James Cordiner, Tax Investigations Manager at Markel Tax, reviews HMRC’s annual report for 2020-21.
Government support schemes
At the onset of the Covid-19 pandemic, the government implemented support schemes to minimise its impact on individuals and businesses. HMRC played a leading role in the administration of those schemes, for which it should be commended.
The report shows that approximately £60.7bn was paid out to support 11.5 million jobs through the Coronavirus Job Retention Scheme (CJRS), with the peak occurring in May 2020 when 8.9 million jobs were being supported. A further £19.7bn was paid out to 2.7 million people as part of the Self-Employment Income Support Scheme (SEISS).
Another scheme, Eat Out to Help Out (EOTHO), paid out £840m. While many hospitality businesses benefitted from EOTHO, questions will be asked about its impact on infection rates.
HMRC estimate that anywhere between £4.4bn and £8bn was paid out because of fraudulent or inaccurate claims for the various support schemes. HMRC’s compliance activity in this area is continuing, and it is HMRC’s upstream compliance activity which likely led to the percentage of error and fraud being lowest in relation to SEISS claims (1.8% to 3.2%) when compared with CJRS and EOTHO claims (5.1% to 12%).
HMRC estimate that it has already recovered or prevented fraudulent claims or claims made in error of £830m, and this figure is likely to rise in the coming months.
In addition to those support schemes, the government asked HMRC to implement a VAT deferment scheme, as well as a change in the VAT rate for the hospitality sector. Those two changes resulted in over 600,000 VAT payment deferrals, a significant fall in VAT revenues, and a 156.7% increase in debts owed to HMRC – from £22.4bn in the previous year to £57.5bn.
More than 9,000 HMRC employees were redeployed to run those schemes and the impact of that decision was felt across HMRC and is likely to be felt by taxpayers in the years to come.
The tax gap
HMRC estimate the difference between the amount of tax that should, in theory, be paid to HMRC and what is actually paid, and this is known as the tax gap.
The actual revenues collected by HMRC fell by 4.4% from £636.7bn to £608.8bn – as was to be expected with the reduction in economic activity in the UK. Most of that drop relates to VAT, stamp duty and hydrocarbon oils because of the VAT deferment scheme, the stamp duty holiday and restrictions on travel during lockdown. The travel restrictions also resulted in a 91% fall in revenue from air passenger duty.
However, in addition to actual revenues falling, the tax gap steadily increased from 4.7% in 2018-19, to 5.0% in 2019-20 and the current estimate is 5.3%. This rise is likely the result from HMRC’s decision to cut its compliance activity so it can administer the various government support schemes. It’s not surprising then that revenues from compliance activity fell by 17.6% from £36.9bn to £30.4bn.
HMRC will hope this trend is reversed as it returns to normal compliance activity levels, particularly with the addition of the new Taxpayer Protection Taskforce. Further investment may be expected, with every 59p spent by the department generating £1 of additional compliance revenue.
Any additional resource will need to be allocated wisely. For instance, while HMRC’s compliance activity within the large business population led to an additional £13.2bn being received, the cost of this was a comparatively minor spend of £220m.
Compare that to the small business population which represents 95% of businesses in the UK, where the yield generated per £1 spent is approximately 81% lower. However, HMRC will consider that this population requires additional resource as the tax gap for that segment is estimated to be £15.1bn.
The annual report shows that 85.2% of customers that completed HMRC’s satisfaction surveys said they were happy with the level of service they received from HMRC.
However, the report suggests HMRC’s service levels have in fact fallen:
- Call waiting times up from 6:39 minutes to 12:04 minutes
- Response time to iForms increased with only 70.4% of forms being answered within a week, compared to 87.6% in the previous year
- Turnaround time for postal correspondence increased with only 64.4% of post being actioned within 15 days, compared to 70.3% in the previous year
- 78,542 complaints were made during the year
- HMRC’s performance ratings for security, data exploitation, customer experience, data protection, funding and affordability were all ‘red’.
While HMRC have undoubtedly faced unprecedented challenges, particularly because of staff redeployment to run Covid support schemes, taxpayers have been negatively impacted by a lack of funding and poor management over several years.
For instance, post clearance rates are historically poor from November to March, even in pre-Covid times; however, HMRC continue to fail to plan for this. Similarly, call waiting times are historically high in April and May, but no action is taken to rectify this. There are reasons for this, such as the self-assessment and tax credit renewal deadlines, and it is clear HMRC need to be more proactive in managing its resources effectively.
The annual report also gives a damning insight into HMRC’s compliance activity. Less than 50% of cases referred to HMRC’s governance boards led to the taxpayer’s case being rejected in full, which raises the question as to how these issues were allowed to continue to that stage.
The reason may be HMRC’s inability to follow its own guidance and governance. Every year, HMRC review a sample of its own settled cases. In each of the past two years, only 36% of those reviewed cases met or exceeded the expected governance and quality standards that HMRC sets itself. Of those cases, 11 were identified where the taxpayer had paid too much tax due to those standards not being met. Additionally, as part of those reviews, it was found that only 87% of settlements had been authorised at the appropriate level and only 83% had followed the appropriate governance.
It is no surprise that of the 10,026 independent reviews that were conducted by HMRC at the request of taxpayers or their advisers as part of the appeals process, only 3,475 of HMRC’s decisions were upheld.
This does, however, infer that most incorrect decisions are identified at the review stage, as is reflected by HMRC’s record at the tax tribunals during the year, where it achieved an 86% success rate at the First Tier Tribunal.
It should also be noted that of the 20,500 appeals to the First Tier Tribunal, more than 75% have currently been stood over, meaning that no progress is being made. Many of these cases are likely to relate to tax avoidance issues, where a decision is awaited on a lead case.
Numerous businesses have made significant changes to their working arrangements because of Covid-19. HMRC are no different, with more than 55,000 of its staff working from home during the year. Employees are receiving an average pay rise of 13% over the three years to June 2022 after HMRC’s Pay Award was agreed.
The Regional Centre programme led to a further four HMRC sites opening in Edinburgh, Cardiff, Leeds and Stratford during the year covered by the report. This has led to many experienced staff deciding to leave HMRC. Not only does this have its own cost in terms of the knowledge and experience lost, but it has cost the department £124.6m in exit packages.
Some of those staff were replaced, although it is noted that 15 of those new off-payroll engagements were subsequently found to have been within the scope of the new IR35 changes, which raises its own set of questions.
Next steps in compliance
None of us expected to be in the position we have been over the last 18 months or so but the report states quite clearly that HMRC’s compliance activity is gradually returning to normal levels. That being the case we can expect to see a surge in the issue of enquiry letters over the coming months.
As ever, interesting times ahead.