impact of all of this on HMRC’s services, which had been improving in recent years but now risk going into reverse.”

He welcomed the candour that CEO Jon Thompson had shown about the problems facing the department. “This is to be applauded. Government and HMRC now need to engage with taxpayers and stakeholders about what can realistically be achieved, given the need to maintain standards.”

Haskew added that there needed to be a realistic assessment of how much the department could achieve and which projects would need to be deferred or dropped.