I have this morning published the last substantial chapter of the Taxing Wealth Report 2024. Some introductory and concluding sections have still to be completed, but this note focuses on the need to reform the organisation, goals, and funding of HMRC and is the last that makes substantial recommendations that will be included in the report.
When I started work on the Taxing Wealth Report 2024, I thought that this section would be one of the first to be completed, largely because I have looked at issues relating to the underfunding of HMRC since 2010. However, as my research on the subject developed it became clear that to discuss funding in isolation made no sense because to do so would have ignored the context within which this matter is of concern.
As the House of Commons Public Accounts Committee has noted in the latest of their many reports on the failings of HMRC, published this week, there is a long-term and marked downward trend in the quality of service supplied by HMRC to taxpayers. They also imply that many of the claims that HMRC's management is making concerning its own performance have to be open to doubt.
Within this context, looking at the claimed improvements in efficiency that HMRC suggest have resulted from the substantial reduction in its workforce cannot be justified. HMRC‘s costs are now rising, significantly. This issue is addressed in detail in this chapter.
Worse, a detailed review of the tax gap, the reduction which is used by HMRC to justify its supposed ever-increasing control of tax collection, cannot support that claim. HMRC admit that around 30% of corporation tax owing by smaller companies goes unpaid each year. They also accept that 18% of tax due by unincorporated small businesses goes unpaid, which they suggest to be a significant improvement on 2015, when more than 30% of those taxes went unpaid. However, data on on-time tax return submissions and data published by HMRC in 2022 showing that they had discovered that more than 8% of the UK population might be involved in the shadow economy, almost all of whom are self-employed, sharply contradicts this claim of an improvement performance in this area. As such this tax gap is highly likely to be at least as large as that for small limited liability companies.
This evidence then suggests that those most in need of help from HMRC to comply with their tax obligations are not getting that help. As a result of HMRC economies, tax offices have been closed, face-to-face taxpayer support has ended, telephone helpline support has become incredibly difficult to access, and online help has proved to be no substitute. Txaayers have been left bewildered by their obligations and alienated from HMRC, and it is not surprising that tax gaps are out of control.
That this is the case might also be due to the fact that HMRC is managed as if it is a large public company and not as a public service. The fact that all its non-executive directors represent the interests of the wealthy and large companies only reinforces the inappropriateness of its focus.
The consequences of all this are that a substantially more radical approach to the reform of HMRC is required than is currently proposed by the House of Commons Public Accounts Committee. It is time to re-organise HMRC so that its focus is on providing taxpayers with the support that they need to meet their tax obligations. At present, far too many of those taxpayers are alienated by IT systems and the demands that they create that taxpayers, quite reasonably, cannot comprehend.
It is, as a result, time for HMRC to restore its local office presence so that people can be provided with face-to-face advice on their taxes.
In addition, HMRC also needs to restart its programme of support to small businesses that are struggling to meet their obligations by reinstating its programme of active engagement with small traders by reviewing their books and records on-site to make sure that they are tax compliant.
What all this also implies is that HMRC‘s headlong rush towards Making Tax Digital is not just inappropriate but is the totally wrong way in which the UK should manage its tax system.
A tax system should be a public good, meaning it is a service supplied without the intention of profit arising by an agency that is seeking to maximise public well-being. The UK tax system does not meet that criteria at present, largely because of failure on the part of HMRC's senior management.
We need a radical overhaul of the management of the UK tax system if it is to be fair, transparent, accountable, open, accessible, and dedicated to creating equality within the UK because everyone is required to pay the taxes that they owe.
The summary of this chapter, which is of 33 pages in total, is noted below. A PDF version of the whole chapter is available here.
A copy of this chapter will be sent to the Public Accounts Committee.
Brief Summary
This note suggests that:
- HM Revenue & Customs governance structures are no longer fit for purpose. They are based on the ethos of a public company and are focused almost entirely on meeting the needs of large companies and the wealthy. Both sectors are well represented amongst its non-executive directors; no other group in society is. That is no longer acceptable.
- HM Revenue & Customs has for too long emphasised cost control as its focus of concern rather than serving taxpayers or raising all the revenue owed to it. This has been inappropriate and has prevented the creation of a tax system suited to the needs of society in the UK.
- HM Revenue & Customs' drive to reduce the cost of collection of tax in the UK has largely failed but has as a consequence:
- Seriously reduced the quality of service that it supplies to taxpayers in the UK, with the quality of everything, from face-to-face services to the answering of telephone calls, to the time taken to reply to letters, all deteriorating significantly leaving many taxpayers without any of the help that they need to pay the right amount of tax that they owe.
- Seriously reduced the number of staff at HM Revenue & Customs.
- Reduced the average real pay of staff at HM Revenue & Customs.
- Considerably reduced the number of tax investigations undertaken each year.
- Lost control of some major parts of the tax gap, which is the difference between the tax that should be paid and the tax that is actually paid in a year.
- Tax gap measurement has been used by HM Revenue & Customs' management as the indicator of its success, but as has been explored in other parts of the Taxing Wealth Report 2024, the claims made with regard to the tax gap in general are open to question.
- One of the two tax gaps where it is very apparent that matters have got out of control is that for small companies, where around 30 per cent of corporation taxes owing now go unpaid each year, which is way in excess of any reasonable level of loss. The likely annual cost of this loss is now £5.9 billion per annum.
- Another tax gap that is likely to be out of control is that for the 5 million small businesses that pay their taxes via the income tax system. HMRC say this tax gap has fallen from around 32.5 per cent of these taxes owing going unpaid in 2014 to only 18.5 per cent being unpaid now. They have not, however, provided any convincing reason for this improvement in taxpayer compliance, which is not matched by improvements in equivalent rates for small companies or in the overall rate of timely tax return submission, half of which returns come from self-employed business owners. The claimed current rate of loss is unlikely to be realistic in that case and an excess loss of maybe £3.4 billion is likely to arise as a result in this area, largely because HMRC has withdrawn from local tax offices that previously supported these taxpayers and from active monitoring of their onsite activities through their now largely abandoned programme of business compliance visits.
- In combination, the losses from just these two tax gaps amount to maybe £9.3 billion and can be attributed to HM Revenue & Customs mismanagement of its activities in the community, whether that be through maintaining local offices where face-to-face help is available or by visiting businesses at their own premises.
- It also seems that HM Revenue & Customs' claims for the benefits of its Making Tax Digital programme seem to be seriously overstated, which is a fact repeatedly noted by the House of Commons Public Accounts Committee. The costs of creating this programme appear to be out of control. The costs it imposes on business taxpayers are excessive. Worst of all, it is likely to alienate millions of people from the tax system and most likely increase the tax gap as a result, rather than reduce it. It also makes the UK a significantly worse place in which to run a business, which is likely to impose serious costs on society at large.
- As a result, this report recommends that:
- That HMRC reforms its governance structures and objectives.
- HMRC restore its local office help centre presence in towns and cities across the UK, and widely advertise the availability of this support service.
- HMRC's should restore its programme of site visits of businesses to monitor their tax compliance to cover checking both PAYE and VAT records.
- HMRC should stop the rollout of its Making Tax Digital programme so that no business that is not VAT registered will never be enrolled in this programme.
- The cost of restoring these services will be very much less than the sums that might be raised by reducing the two gaps that have been noted to reasonable levels (i.e. those that were maintained during periods when HMRC was better resourced in the past), but since some of those sums capable of recovery have already been noted elsewhere in the Taxing Wealth Report 2024 no additional account of such recovery is made here. That said, because other tax gaps would also undoubtedly improve if HM Revenue & Customs were to re-establish its presence in UK towns and cities the likely cost of this programme – which might be £1 billion a year, or twenty per cent of the current cost of running HMRC - is not taken into account either. Nor is the likely significant gain from reducing taxpayer strain taken into consideration, or the gain from making the UK a more tax-friendly environment, to which considerable harm has been done since 2010.
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I remember back in the 70’s a teacher of mine described working in a Tax Office in London and Market Traders who would produce their figures with the tax correctly calculated literally on the back of a fag packet.
Similarly the old farmer we used to rent a holiday cottage from described tripe to the Tax Office in Cardigan to wind up the inspector.
But yes as you say how can you talk face to face these days with someone who can actually sort things out with you and build up a relationship of trust.
‘A copy of this chapter will be sent to the Public Accounts Committee.’
Good.
Memories of tax offices?
My fiance when we were students in the 60s worked in vacations in a tax office. Her role was called, as I recall, “N Zedding” – a function for which she had, so far as we could tell, zero specialist training. It consisted of sorting personal tax returns into N and Z trays. N was OK and Z was not/uncertain. It typical student form we were irresponsibly amused/bemused but perhaps shocked would have been more appropriate.
Wow….
I had a similar experience as a student in the late 1960s vacation job with the Inland Revenue ‘checking great bundles of PAYE documents from what was then the British Rail Southern Region. Mounds of paper which if I had checked through every one carefully would have taken me years. Just a cursory glance through a bundle and then chuck them on the ‘done ‘ pile. Whether the tax paid was correct or not is anyone’s guess.
“At present, far too many of those taxpayers are alienated by IT systems and the demands that they create that taxpayers, quite reasonably, cannot comprehend.”
I’ll second that. As I said last week I tried to set up a new Government Gateway which I have not done since I retired in 2014, before which my tax was dealt with through my limited company. The system would not ratify my identity because it did not match the answers I had given with my credit reference agency data. I got through to a person at HMRC eventually, but they would not tell me what did not match. I eventually worked out from my Transunion record that I had answered that I had taken out a new mobile phone contract last month and they had it recorded as an amendment to an existing one. When I changed my answer, low and behold I got my Gateway. But that’s all very well because I am extremely presistent (read obstinate) and was trained in systems design and engineering. Not everyone has such abilities and why should they?
I fully support your call for the reintroduction of local tax offices, but I’m afraid it ain’t gonna happen. That costs a lot of money and there simply wouldn’t be the people to staff them. They’re all working in financial services and, probably, scamming.
But as I show, we could afford such offices and they would be a massive boost to the economy
I didn’t say we couldn’t afford it; it’s a matter of whether we have the resources.
We do
People would prefer a well paid job with a pension
I am interested to read the comments of other readers of their experience working for the revenue in the last quarter of the 20th century. However, in some aspects it has moved on a great deal, in others not.
My comments below of this excellent post is based on a long career working in the revenue in a former colony and in the mother country until COVID hit.
I agree that the move to large offices in large cities will lead to the inevitable erosion of the local revenue person being able to keep their eye on their patch. It is the equivalent of closing down small police stations and centralising them into larger centres.
The issue in the UK has been for a long while that the running costs are based on allocation of resources in the awful spending reviews. What is left out of these reviews is the amount of additional tax raised by compliance work and support programs. It is like it is merely a cost centre and the job of management as dictated by the masters in the Big House in westminister is to keep within the budget. There is little incentive to increase the ‘profits’ being the tax revenue.
What has been missed in the UK is the concept that an investment in compliance programs pays off on a ratio of up to 100 to 1, with every additonal £ of expenditure on recruiting and training an enlarged workforce, leading to a very large mutlipler in tax raised. This idea has been used very successfully in Australia over the last twenty years or so.
But since at least 2010, the emphasis has been on trying to get tax inspectors to do the job by paying them a reduced real wage each year, reducing the future pension payments, reducing the head count, reducing the resources available to travel away from the large centralised offices and not giving them effective anti-avoidance tools to use. Is it any wonder that the workforce is disengaged and the wider population has learnt to reduce their tax burden with impunity?
I also think that having HMRC report to a Minister of the Crown could make a difference too.
Keep up the good work Richard. I fear I do not share your hope for the future.
Thank you