There are many reasons why a number of individuals and professional bodies believe that a decade after HMRC was formed by the merger of the Inland Revenue and Her Majesty’s Customs and Excise, at least some elements of the merged entity need to be reviewed.
Tax is always a contentious issue, and never more so than during periods of austerity. On the face of it, HMRC doesn’t seem to be doing too badly – it collected a record amount of tax revenue in 2013/14 (£505.8bn), and tax credits error and fraud have never been lower, despite having £235m taken from its budget.
HMRC needs an independent assessment not just of what is wrong but of how to put it right
It’s this latter point that underlies the continuing complaints about service levels and the growing calls for review, reckons Anita Monteith, technical manager at the ICAEW Tax Faculty.
“Government accounts on a cash basis, so we are more likely to see investment at the start of a parliament because any expenditure on tax collection will only bear fruit a few years down the line,” she says. “There is probably a general acceptance that greater investment in HMRC would lead to a higher tax take, but the message is that there is no more money to spend.”
Her expectation is that some sort of review is likely on the basis that 10 years is a logical period after which to analyse the workings of a new (albeit merged) entity. However, she is clear that any review should not be conducted simply as an exercise in “Revenue bashing” and says that most external experts would be likely to take a measured view.
In June, HMRC announced that it was allocating £45m to improve customer service, adding 3,000 staff to its customer service teams as well as moving some 2,000 staff temporarily from other parts of HMRC to help with the tax credits deadline and letters and forms. This followed an admission by its chief executive that service standards were not good enough.
An HMRC spokesperson points out that it is constantly under independent review by bodies such as the Public Accounts Committee (PAC), National Audit Office (NAO) and Treasury Select Committees, with more than 250 recommendations made by external scrutiny bodies in 2013/14.
Paul Aplin, tax partner with AC Mole & Sons and chairman of the ICAEW Tax Faculty technical committee, accepts HMRC’s point but adds that these reviews were restricted to particular areas. He is calling for a comprehensive review: “In the early days there were also capability reviews. What I am calling for is to examine whether the 2004 O’Donnell Review’s aspirations have been met and to reapply those aspirations to the very different world HMRC now operates in – or consider whether to set new ones.”
Any review must be comprehensive, independent and informed, and must have the confidence of taxpayers and those who work within HMRC, he adds. “The time has come for a general review embracing governance, management structure, culture, powers – and how they are used – service delivery, digital strategy, training, efficiency and effectiveness. It must also address the absolutely fundamental question of the adequacy of HMRC’s resources.”
The move to digital processes means HMRC will be able to do more with fewer staff than it had, and with fewer people than it has now. The problem is there is a disparity between the rate at which staffing is being reduced and the capacity to manage change
Aplin’s preference would be for the review to consider the balance between revenue-raising, cost-cutting and service delivery. “It is not enough for HMRC to self-assess its performance when the imbalance is so marked; it needs an independent assessment not just of what is wrong but also of how to put it right.”
While Aplin is critical of some decisions taken by HMRC’s management, he also acknowledges that budget cuts have been taking their toll for a decade – five years before other departments faced austerity measures. “Headcount has fallen by 40%. Service levels are unacceptable.
If resources are cut further, service levels will continue to decline. It is a staggeringly obvious case of cause and effect and it is both unreasonable and unrealistic to expect HMRC to be able to deliver improvements if it is constantly facing resource reductions on this scale.”
Ironically, Judith Freedman, Professor of Taxation Law at the University of Oxford, says some of the problems facing HMRC are down to the structural reforms recommended and introduced as a result of the O’Donnell Review.
“Some of O’Donnell’s recommendations were sound – for example, bringing customs together with Inland Revenue – but placing policy functions purely into the Treasury was a mistake and means there is not enough input into policy from operational staff. There have been improvements, but not enough. Any new review would have to address that issue and the main thing would be to propose new resources – HMRC needs better trained staff and more of them.”
HMRC’s management structure is wrong, resources are inappropriately focused, there is insufficient accountability and it is an embarrassment that permanent secretaries are being called before the Public Accounts Committee because there is no one else to hold them to account.
That is the view of Tax Research UK director Richard Murphy, who says a thorough review of the governance of HMRC is required and that it is “absurd” that HMRC’s board is made up of representatives from the large business community and its advisers “who between them represent about 700 tax payers when there are 31m income tax payers in the UK.” He continues: “It is also absurd that parliament has almost no resources available to it to scrutinise HMRC. Margaret Hodge may have done well, but it was despite the NAO and not because of it – indeed, the NAO fought long and hard to deny information on HMRC to the PAC. That is wholly unacceptable and must change, which is why I suggest there should be an Office for Tax Responsibility reporting straight to the PAC that can properly audit HMRC and tax policy.”
Murphy adds that any review should look at the resourcing of HMRC and should have representation from beyond big business and the tax profession. If government cannot be persuaded to implement a review, employers’ groups, professional bodies and trade unions should work together, he says.
He accepts that funding would be an issue, but says a relatively limited number of people producing a report on a timely basis could have a significant impact on taxation in the UK during the next 10 to 20 years.
Jolyon Maugham QC, barrister at Devereux Chambers, suggests that one of the key weaknesses of HMRC in its present structure and approach is its unresponsiveness to public demands for transparency around matters of public interest.
“Another shortcoming is the absence of a minister for HMRC, which means it lacks political accountability. It has been suggested that this is because a minister might be able to access the affairs of individual taxpayers and this would clearly be undesirable. But this confidential kind of access could easily be controlled and recorded, to provide accountability.”
Freedman believes that unless customer service is improved, tax morale will decline further. “The majority of people comply with tax laws and we need more emphasis on providing them with a proper service to keep up their compliance.”
Maugham agrees that the success of self-assessment depends on public confidence and suggests that the government is fearful of a review because it does not want it to conclude that resourcing constraints have impacted on the ability of HMRC to reduce tax avoidance and evasion.
“A review could proceed on the basis that HMRC has to operate in a constrained funding environment,” adds Maugham, who says it is difficult to blame senior management for all its failings. “It is the governance structure that leads to failings in management or at least the suspicion of management not acting in the public interest, rather than the quality of management staff working in HMRC.”
Many of the requests for a comprehensive review of HMRC stemmed from the recent election campaign, when the Labour opposition expressed the view that the organisation was contributing to unfairness in taxation. However, Patrick Stevens, tax policy director at the Chartered Institute of Taxation, is unconvinced that such requests are particularly helpful. “In terms of resources, the move to digital processes means HMRC will be able to do more with fewer staff than it had when it was established and with even fewer people than it has now,” he says. “The problem is that there is a disparity between the rate at which staffing is being cut and the capacity to manage this change.”
While accepting that the tax system is far from perfect, he does not believe that a review would pick up on everything that is going wrong and suggests instead that some of the challenges facing HMRC should be discussed openly with management.
“This needs to be done by people who can get to the heart of what is going on and who do not feel constrained by any expectations of what they recommend,” he adds.
Monteith reckons HMRC would benefit greatly from having an accountant in charge of the organisation and a chief finance officer representing it at the Cabinet table, and Stevens agrees that unless, and until, it is managed like a business, it is impossible to apply normal management techniques to its work.
“One of the questions begging to be asked is whether there are people with the appropriate management expertise in the right places,” he says. “Many of those in the management structure are from a tax background and may not have significant experience in change management.”
According to Stevens, there is an understanding at government level that HMRC should be better resourced and that there would be value in an independent assessment of how improvements might be made since this kind of independent verdict would make any recommendations harder to ignore. “I am not against external scrutiny – my suggestion would be to focus on specific areas,” he concludes.
Lynne Oats, professor of taxation and accounting at University of Exeter Business School, is another who believes that an independent review of the workings of HMRC would be helpful. But she also observes that so much has changed in the decade since it was established there would be little point in going back to the original aspirations of the merged entity. She says a review would need to be conducted in light of recent developments. “It would need to cover issues relevant to any big department or organisation,” she says. “For example, are the performance measurement metrics fit for purpose? Issues of particular relevance to HMRC should include the impact of changes to training and development, especially inspector training.”
On the question of whether decisions taken by senior management have always proved to be in the best interests of either the organisation or taxpayers, Oats says there is insufficient information already available in the public domain to make such judgements.
“The sensationalist treatment of this and similar issues by the press and tax campaigners has potentially undermined public confidence unnecessarily,” she says. “HMRC is much like all very large, bureaucratic organisations, and a careful balance needs to be struck between necessary and unnecessary change. It is difficult to assess the resource needs of HMRC because there is so much technological innovation going on right now – it is a constantly moving target.”
According to Jonathan Isaby, chief executive of the TaxPayers’ Alliance, while an independent review of HMRC might be an interesting exercise, many of the errors it presently makes are a result of the tax code it is attempting to administer. “At more than 17,000 pages,” he says, “the level of complexity involved is ludicrous and that means that HMRC is simply unable to notice when people are not paying the right amount of tax or are being over-taxed. Ultimately, taxes should be low, simple and compulsory. If we could slice our tax code down to size, restore trust in the system and reduce the incentives to find loopholes, the job of HMRC and its employees would be far easier.”
On international comparisons, HMRC is failing to perform, he adds. “But though it does make errors, often avoidable ones, this is a product of the system it is attempting to administer.”
When asked whether it is possible to objectively compare the efficacy of tax authorities to determine how HMRC stands up to the performance of its counterparts in other countries, Oats warns that benchmarking performance between countries is fraught with danger because of the differences in economic, social, cultural and institutional conditions – let alone the historical baggage that all tax authorities have to deal with.
“However, it is nonetheless worthwhile looking at processes and procedures in other countries for potentially useful ideas on new ways of working, so long as adoption in the UK is carefully thought through in terms of context,” she concludes.
Tax toolsICAEW’s Tax Faculty offers help for tax advisers via its online Taxtools kit. This includes HMRC contacts (telephone numbers and email addresses) to help direct you to the part of HMRC you need for resolving issues and to advise on the best method of contact to use. There is also a guide on HMRC toolkits with information and guidance on how they may be used. Plus, what to do if you find yourself in the position of having to make a complaint to or about HMRC. icaew.com/tax