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NAO warns of challenges ahead for HMRC as MPs debate ‘massive staff cuts’

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The department needs to make new savings of £585m a year by 2014/15, says parliament's spending watchdog

HMRC maintained its performance in key strategic areas during 2011/12 at the same time as reducing its staff and spending, the National Audit Office has found. The department ‘improved its cost effectiveness and value for money in the year’.

However, the NAO said it was ‘too early to tell’ what the long-term impact of cost reduction will be on HMRC’s performance: ‘The challenge for HMRC will be to make more and deeper reductions over the spending review period while increasing tax revenues, improving customer service and introducing its “real time information” project [RTI] and changes to benefits and credits.’

Frustration

The NAO’s report was published two days after a Westminster Hall debate in which the Labour MP John McDonnell said HMRC staff had expressed an ‘overwhelming sense of frustration, which has at times verged on anger that, as professionals, staff have been held back from fulfilling their role of ensuring that taxes are collected efficiently’.

McDonnell said: ‘There is a particular sense of frustration because during the recession HMRC could, through tax collection, make a significant contribution to tackling the economic crisis and, indeed, the overall deficit. Staff feel that they are being held back professionally, and undermined by cuts: staffing cuts, office closures, deteriorating work conditions resulting in low morale, and the lack of appropriate professional and legislative tools to do the job. Time and again the view has been expressed that more and more policy changes load responsibilities on to them – more work for an overstretched and overburdened work force.’

He claimed that while the big accountancy firms, along with banks and financial advisers, had been investing in staff recruitment and training ‘on a scale that has produced [a] massive base of tax avoidance opportunities for companies’, there had been ‘massive staff cuts in HMRC’.

The Conservative MP and former employment secretary Sir Peter Bottomley intervened to suggest that it would be ‘right to consider whether each company should state on the front of its annual accounts its turnover, surplus, calculated profit, and tax paid other than on staff wages and national insurance’.

Bottomley added: ‘That would bring things out in the open, and directors might ask themselves, “Is this justifiable?” let alone lawful.’

McDonnell agreed, but pointed out that avoidance was not the only challenge facing HMRC. An ICAEW briefing said that, in the view of independent accountants, ‘the system is not working’.

‘Why not? One reason is the scale of the cuts,’ McDonnell said. ‘HMRC has been charged with finding a 25% reduction in expenditure. I accept that that was under the previous government, but I was critical then also. Under this government, it is expected to find another 15%.’

He added: ‘To be frank, HMRC is woefully under-resourced to tackle the tax gap, and fraud and evasion, and the view of professionals in the field is that the staff cuts seriously hinder the department’s effectiveness.’

McDonnell was backed by a number of speakers including the shadow exchequer secretary Catherine McKinnell.

However, exchequer secretary David Gauke said the government had recognised ‘the crucial role that HMRC has played, and will continue to play, in helping manage the deficit’. HMRC was bringing in more additional revenues than ever before.

HMRC comprised about 100,000 staff when it was formed in 2005 by the merger of Customs and Excise and the Inland Revenue, he said.

‘The previous government sought efficiencies and, as a result, staff numbers fell by around 25,000 between 2005 and 2010. As part of that process, the number of staff engaged in compliance work also fell each year, and by 2010 about 10,000 staff had been lost in those important revenue-raising areas.

‘Our priority [at the current government’s first spending review in 2010] was to ensure that HMRC delivered a service that would provide the best possible value for money to taxpayers. Consequently, we required HMRC to make 25% efficiencies to reduce its costs. We then agreed to reinvest a proportion of those efficiencies to tackle avoidance and evasion. The result was a net impact of overall savings over the spending review period of about 16% and a net reduction in overall staff numbers of about 10,000. I say “net” because in that figure is an actual increase of about 2,500 in the number of staff HMRC deployed on its compliance activities over the period.’

'Re-assuring'

Paul Aplin, chairman of the ICAEW Tax Faculty’s technical committee, said it was re-assuring to hear ‘so many MPs at last openly acknowledging the direct link between service delivery problems and the year on year cuts since HMRC’s formation’.

Writing in this week’s issue of Tax Journal, Aplin warned that compliance and enforcement was ‘not the only area that needs proper funding’.

‘Good service delivery is important too – essential in fact if people are to have confidence in and respect for the tax system. If confidence and respect is eroded then attitudes to compliance will change. That will risk widening the tax gap.’

National Audit Office report

The spending watchdog said HMRC made £296m of savings in 2011/12, exceeding its target by 19%.

‘This is about a third of the total savings it is required to make over the four years of the spending review period. HMRC exceeded its overall 2011/12 target for collecting additional tax revenues, maintained tax collection and reduced the level of tax debt. It restored customer service performance from a low point in 2010/11, but did not meet all of its customer service targets.’

The NAO added: ‘HMRC needs to make new savings of £585m a year by 2014/15 as well as maintain those savings already made. At September 2012, HMRC was on track to exceed its 2012/13 cost reduction target by £29m. However, the reduction in planned savings being delivered by change projects means that HMRC needs to find £66m more savings than it originally planned through other initiatives. As at July 2012, HMRC had not fully worked out where these additional savings in 2013/14 and beyond would come from.’

Amyas Morse, head of the NAO, said: ‘HMRC is moving from making tactical efficiency savings and quick wins towards a more strategic approach to managing its resources … The big challenge ahead will be to make more and deeper spending reductions without impairing its performance.’

An HMRC spokesman said: ‘The NAO report recognises HMRC's success in exceeding our 2011/12 savings targets whilst delivering more value for money to the taxpayer. We are now taking a more strategic approach to managing our resources resulting in us answering phone calls faster and turning post around more quickly than ever before.

‘The NAO has recognised how well HMRC manages change, and how cost reduction and reinvestment plans are aligned with long-term plans to maximise revenues, and improve customer service.’


HMRC plans to reduce staff numbers and redeploy existing staff

‘HMRC’s spending review plans include moving 20,000 full-time equivalent staff. Some 10,000 will leave HMRC as it reduces its permanent headcount from 67,500 in 2010/11. Around 10,000 full-time equivalents will move within HMRC into enforcement and compliance activities as part of its £917m reinvestment agreement. By 2015 more than half of HMRC’s operational staff will be engaged in more complex compliance and enforcement work, representing 5% of its revenue, with the remaining 95% of tax being collected by substantially fewer staff. This is consistent with HMRC’s vision for how it wants its business to develop, where the majority of tax is determined and paid online, and back-office systems are more automated, meaning that more resource can be devoted to closing the tax gap.’

Source: National Audit Office, HM Revenue & Customs, Progress on reducing costs


 

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