HMRC’s been giving itself an easy time on the tax gap

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The National Audit Office's report on HMRC's 2013-14 accounts includes some pretty damning commentary on its work in closing the tax gap - or increasing the compliance target, as it would call it. The NAO says:

HMRC’s strategy since the 2010 Spending Review has been to do more compliance work to secure additional revenues. Its settlement with HM Treasury (the Treasury) included a £917 million reinvestment in compliance work in order to generate additional revenues of £7 billion a year by 2014-15.

It then notes:

When HMRC agreed performance targets with the Treasury for the spending review period, it set its baseline too low which made the targets easier to achieve. This has not diminished the focus and energy HMRC has put into maximising revenue from its compliance work, but it has made the targets less challenging.

In responding to our review, HMRC identified errors it had made when calculating its baseline in 2010-11, which had the effect of understating the baseline by £1.9 billion. HMRC reported that it had exceeded its performance targets by £1.9 billion and £2.0 billion in 2011-12 and 2012-13 respectively, when in fact it had achieved almost exactly the level of performance improvement required under its settlement.

So lots of back-slapping went on when in fact much less than desired was being done by HMRC management.

I think the best commentary on this comes from a statement issued by Margaret Hodge this afternoon. She says:

HMRC has admitted that it made a mistake which meant it set its targets for compliance yield £1.9bn too low over the 2010 spending review period.  The mistake led HMRC to overstate its improvement since 2010 by a similar amount, overestimating how successful it has been in getting more people and businesses to pay the tax they owe. The fact HMRC did not know about this serious error in its calculations until the National Audit Office pointed it out paints a worrying picture.

HMRC’s commitment to securing more tax revenue for the taxpayer should be commended, but its efforts to date are undermined by poor governance arrangements that have not picked up on this mistake. Put simply: it has not been able to track its performance accurately which is absolutely crucial to long term success. If HMRC can’t get its own numbers right, how can it ask the same of others?

It is truly depressing that HMRC’s failure to take appropriate action has led to its unwittingly misleading Ministers, Parliament and the taxpayer. It is frustrating that time and time again my Committee has urged HMRC to get its house in order and ensure its governance arrangements and management information provide the solid foundations that it needs for tackling tax avoidance - a point made in our recent report on tax reliefs.

I look forward to discussing this issue with department officials when they appear before us on 16 July 2014.

And you wonder why I think they get the tax gap wrong?

Surely the time has come for some more rigorous management at HMRC and some non-execs who don't spend their time capturing the system for the benefit of big business but who actually hold it to account?