The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:
"In pursuing unpaid tax, HMRC has not clearly demonstrated that it is on the side of the majority of taxpayers who pay their taxes in full.
Last year the Department collected less tax in real terms than it managed to collect in 2011-12. This was despite the stated ambition to crack down on tax avoidance. The tax gap as defined by HMRC did not shrink, but in 2011-12 grew to £35 billion. Yet that measure does not capture all the tax government should be collecting. For instance, this figure does not include all the tax revenue lost to aggressive tax avoidance schemes.
HMRC holds back from using the full range of sanctions at its disposal. It pursues tax owed by the smaller businesses but seems to lose its nerve when it comes to mounting prosecutions against multinational corporations. It predicted that it would collect £3.12 billion unpaid tax from UK holders of Swiss bank accounts and this figure was built into budget estimates, but in 2013-14 it has so far secured just £440 million. We were astonished that HMRC could not give any reasons for such a shortfall.
HMRC aims to make the UK more attractive to business but the incentives to international corporations may also enable them to avoid tax. Changes in the controlled foreign company rules and the failure to close the loophole created by Eurobonds are two examples showing where it has become easier for companies to avoid tax while ordinary people continue to pay their share. If that is HMRC’s real intent, then it should be open about it. When designing the tax regime for businesses, HMRC needs to strike the right balance between support and enforcement.
The implementation of the Real Time Information system has been encouraging overall though some small businesses are continuing to struggle. It is of concern that HMRC is planning from April 2014 to fine companies even though some face continuing challenges.
The successful implementation of Universal Credit depends on RTI continuing to work properly but the system does not have full disaster recovery arrangements. System failures could have serious consequences for payments to individuals."
Margaret Hodge was speaking as the Committee published its 34th report of this Session which, on the basis of evidence from HM Revenue & Customs, examined its progress in dealing with personal tax, business tax and tax avoidance issues.
HMRC is responsible for collecting UK taxes and duties from businesses and individuals and providing financial support to taxpayers through tax credits. It aims to deliver three strategic priorities: to improve customer service; to reduce operating costs; and to reinvest money from its efficiency savings to generate increased tax revenue. In 2012-13, HMRC reported that it had brought in £475.6 billion of revenue, an increase of £1.4 billion or 0.3% in cash terms compared to 2011-12. Tax revenue therefore fell in real terms in 2012-13 as compared to 2011-12.
The tax gap is a theoretical concept to assess tax revenues lost to the Exchequer. It does not cover the full amount lost through tax avoidance. It sets out to measure the difference between the amount collected and the amount that should be collected. The stated tax gap underestimates the amount of money lost to the Exchequer. Despite the Department’s increased efforts on reducing the tax gap, the latest figures for 2011-12 shows an increase of £1 billion to £35 billion compared to the previous year. Furthermore, HMRC has not attempted to gather intelligence about how much tax revenue is lost through aggressive tax avoidance schemes, so this is not included in its figures. HMRC is not explicit about this limitation to its current measure.
Recommendation: HMRC should be explicit about the limitations of its current measure of the tax gap and gather intelligence about the value of tax lost through aggressive tax avoidance schemes. When there are firm plans to change international tax laws to tackle avoidance, HMRC should use this intelligence to assess how much additional tax revenue the changes would generate within the UK.
HMRC needs to demonstrate that it deals robustly with individuals and companies who deliberately mislead it. While HMRC told us that it is committed to collecting the tax that the law provides for, the lack of prosecutions against multinational corporations seems at odds with HMRC’s stance on pursuing tax debt from small and medium-sized businesses in the UK. HMRC has yet to test how existing tax law impacts on global internet-based companies. Despite assurances given to us by HMRC a year ago, it remains the case that only one of 16 cases subject to criminal investigations arising from the Lagarde list of Swiss bank account holders has resulted in a prosecution.
Recommendation: HMRC should be more willing to pursue prosecutions against individuals and large businesses to test the boundaries of the law and to demonstrate firm action against those who have knowingly misled or withheld information.
HMRC massively over-estimated how much it could collect from UK holders of Swiss bank accounts and has not been sufficiently vigorous in pursuing outstanding liabilities. The 2012 Autumn Statement estimated that in 2013-14 HMRC would recover £3.12 billion unpaid tax from the Swiss bank accounts of UK taxpayers and this figure was built into budget estimates. So far it has collected just £440 million. We were astonished that HMRC could not explain the reasons for such a huge shortfall, or what it was doing to gather the data it needs from the Swiss authorities to assess and collect the tax due, despite it having met with the Swiss authorities to discuss these issues.
Recommendation: HMRC must continue to press the Swiss authorities to provide accurate and complete information about amounts held there by UK taxpayers, and pursue more vigorously the amounts owed in unpaid tax.
In seeking to make the UK more attractive to business, HMRC has not considered adequately the impact that changes to the tax regime will have on the behaviour of large businesses. UK-based companies may reduce their tax liability by borrowing money in the UK to invest in an offshore subsidiary and then offsetting the borrowing cost against their UK profits. The UK’s Controlled Foreign Companies rules have been weakened and incentivise UK companies to move finance operations offshore. Multinational companies are also using the Eurobond rules to lend money to their UK subsidiaries via low-tax jurisdictions and offset the interest payments against their UK profits, thereby reducing their corporation tax liability.
Recommendation: HMRC needs to better understand how companies and their advisers will react to new tax rules and legislation, and prevent unintended consequences. If the department is creating new incentives that may also enable international corporations to avoid tax, then it should be open about any such consequences.
HMRC’s implementation of its Real Time Information system has been encouraging overall, although some smaller businesses continue to struggle with the transition. HMRC’s gradual approach to implementing RTI has gone well so far, and has been characterised by a willingness to learn lessons and adapt as it goes along. It has extended its implementation deadline for smaller businesses, and increasing numbers of employers have signed up to it. HMRC has had responses from 24,000 businesses to its survey of RTI but it has yet to analyse these. We are concerned that, while HMRC is planning to introduce fines for non-compliance with RTI from April 2014, some small businesses face continuing challenges to adopt it.
Recommendation: HMRC should analyse the information it has from its customers to help it understand the problems faced by smaller businesses struggling to adopt RTI, so that it can continue to provide them with effective support.
The lack of full disaster recovery arrangements in the RTI system means there is a risk that any system failure will delay or introduce errors in payments to Universal Credit claimants. The successful implementation of Universal Credit depends on HMRC working effectively with the Department for Work & Pensions, both because Universal Credit uses information transferred to it from RTI to calculate payments to claimants and because it will eventually replace tax credits. However, delays in receiving information from RTI, or any system failures, are likely to affect payments to individual claimants, and RTI currently lacks full disaster recovery arrangements.
Recommendation: HMRC must undertake work necessary to improve the provision for disaster recovery within the RTI system to ensure that correct payments to claimants will continue in the event of a system failure.
Personal tax credit debt has increased since 2011-12, and HMRC has reduced markedly the amount it expects to recover. Personal tax credit debt increased from £4 billion at the end of 2011-12 to £4.8 billion in 2012-13. HMRC estimates it could increase to £5.5 billion by 2014-15. It reduced its estimate of recoverable tax debt in 2012-13 from 43% to 31% and increased the provision in its accounts for "irrecoverable" debt by £985 million to £3.3 billion. While it is unlikely that these amounts will be fully recovered, HMRC has not actually written-off these debts.
Recommendation: HMRC should undertake a thorough analysis to identify which tax credit debt is recoverable and write off that which is not, to provide a more accurate assessment of the position before tax credits are transferred to Universal Credit.
HMRC has not done enough to identify potential tax credit error and fraud, prosecute offenders and pursue overpayments. HMRC has had some success in identifying losses from tax credit error and fraud through a pilot programme using a private sector provider to identify potential fraud cases. However, it could make far greater use of information from organisations, including banks, to help it identify potential fraud risks, for example to identify bank accounts which receive tax credits but from which withdrawals are consistently made outside the EU.
Recommendation: HMRC must analyse the cost-effectiveness of the measures it uses to counter tax credits error and fraud, to establish which provide the best return on its investment.