Public Accounts Committee slams HMRC – but now it’s time for solutions

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The Public Accounts Committee has published its report on HMRC this morning and it is damning. The summary says:

In pursuing unpaid tax, HM Revenue & Customs (HMRC) has not clearly demonstrated that it is on the side of the majority of taxpayers who pay their taxes in full. It does not use the full range of sanctions at its disposal to pursue vigorously all unpaid tax, and its measure of the tax gap does not capture all the avoided tax that it should be collecting. HMRC massively over-estimated how much it would collect from UK holders of Swiss bank accounts, and in 2013-14 has so far collected only £440 million of the £3.12 billion predicted in the 2012 Autumn Statement. HMRC is not doing enough to collect tax credits debt or to tackle tax credit error and fraud.

That's pretty clear but in case the point is missed the key points of primary concern to me are firstly that HMRC don't measure the scale of the problem they face in tax collection correctly, and that is a wilful act on their part. The tax gap data they publish is wrong, and the committee clearly think they know it is.

Second, they're frightened to take on big business and do not use the evidence available to them to do so.

Third, they will not tackle serious, organised tax evasion. The example they use is offshore abuse in Switzerland but I think the problem extends further than that.

Fourth they imply that the small business community get a rough deal but do not fully spell out why. The implication is that the honest small business that makes a mistake is penalised hard when there are many businesses simply not paying at all because they do not make tax returns and duck the system entirely and HMRC does not pursue them.

Perhaps as important, finally, they make clear that HMRC does not have the resources it needs and is not using them well enough.

Finally, and perhaps as importantly, nor, in the committee's view does HMRC adequately plan its work, strategic or otherwise.

I find it hard to argue with any of that: I think it all true. But what the committee does not do is say what all this means. Let me fill in for them.

What could, of course, be offered is a patchwork of reforms to deal with some of these issues. I am not convinced that is appropriate now. I do want the HMRC approach to the tax gap to be reformed. It is obviously inadequate. This though, by itself, will not address the real issue which connects all these problems, and that is that there is a vacuum of appropriate leadership in HMRC, and above it.

The problem HMRC faces is twofold. First, we have a group of politicians in this country who do not believe in tax. Cameron may talk tough on tax avoidance but the reality is that he has also led a government that has deliberately fuelled tax competition and has pretty much transformed the UK into a corporate tax haven. And we have also to accept that to some degree the same attitude prevailed in the previous Labour government when tax was flowing in. Its main tax adviser, Chris Wales, was an ex Arthur Andersen partner who wanted to seriously cut corporation tax, cut staff at HMRC and was probably influential in determining the UK's uncooperative line on tax cooperation with Europe. And Labour maintained the domicile rule for thirteen years and exonerated a lot of tax haven activity with its absurd Foot report in 2009 in which Deloitte were paid to ridicule my work on the tax gap, as we now know wholly inappropriately.

So, the first reform we need in HMRC is to have a political leadership for it that believes in the power of tax. That’s its power to deliver jobs. And homes. And education, pensions, social security, infrastructure, security, health and well being for all. It’s the power of tax to deliver freedom from fear for everyone. It’s the power to deliver that most precious of things – hope. That is hope for the future. Hope that can only be founded on the security that this government has stripped from millions. And the hope that we can and will invest, together, in our communities and well-being.

And then, as importantly, we need a leadership at HMRC that shares that vision. Right now HMRC is directed by Lin Homer, who arrived in the department after overseeing disasters in Birmingham where she was chief executive, the Borders Agency, which collapsed to the point where it was beyond salvation under her leadership and the Department of Transport where the West Coats debacle happened during her period in charge. That's not a basis for optimism. And second in command is Edward Troup, the solicitor who in 1999 wrote in the FT that 'taxation is legalised extortion'.  That libertarian attitude is antithetical to the job he now holds but I suspect typifies the Board of HMRC where far too many of the independent directors  have little experience of tax and if they do got it in the likes of KPMG, PWC and Npower. Is it any surprise that we have a tax authority that does not wish to collect tax when it is directed by people who have made their careers out of ensuring it is not paid and who do not believe in its power to do good? Or who, alternatively, as I once heard John Whiting argue, think 'trickle down' is the way to transform society.

My suggestion then is that we need a review of HMRC now: a review to be initiated politically and which will look at the success or otherwise of the merger of the Inland Revenue and HM Customs & Excise in 2005. It will consider what the task of the body is and whether it has fulfilled it. It will look at whether or not the body understands the issues it faces - as represented by the tax gap. And it would examine culture. It is not a chance that HMRC has the lowest staff morale in the civil service: its staff are being asked to do a task its leadership evidence that they do not believe in.

That review would have to look at how tax policy is made - and maybe separate it from HM Treasury whose attitudes to tax are often questionable and reflect the false assumptions of micro economics on this issue.

And the resources available to HMRC would have to be questioned with a consideration of the required level being undertaken on the basis of the need not just for cost effectiveness in the working of the department but of the nature of its relationship with society at large and the need it must demonstrate for delivery of social and economic justice for the honest taxpayer - who do still represent the majority in this country. That will, almost inevitably, significantly increase HMRC's budget, but also result in a significant reduction of the tax gap and an increase in well-being in this country.

Only then can we be sure that we will get the tax authority we need in the UK. Right now we are a very  long way from having it. The PAC have done a good job if signposting the problems. Now we must move to solutions.