The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:
"There is at least £35 billion outstanding in uncollected tax.
This Programme has achieved a substantial increase in tax revenue of an additional £4.32 billion over the last five years. This is an impressive return on the £387 million invested and we welcome the progress the Department has made.
However, HMRC could have collected a further £1.1 billion had it not cut its staff numbers by more than 3,300 over the lifecycle of the Programme. The Department must consider whether further staff cuts will deliver value for money for the taxpayer.
We are also shocked that the Department appears to have advised senior public sector employees that it was appropriate for them to avoid tax by using a managed service company. It is incredible that the Department could under any circumstances advise that this was acceptable behaviour for a public servant. We welcome the Department’s commitment to reinvesting £917 million of its efficiency savings between now and 2014-15 with the aim of generating a further £7 billion a year in tax revenue.
It is essential to take on board the lessons so far if the return on this new investment is to be maximized. In particular the Department needs to be much clearer about the marginal rate of return it could achieve from different levels of spending.
Delays in introducing key technology have led to some of the intended benefits of the programme being postponed or lost altogether. In particular, by delaying its new Caseflow and Spectrum systems, the Department has reduced the amount of additional tax likely to be collected by 2014-15 from £743 million to £547 million.
Margaret Hodge was speaking as the Committee published its 87th Report of the 2010-12 Session which, on the basis of evidence from HM Revenue and Customs, examined the Department's management of the Programme and the potential to increase tax revenues further through compliance and enforcement work.
HM Revenue and Customs (the Department) employs some 26,000 people on compliance and enforcement work, the purpose of which is to improve taxpayer compliance and tackle tax evasion and avoidance. Its long term aim is to reduce the tax gap – the difference between taxes due and the amount actually collected. According to the Department’s own estimate, the tax gap stood at £35 billion (7.9% of all the tax due) in 2009-10, although other estimates suggest the figure is much greater.
Over the last five years, the Department has sought to transform this area of its business through the Compliance and Enforcement Programme (the Programme). The Programme was intended to target the areas of greatest risk and raise productivity, delivering an extra £4.56 billion in tax revenue by 2010-11. In practice, the Programme has brought in £4.32 billion of tax revenue over the five years to 2010-11, a rate of return of 11:1 on the money invested. The Department expects that the changes introduced will generate a further £8.87 billion by 2014-15. This success has been achieved in large part by innovation, allowing HMRC to make better use of data to assess the risks and patterns of evasion, and to deliver substantial productivity improvements by processing cases more quickly and efficiently.
Within the context of this welcome improvement, we believe that the Department’s targets for the Programme could have been more ambitious. We are not convinced that the decision to reduce staff numbers working in this area in the past represented value for money for the taxpayer. The Department has estimated that, in shedding more than 3,300 staff, it lost £1.1 billion in potential tax revenue: about £10 in tax lost for every £1 in running costs saved. We are not confident, from what we heard, that there is a regular discussion with policy makers in which the Department is sufficiently clear about the marginal rate of return it could achieve from different levels of spending. We therefore welcome the increase in spending by £ 917 million in the 2010 Spending Review.
We also found that some of the intended benefits of the Programme were postponed or lost due to slippage in introducing key technology. In order to live within funding limits, the Department had to defer the introduction of new systems or reduce their scope. In particular, by delaying implementation of its new Caseflow and Spectrum systems, the Department deferred the additional tax revenue of £743 million it had estimated these systems would provide by 2010-11. It now expects that these projects will instead deliver £547 million of new tax revenue by 2014-15.
In this Spending Review period the Department has agreed with Treasury to re-invest £917 million in further activities to tackle tax evasion and avoidance, and to collect more debt. This investment is more than double the money spent on the Programme over the last five years, and is expected to generate an additional £7 billion a year by 2014-15. It is therefore essential that the Department learns and applies lessons from the Compliance and Enforcement Programme.
In particular, the Department must improve the way it integrates new systems with its existing working practices, ensuring the training necessary to support the introduction of new technology is both targeted and timely, and strengthening its procedures for managing ICT contractors. The Department acknowledged that the way it had measured the Programme’s benefits lacked rigour, hindering its ability to understand the return on individual projects. The Department needs to take a more rigorous approach to tracking and evaluating benefits to inform future investment decisions. We are also concerned that the Department places insufficient focus on the importance of customer service and were disappointed to note that the Department had not done enough to evaluate the Programme’s impact on customers.
Finally, we consider that the Department needs to be more transparent and consistent in its commitment to tackling tax avoidance. We were alarmed at reports that the Department had advised that the use of managed service companies to avoid tax could ever be appropriate for full-time employees of public bodies. The Department must have a clear and consistent approach to providing advice on such matters. The Chief Secretary to the Treasury has announced a review of how managed service companies are used in the public sector and we expect to return to this issue once the review is concluded.