The Committee makes a series of urgent recommendations in its Sixth Report of 2015-16, examining the performance of HM Revenue & Customs (HMRC) in 2014-15.
It describes the number of prosecutions for offshore tax evasion as "woefully inadequate" and cites HMRC’s failure to gather intelligence on losses through aggressive tax avoidance as an obstacle to improving UK tax laws.
The Committee also raises fresh concerns over HMRC’s customer service, now considered so bad it could be having "an adverse impact on the collection of tax revenues".
Meg Hillier MP, Chair of the PAC, said:
"HMRC must do more to ensure all due tax is paid. The public purse is missing out and taxpayers expect and deserve better.
We are deeply disappointed at the low number of prosecutions by HMRC for tax evasion. We believe it is important for HMRC to send a clear message to those who seek to evade tax that the penalties will be severe and public. It's also important that the majority who play by the rules, paying their tax on time and in full, see that those who don't will face the consequences.
Tax avoidance also remains a serious concern. Too many avoidance schemes run rings around the taxman, operating legally but gaining advantages never intended by Parliament. If tax law is to be improved then HMRC must as a priority provide Parliament with comprehensive details of avoidance.
HMRC must also rapidly improve its customer service, previously described by the PAC as abysmal and now even worse – to the extent it could be considered a genuine threat to tax collection.
It beggars belief that, having made disappointing progress on tax evasion and avoidance, the taxman also seems incapable of running a satisfactory service for people trying to pay their fair share."
We recognise the achievement of HM Revenue & Customs (HMRC) in increasing the amount of tax collected while also reducing its running costs over the last 5 years. However, we are concerned that it has made little or no progress on a number of important issues that this Committee has raised before.
Despite this Committee’s previous recommendations, HMRC still does not report on how much cash was received as a result of its compliance work or on the scale of aggressive tax avoidance which exploits loopholes in the law. HMRC also continues to avoid publishing information on the scale and nature of tax reliefs that would assist Parliamentary oversight of this area of the tax system.
Customer service "unacceptable"
The standard of customer service remains unacceptable. We are particularly disappointed by HMRC’s failure in this area given that people are more likely to pay the right tax when they find HMRC easy to deal with.
We also remain extremely concerned that HMRC’s work has led to too few prosecutions of individuals for tax evasion, and that there is therefore no credible punishment to deter people from breaking the law in this manner.
HMRC collected £517.7 billion from UK taxpayers in 2014-15, some £11.9 billion more than in 2013-14. Total tax revenue has increased in each of the past 5 years, during which HMRC reduced its running costs from £3.4 billion to £3.1 billion. HMRC has thereby improved its ratio of revenue collected per £1 of administrative expenditure from £138.14 in 2010-11 to £166.95 in 2014-15.
In 2014-15, HMRC also reduced tax losses (mainly the amount of tax written off because there is no practical way to collect it) and the balance of tax debt (tax that is overdue and outstanding at the end of the year), while paying out more in benefits and credits.
HMRC estimates its compliance work (tackling those who do not comply with their tax liabilities) saved £26.6 billion in 2014-15. The July 2015 budget announced that HMRC would be given a further £800 million to collect an additional £7.2 billion in tax revenue from its compliance work between 2015 and 2020.
Summary of conclusions and recommendations
- HMRC does not report on the scale of aggressive tax avoidance, which means Parliament cannot assess whether tax law is working as intended. HMRC defines avoidance as exploiting the tax rules to gain a tax advantage that Parliament never intended. It involves operating within the letter but not the spirit of the law. We remain concerned that HMRC has failed to act on the previous Committee’s recommendation from December 2013 that it should gather intelligence about the value of tax lost through aggressive tax avoidance schemes.
Recommendation: HMRC should identify and report the value of all tax avoidance schemes. It should include an estimate of the value of those schemes it has challenged but which have been judged to be legal by the courts, both so that Parliament can see the scale of avoidance and ensure improvements are made to tax law.
- The number of tax reliefs continues to grow but the scale and nature of the tax foregone is invisible to Parliament because HMRC refuses either to define them or list them comprehensively. We see no case, other than to avoid accountability, for HM Treasury and HMRC to reject the previous Committee’s recommendations to improve the transparency of the cost of tax reliefs to Parliament.
Recommendation: HMRC should define the different types of tax relief, including those it considers to be tax expenditures. It should identify which reliefs it considers require monitoring and evaluation and publish this information to enable Parliament to decide which reliefs may require further scrutiny or legislative change.
- HMRC is still failing to provide an acceptable service to customers and could not tell us when it would be able to do so. In March 2013, the previous Committee concluded that HMRC had "an abysmal record on customer service", having only answered 74% of telephone calls received by its contact centres during 2011-12. In 2014-15, HMRC responded to just 72.5% of calls and over the first half of 2015 this had fallen to 50%. The previous Committee considered that HMRC’s target of answering 80% of telephone calls within five minutes was "woefully inadequate and unambitious" and recommended that HMRC should set a more challenging short-term target for call-waiting times and a long-term target that is much closer to industry standards. HMRC has consistently refused to set more demanding targets, however, and in 2014-15 it answered only 39% of calls within five minutes. HMRC did not provide us with any indication of when or by how much its customer service would improve, beyond a vague aim to improve year on year. It acknowledged that people are more likely to pay the right tax when they find HMRC easy to deal with, but, in the words of its own Chief Executive and Permanent Secretary, “we are still struggling”. We are concerned that customer service levels are so bad that they are having an adverse impact on the collection of tax revenues.
Recommendation: HMRC should identify what impact its poor level of service is having on tax revenues and produce a detailed plan setting out how and when it will provide an acceptable standard of customer service. This should include a clear plan for the efficient management of its change programme and introduction of new IT systems.
- HMRC’s performance measures do not cover delivering a consistent level of customer service throughout the year. In response to our concerns about the poor customer service levels achieved, HMRC maintained that its main focus was on providing a consistent level of customer service throughout the year, rather than meeting annual targets. However, the consistency of the service is not measured by HMRC’s current performance indicators.
Recommendation: HMRC should report its performance against measures which reflect all its aims, including providing a consistent level of service and ensuring that accurate and complete advice is provided first-time.
- The number of criminal prosecutions for offshore tax evasion is still woefully inadequate. HMRC’s investigations do not lead to sufficient prosecutions to provide an effective deterrent, particularly for wealthy individuals who hide their assets offshore. In December 2013, we argued that HMRC needed to demonstrate that it deals robustly with individuals and companies who deliberately mislead it and that HMRC should be more willing to pursue prosecutions against both individuals and businesses. Regrettably, since then HMRC appears either to have ignored our recommendation or to have made little progress. Incredibly, there have been only 11 prosecutions in relation to offshore tax evasion since 2010, and only one individual from the Falciani list (of some 3,600 potential UK tax evaders whose Swiss bank account details were leaked by a former employee of HSBC) has been prosecuted. HMRC told us that it had now exhausted its use of the Falciani data, which did not meet the standards required for UK evidence. It said that offshore tax evasion is one of the toughest areas to prosecute, with people deliberately disguising their activities, while those who facilitate this form of tax evasion were careful not to enter the United Kingdom. HMRC has offered disclosure facilities with reduced penalties for people who come forward and provide information on assets held offshore. We are in no doubt that the use of these disclosure facilities is not an adequate substitute for the deterrent effect of prosecution. That is particularly so given that by 2017, HMRC will receive tax data from 94 countries and will be able to detect evaders more easily, so these disclosure facilities will no longer be necessary. The vast majority of UK individuals pay what is due from them in tax. Those who do not must in future know that they could face prosecution if they deliberately seek to evade paying what is due.
Recommendation: As previously recommended, HMRC should strengthen its capability to investigate offshore tax evasion and make tougher the criminal and civil sanctions it can apply. It should make clear that those who persist in their attempts to hide assets offshore will face the threat of prosecution, and should in future demonstrate the significance of this threat through its actions.
- HMRC’s public reporting of the additional tax revenue it generates from its compliance work (compliance yield) remains unnecessarily complicated and confusing. HMRC has not made it sufficiently clear in its Annual Report that its estimate of compliance yield is not the amount of cash it has actually collected. It is a combination of measures, calculated in different ways and covering different time periods. It includes some cash that is owed, estimates of tax losses prevented and estimates of the impact of its work on tax revenue in future years. Most readers of HMRC’s Annual Report would assume that the type of compliance yield it calls "cash collected" is cash actually received, but even this is not the case. "Cash collected" includes cash not yet received, not all of which will be collected. In addition, HMRC’s approach of counting revenue it expects to collect in future years in this year’s compliance figures is questionable and may well mislead people into believing that HMRC has recovered more tax than it really has.
Recommendation: HMRC should report its compliance yield in much clearer and simpler terms. It should state how much cash its compliance activity has recovered each year, alongside its estimates of future revenue and losses prevented. It should also report the range of uncertainty around its estimates.