The National Audit Office (NAO) has been busy recently on HMRC matters.
In October last year it published a report on ‘HMRC: Engaging with tax agents’ which suggested HMRC could make improvements in the efficiencies with which it engaged with tax agents, improving compliance and reducing costs and processing delays.
There was also controversy over criticisms of tax agent performance, with HMRC putting a lot of time and effort now into deciding whether and how it might assess tax agents’ performance, and require performance improvement.
In December, more challenging questions for HMRC were raised by the NAO report ‘HMRC: Managing civil tax investigations’. This addressed the efficiency and effectiveness of HMRC’s efforts to collect tax from those who set out to evade tax but who are not subjected to criminal prosecution, rather they reach settlement agreements for their underpaid taxes plus a tax geared penalty of up to 100%.
HMRC’s task in civil investigations sounds simple – to collect the £15bn estimated annual tax loss due to fraud and evasion, the black economy included.
In his Spending Review, George Osborne committed an additional £900m of resources to this pursuit, against the grain of the spending cuts. If the reported current costs to tax recovery ratio by HMRC’s specialists of 1:15 or so is maintained, simple arithmetic suggests much of that recovery could be achieved.
But can HMRC deliver?
To expect overnight success is not realistic and their targets have been set at raising £7bn a year by 2014/15. But such efforts require clear leadership and ‘strategic alignment to the critical success factors’ for the task in hand, as they teach in business.
This in practice includes having clarity of internal priorities, the right technical, investigative and commercial skills, and management information for both the success of particular initiatives and of performance of all personnel.
Sadly, in its most recent report, the NAO identify a series of management failings, information gaps, poor direction setting, the absence of relevant performance measures and inconsistencies of taxpayer treatment as key issues.
Taken together this suggests an HMRC operation that is poorly directed, historically unaccountable and in need of a serious performance improvement mindset.
Bearing in mind the PAYE hiatus, and forced apology, from Dave Hartnett in the summer, this report somewhat undermines the suggestion that, for HMRC, the PAYE issue was a one-off due to IT problems.
There is no doubt that in HMRC there is talent capable of undertaking, and currently undertaking, their roles in tax investigations, and wider areas very well.
But you have to wonder at those at the top of HMRC, when this core directorate in charge of pursuing all tax evaders haven’t even had what NAO considers an appropriate set of performance measures.
NAO report, for example, that HMRC management don’t know why some teams take a third longer to complete investigations than other teams, why workloads are so variable or the average tax yield per investigator shows wide variations. It does however explain the experiences of many tax advisers of inconsistencies of taxpayer treatment, excessive time taken and lack of commercial focus on settlements in practice.
And that’s not the end of the story...
The HMRC investigators haven’t been monitoring whether tax settlements reached are ever paid, nor considered whether the average penalty negotiated being only 20% or so of tax rather than the headline 100%, might not actually deter those so inclined from evading their tax obligations.
As a result, NAO suggest HMRC are giving consideration to a more ‘credible threat’ to tax evaders, including prosecution or the use of insolvency powers where there is non-cooperation. Hopefully, non-cooperation is practised only by the guilty.
The report does however suggest that many of these aspects are now being addressed. But it does beg the question as to why those at the top of HMRC consider they have any right, never mind ability or expertise, to measure agents’ performance in meeting tax compliance obligations when their own performance focus has apparently been so sadly lacking.
If improvements are to be required from some tax agents, this NAO report suggests it’s nothing in comparison with the performance improvement taxpayers expect from HMRC leadership.
The NAO scrutiny of HMRC is to continue. It has recently been confirmed that NAO will undertake a specific review of HMRC processes and procedures in negotiating sizeable settlements following disputes.
The concern here is that international business has grown to such a large financial scale that many millions of tax may be at stake at each decision. There needs to be clear approval policies and principles for such decisions, and appropriate external expertise should be sought where necessary.
It’s in every UK taxpayer’s interest that 2011 brings HMRC the wisdom, credibility and effectiveness that means it serves the country in fulfilment of its obligations. And it might just see the point in letting the tax agents’ professional bodies look after theirs.
Elspeth Orcharton, Assistant Director, Taxation, the Institute of Chartered Accountants of Scotland
