Administration and Effectiveness of HM Revenue and Customs

House of Commons Treasury Committee Administration and effectiveness of HM Revenue and Customs

Sixteenth Report of Session 2010-12

Volume II Additional written evidence

Ordered by the House of Commons to be published 2 December 2010 and 1 March and 12 July 2011

Published on 30 July 2011 by authority of the House of Commons London: The Stationery Office Limited

The Treasury Committee

The Treasury Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Office of the Secretary of State for Wales (including relations with the National assembly for Wales.)

Current membership Mr Andrew Tyrie MP (Conservative, Chichester) (Chairman) Tom Blenkinsop MP (Labour, Middlesbrough South and East Cleveland) John Cryer MP (Labour, Leyton and Wanstead) Michael Fallon MP (Conservative, Sevenoaks) Mark Garnier MP (Conservative, Wyre Forest) Stewart Hosie MP (Scottish National Party, Dundee East) Andrea Leadsom MP (Conservative, South Northamptonshire) Mr Andy Love MP (Labour, Edmonton) John Mann MP (Labour, Bassetlaw) Mr George Mudie MP (Labour, Leeds East) Jesse Norman MP (Conservative, Hereford and South Herefordshire) David Ruffley MP, (Conservative, Bury St Edmunds) John Thurso MP (Liberal Democrat, Caithness, Sutherland, and Easter Ross)

Mr Chuka Umunna MP (Labour, Streatham) was also a member of the Committee during the inquiry.

Powers The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk.

Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at www.parliament.uk/treascom.

The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in printed volume(s). Additional written evidence may be published on the internet only.

Committee staff The current staff of the Committee are Chris Stanton (Clerk), David Slater (Second Clerk), Jay Sheth, Peter Stam and Daniel Fairhead (Committee Specialists), Phil Jones (Senior Committee Assistant), Caroline McElwee (Committee Assistant), Steven Price (Committee Support Assistant) and Nick Davies (Media Officer).

Contacts All correspondence should be addressed to the Clerk of the Treasury Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5768; the Committee’s email address is [email protected]

List of additional written evidence

(published in Volume II on the Committee’s website www.parliament.uk/treascom)

1 Institute of Payroll Professionals Ev w1 2 Tax Aid Ev w5 3 Society of Trust and Estate Practitioners Ev w8 4 Institute of Chartered Accountants of Scotland Ev w10 5 Forum of Private Business Ev w14 6 Chartered Institute of Taxation Ev w17 7 Tax Help for Older People Ev w22 8 Vocalink Ev w25 9 Association of Taxation Technicians Ev w27 10 Martin Lewis Ev w30 11 Lin Kiernan Ev w33 12 Michael Blake Ev w34 13 David Marsh Ev w35 14 Keith Aiden Ev w36 15 Ella Levy Ev w37 16 Russell Hibbin Ev w37 17 David Hickson Ev w41, w42 18 Andy Wells Ev w42 19 Ian Holloway Ev w44 20 PCG Ev w45 21 Professor John Seddon Ev w48 22 Confederation of British Industry Ev w50 23 Tax Research LLP Ev w51 24 Federation of Wholesale Distributors Ev w56 25 Former employee of HM Revenue and Customs Ev w58

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Written evidence

Written evidence submitted by the Institute of Payroll Professionals (IPP) Executive Summary The Institute of Payroll Professionals (IPP) was established as an official industry body in 1985 when the Institute of British Payroll Managers (IBPM) was formed. In 1998, the IBPM merged with the Association of Pensions and Superannuation Administrators (APSA) to form the Institute of Payroll and Pensions Management (IPPM), which became the IPP in September 2006. On 10 November the Privy Council approved the grant of Royal Charter. The Institute expects to be rebranded on the 1 January 2011 to the Chartered Institute of Payroll Professionals. Further information about the IPP can be found in Appendix A. HMRC have over the last few years pledged to make the tax system more transparent, resulting in an easier tax system for individuals and businesses to understand. Although still some way to go overall the IPP does believe that HMRC is striving to meets its aims and objectives. Although there is still some frustration felt from employers about HMRC’s understanding of their business. Having read the HMRC Business Plan the IPP is pleased to see that additional money has been set aside for programme spending in 2011–12. As stated in the main document the IPP is concerned that the Spending Review has not allowed sufficient money for the administration of enhancements, and is concerned this may lead to a further lack in confidence by HMRC’s customers. The new HMRC system (NPS) coupled with the PAYE Review and Real Time Information (RTI) should assist in delivering HMG aims on tax compliance. It will be crucial that the tax compliance policies are adhered to, and the IPP will support HMRC via consultation and facilitation of best practice for payroll professionals. The PAYE system works extremely well but has not moved with the times. The system does need to improve as the government will not accept the current levels of incorrect tax code issue. Real Time Information will cost employers through their payroll software providers’ copious amounts of money to change the current end of year reporting. However the IPP understand that by using the BACs system it is more likely that HMRC will control the uploading of data at a time to suit HMRC. This in turn concerns the IPP as will this measure really improve the correct issuing of tax codes? HMRC’s priorities should be improved customer contact whether online or in person. Better customer contact would assist in changing the tax payer’s perception of HMRC. The IPP provides support to all government departments but in particular HMRC, and at the same time gives a voice for employers. In conclusion we believe that in addition to customer contact, and working with representative bodies that HMRC should strive to deliver a more efficient tax system in line with the Coalition priorities.

1. HMRC’s performance as an organisation and whether it is delivering its key aims 1.1.1 HMRC have over the last few years pledged to make the tax system more transparent, resulting in an easier tax system for individuals and businesses to understand. The Business Plan published earlier this month confirms that this is still part of HMRC’s vision. The reality is that most individuals do not want to know how the tax system works, just that it does work. One of the most trusted systems until recently was the PAYE system. From anecdotal evidence within the IPP, we found that employees trust their payroll department to deduct the correct tax and National Insurance Contributions. They also understand that payroll operates the system via a tax code. 1.1.2 Earlier this year when the national media highlighted the under and over payments of tax, the credibility of HMRC plummeted. In light of this the IPP ran a survey containing just one question with five possible answers to choose from. The question and answers available were the same as those used by an accountancy representative body. The IPP wanted to understand whether the views of the payroll profession were different to those in the accountancy profession. The comparison has not yet been carried out as the survey only closed on Friday 12 November. However the results which can be found in Appendix B showed that of the sixty six respondents nearly 35% felt that it was a mess, but that the New PAYE System needed time to “bed in”. This is also the view of the IPP. The new system was designed to improve the tax system and it did what it was meant to do. Albeit this meant a huge number of tax notifications were sent to individuals with some being an unfavourable notification; it does mean that there are many more individuals now paying the right amount of tax. 1.1.3 In order for HMRC to deliver its key aims it is vital that sufficient monies are allocated to allow them to do this. Many might argue that by stream lining processes or removing one to one contact will reduce costs, however this will not necessarily improve customer service or customer confidence. Anecdotal evidence from the IPP members suggests that there is frustration amongst employers as they do not feel HMRC staff understand their business. This is mainly due to contact centres, rather than being allocated a tax inspector. HMRC have addressed this area to some degree by having Customer Account Managers, but many feel this is only for the large employers, leaving the smaller, more vulnerable employers to fend for themselves. cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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1.1.4 With HMRC’s core purpose being to make sure that money is available to fund the UK’s public services and support individuals, one must ask is customer service a priority and should valuable funds be provided to improve this area? HMRC states that by 2015 they want to have a flexible and more efficient system when dealing with customers and they have a number of initiatives that the IPP believes will assist them in achieving this goal. The implementation and delivery of the Change Programme will be vital as will the “One Click” registration process. 1.1.5 Employers and individuals were mandated to use online facilities for reporting, and now most embrace this technology and want a lot more communication with HMRC on line. The introduction of Real Time Information may improve this and is discussed later in this submission. 1.1.6 From the IPP’s perspective HMRC have made huge improvements over the last five years, quite often under pressure both financially and due to the lack of resource. The IPP knows that HMRC has highly qualified and competent staff and not enough credit is given to these civil servants. It is the experience of the IPP’s Policy team that the consultation process, albeit some areas could be improved, is an excellent example of how government departments can work with external stakeholders. HMRC’s attitude previously was that they knew what employers/payroll wanted, however over the last five years they have demonstrated that on the whole they ask first before introducing policy or operational changes. There is always room for improvement but in order to do this money must be set aside for consultation.

2. What the implications are of HMRC’s spending review settlement? 2.1.1 Having read the HMRC Business Plan the IPP is pleased to see that additional money has been set aside for programme spending in 2011–12. The IPP would question whether this was a sufﬁcient sum, however without having a breakdown of the spend we need to reserve judgment on the actual amount allocated. The programme spending is set to increase in 2011–12 and again in 2013–14 presumably for the Real Time Information and “One Click” initiatives already planned. The IPP does however have concern that the administration spending allocation will gradually be reduced. 2.1.2 The IPP understands that savings must be made, and that by investing in programmes this should result in a reduction of administration costs. The IPP would however prefer that any new programmes and or technology is allowed a long period to “bed in” before looking to reduce the budget for administration. Conﬁdence levels in new technology have improved, but the future changes should not be underestimated. These require not only an understanding of different technology, but a different way of communicating with HMRC. A major culture change will be required by both business and individuals. It will also require culture change within government departments. Morale is believed to be low now in HMRC and other government departments, it is vital that time is given to change attitudes, otherwise any new advances will not be received well, and will surely set them onto the path of failure?

3. Whether HMRC is able to deliver the Government’s aims on tax compliance 3.1.1 From a PAYE point of view, various changes to the Finance Act have introduced anti-avoidance measures eg mandatory e-ﬁling, penalties for ﬁling paper returns, and for those who do not submit the correct in year payment of PAYE and National Insurance Contributions. The new in-year regime has replaced the previous surcharge regime; however for employers there still remains an end of year expectation as HMRC do not have the required systems and processes in order to police the new risked based regime. The new NPS system coupled with the PAYE Review and RTI should assist in delivering HMG aims on tax compliance. This comment links to the issue below and supports the need for a PAYE Review. Based on what we know to date the PAYE Review proposals should help in achieving tax compliance. 3.1.2 It will be crucial that the tax compliance policies are adhered to, and the IPP will support HMRC via consultation and facilitation of best practice for payroll professionals to make sure this happens.

4. Whether PAYE reform is necessary? 4.1.1 Based on the dissatisfaction from HMRC’s customers after the P800 release it has to be reviewed. The PAYE system works extremely well but has not moved with the times. When it was introduced most people had one job, and stayed in that job until retirement. They would then receive one pension, normally from the State. 4.1.2 An increasing number of people now have two or more incomes, such as students and part-time workers. Add to that the economic climate where some have to hold two jobs the previous system (COPS) was unable to cope. The intention of NPS is that it will know an individual’s circumstances for tax purposes and allocate the tax code splits accordingly. 4.1.3 Unfortunately this system has not had time to bed in, and a knee jerk reaction was seen by government to improve the system. In fact many government ministers were implying that the system was broken! This is not a view shared by the IPP. cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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4.1.4 The system does need to improve as the government will not accept the current levels of incorrect tax code issue. There were two solutions presented to businesses first one being the introduction of Real Time Data followed by Centralised Deductions. 4.1.5 The IPP and its members have on the whole supported the RTI concept but did not agree that Centralised Deductions would reap a return on investment for either HMRC or the individuals. 4.1.6 Due to the knee jerk reaction the concern of the IPP is not whether Real Time Information should happen, but the timescale in which it is to happen. Many believe within the IPP membership that it is being driven by politics, and the need for the coalition to “make their mark” rather than helping HMRC be more efficient. 4.1.7 Real Time Information will cost employers mainly through their payroll software providers, copious amounts of money to change the current end of year reporting. This is not due to having to complete payroll returns, as most organisations will carry out a reconciliation each pay period anyway, but more so in the way that communication is sent to HMRC. 4.1.8 Employers invested in technology to meet the online filing conditions, however the intention is that employers will need to use a different method to communicate in the future via the BACs system. The IPP in its response to the short consultation on RTI found that its members would prefer to use the existing technology rather than use the BACs technology. It is the belief of the IPP that it was assumed that most employers pay their employees via BACs. Whilst this will be an accurate statement employers are not convinced that using this method to transmit data to HMRC is the right way to go. 4.1.9 RTI would work best if information from employers could be uploaded in the NPS and act on the information in real time. However the IPP understand that by using the BACs system it is more likely that HMRC will control the uploading of data at a time to suit HMRC. Although the IPP understands the need for control to ensure the NPS can handle it, we are not yet sure we understand how this will improve the issuing of tax codes on a more timely basis, as the data could be out of date if two transmissions are submitted to HMRC by different employers and both not acted upon? 4.1.10 The introduction of RTI would also need to encompass benefits in kind as the IPP believes this might be a major contributor to individuals not being on the right tax code. 4.1.11 In respect of the proposal of Centralised Deductions the IPP does not currently support this way of calculating tax and NI etc for individuals. Contrary to belief this is not due to fear of losing jobs within the payroll profession, more so that the IPP does not believe individuals have sufficient interest in the tax system to ensure their tax codes are right. Employers and payroll professionals pride themselves in carrying out the payroll calculation of gross to net to ensure their customers ie employees receive an excellent standard of service, and receive their pay accurately and on time.

5. What HMRC’s priorities should be for the future? 5.1.1 Improved customer contact whether online or in person. There is quite often a lack of consistency within HMRC contact centres. This in turn leads to employers carrying out their obligations in different ways, all approved by HMRC. This then results in HMRC not having accurate data to ensure compliance or assistance is delivered in an effective way. 5.1.2 Better customer contact would assist in changing the tax payer’s perception of HMRC. Being able to build relationships with your tax ofﬁce would mitigate some of the other processes that let employers down. 5.1.3 From a stakeholder point of view, it is important that HMRC continues to recognise the skill and knowledge of organisations such as the IPP. The IPP provides support to all government departments but in particular HMRC, and at the same time gives a voice for employers. The IPP is able to assist all parties by identifying issues that would prevent HMG and employers from suffering unnecessary burdens and costs.

APPENDIX A ABOUT THE INSTITUTE OF PAYROLL PROFESSIONALS The Institute of Payroll Professionals (IPP) was established as an official industry body in 1985 when the Institute of British Payroll Managers (IBPM) was formed. In 1998, the IBPM merged with the Association of Pensions and Superannuation Administrators (APSA) to form the Institute of Payroll and Pensions Management (IPPM), which become the IPP in September 2006. On 10 November the Privy Council approved the grant of Royal Charter. The Institute expects to be rebranded on 1 January 2011 to the Chartered Institute of Payroll Professionals. The IPP is the only membership body for payroll professionals in the UK and currently has in excess of 5,000 members enjoying a range of benefits. In addition, the IPP is the UK’s leading provider of qualifications, training and consultancy for payroll, and has a Pensions Faculty responsible for delivering qualifications and membership services to those responsible for public sector pensions. cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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The mission statement of the IPP is: Leading payroll and pension professionals through education, membership and recognition.

Education

The IPP is the leading provider of qualifications, training and consultancy for payroll professionals in the UK. Our payroll qualifications programme was originally formed in 1991 and is updated each year. The latest developments to our payroll programme led to the introduction of a Foundation Degree in Payroll Management accredited by Worcester University being introduced in September 2008, which utilises online and face to face learning methods. The payroll qualifications programme goes all the way to MSc in Business and Payroll Management and aims to get more payroll staff in the boardroom.

Our pension qualiﬁcations currently focus on Local Government Pension Schemes and are being extended to all public sector pensions going forward. The most recent development is the introduction of the Foundation Degree in Pensions Administration and Management for students enrolling for Autumn 2010. This new qualiﬁcation is accredited, subject to approval, by Leeds Metropolitan University and covers all the latest developments in the Local Government Pensions arena.

As well as our industry recognised qualiﬁcations, the IPP boasts a wide range of payroll training courses to increase professional knowledge in speciﬁc areas such as statutory payments, termination payments, overpayment recovery and changes to legislation. And we have recently re-launched our Pensions for Payroll Professionals training course.

Membership

The IPP is the only professional body for individuals working in payroll in the UK, and has a separate Pensions Faculty to represent public sector pensions professionals. The IPP has an excellent position within government to represent our members’ views, enabling us to keep you abreast of all the legislation changes that have come into effect or are in the pipeline through a number of communications channels including: — News On Line—weekly e-newsletter. — PayrollProfessional magazine issued ten months a year. — Advisory Service helpline which you can call on during ofﬁce hours. — Members only sections of the website to network and discuss topical issues.

Recognition

The IPP is working hard to increase recognition towards the importance of payroll in business and achieve Chartered status for the profession. The policy team are now representing members’ views at over 60 government consultation forums which highlights that HMRC and other government departments recognise the important part that payroll plays in the UK economy

APPENDIX B

SURVEY RESULTS

What do you think of HMRC’s handling of the 2010–11 PAYE reconciliation process? Answer Options Response Percent Response Count PAYE system is 66 years old: bring on real-time information. 10.6% 7 Yes, it’s a mess, but let NPS bed in and work with HMRC to make 34.8% 23 it better. Yet another episode in HMRC’s long history of IT disasters. 25.8% 17 A result of cutbacks & declining morale—more funds needed. 13.6% 9 Proof that HMRC is not ﬁt for purpose. Current managers must 15.2% 10 go. answered question 66 skipped question 0

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Written evidence submitted by TaxAid HMRC PERFORMANCE AND CAPABILITY TO DELIVER THE GOVERNMENT’S AIMS ON TAX COMPLIANCE TaxAid is a charity providing free, independent advice across the entire range of tax issues that impact on the most disadvantaged taxpayers on low incomes. Service provision includes a crisis advice helpline and face-to-face advice. TaxAid’s website provides information to taxpayers in an accessible format which generates email and correspondence queries. We also train front-line generalist advice agencies (eg Citizens Advice Bureaux) to operate as a triage service by recognizing the tax issues, dealing with the ﬁrst step and appropriately referring. These services give us insight into the capabilities and needs of the unrepresented taxpayer in meeting their responsibilities under the tax system. Consequently, we work with HMRC at appropriate consultations to represent their perspective on the impact of tax on the unrepresented.

Summary TaxAid considers that HMRC should be encouraged by the Government to take some bolder steps to help low income workers out of the informal economy, by: — Improving and promoting the Tax and Benefits Confidential Helpline (TBCH). — Streamlining the disclosure procedures to support the role played by the Voluntary and Community Sector. As it currently operates access to come forward from the informal economy has severe limitations, including: — TCBH refuses to help anyone who is already reflected anywhere on HMRC’s systems. — The service is completely unpublicised and is difficult to find on HMRC’s website. — The scripts used by operators on the TBCH can be unhelpful. — Procedures operated by HMRC make it extremely cumbersome and time-consuming process for the voluntary sector to support anyone wishing to disclose untaxed income. For such reasons, it is hardly surprising that the TBCH has had limited success as a bridge into the formal economy; a 2008 report on Tackling the Hidden Economy by the NAO stated that just 65 taxpayers registered with HMRC through the TBCH in 2006–07.

Background A general point we have experienced is that HMRC skills of front-line staff are probably about the same, or possibly a bit worse, than five years ago—and definitely worse than 10–15 years ago when staff facing the public had much more hands on knowledge and experience of tax. Since processing and customer contact have been separated, the decline has been marked. However, for HMRC itself the goalposts have shifted. Practicalities of implementing new areas of legislation that impact on unrepresented taxpayers do not always appear to be considered. Our experience at TaxAid is that the unrepresented taxpayer is in recent years compounding the challenges faced by HMRC. For example, a survey of clients referred to TaxAid from Citizens Advice Bureaux in need of help with a crisis are likely to be within a range of 50%–95% functionally illiterate. Minority groups such as migrants, those with mental illness, many of the elderly, the homeless and prisoners are other groups who are not capable of meeting their responsibilities without a more skilled support structure in HMRC’s staff. TaxAid—and presumably other paid agents when serving represented taxpayers—can and does compensate for poor skills and lack of knowledge since we frame the questions to HMRC officers appropriately and point to the “rules” that they should be following, even those in their own manuals. This of course increases the costs to us (and to the paid agents) to compensate for poor HMRC service to these more costly-to-serve taxpayer groups. This is not of course a possible route for the unrepresented taxpayer, of whom there are 3.8 million in HMRC’s own estimate of the “Willing But Needs Help” group.

1. We areFocusing ourSubmission on aSingleArea of ourWork inAdvisingTaxpayers with UndisclosedIncome The Government and HMRC have long been concerned about “ghosts” and “moonlighters” (workers who fail to declare all or part of their earnings). Currently, HMRC is running a series of campaigns, through which it has recovered unpaid taxes from doctors and dentists, with future campaigns aimed at other industry sectors. This runs alongside ongoing work, such as Self Assessment enquiries. Understandably HMRC focuses its resources on those with average and above average incomes, who are more likely to owe larger amounts, and to have funds to settle what is due.

1.1 Informal workers on low incomes Relatively little resource is directed at those at the lower end of the income scale, many of whom seek advice from TaxAid (which offers free advice to those on incomes below £16,000 per annum). cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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1.2 Such individuals may be outside the tax net for a variety of reasons, for example: 1.2.1 Some will have started up self-employment in a small way, with any profits falling within their tax allowances. Gradually this has grown, but they are then nervous about contacting HMRC in case they owe a large amount which they cannot afford to pay. 1.2.2 Some have been working for an organisation where it is unclear who is responsible for their taxes, and they discover after some years that no tax has been paid. 1.2.3 Others have started some casual work while claiming benefits and this has grown to a situation where there is clear wrongdoing, but they are fearful of trying to regularise their situation for fear of prosecution. 1.2.4 Some were trying to comply with their tax obligations but found it too difficult and drifted out of HMRC’s sights on a change of residence. 1.2.5 Quite often their non-compliance will be linked with other personal problems, mental illness or domestic breakdown. 1.3 In our experience such individuals may trade untaxed for decades—or indeed a lifetime—without coming to the attention of the tax authorities and, although the average contribution lost to the Exchequer in each case is quite small: 1.3.1 The total amount involved could be up to £½ billion per annum. 1.3.2 Illegal benefit claims are continuing. 1.3.3 Families with children are not receiving child tax credit due to them, as the parents seek to avoid HMRC’s radar. 1.3.4 There are neighbourhoods where large numbers of individuals are working untaxed and undetected, which may promote negative attitudes towards tax compliance in the minds of their wider communities.

2. Moving such Individuals into the Formal Economy 2.1 There are clearly sound reasons for promoting tax compliance in this low income group, and in TaxAid’s experience many of the workers involved would like to “join the club of taxpayers” but are deterred by fears of prosecution (usually unfounded) or unaffordable tax debts (often exaggerated). 2.2 It would be difficult and costly for the Revenue authorities to track down such people individually, and bring them into the system. Each case would require individual pursuit, and the staff costs incurred in assessing unpaid taxes in any one case may exceed the amounts owed. 2.3 It is interesting to note that HMRC seeks to rely more on the carrot than the stick. For example: 2.3.1 It operates the Tax and Benefits Confidential Helpline, which offers a route into tax compliance, whereby the individual can be told what sanctions they will face before choosing to reveal their identity. 2.3.2 It partly funds advice offered by the voluntary sector—eg TaxAid receives grant-in-aid each year towards the operating costs of its “Non-disclosure Helpline”, whereby callers may receive free, independent and confidential advice to help them decide how to proceed. This may be followed by further help in completing the necessary forms and negotiating payment. 2.4 TaxAid supports these HMRC initiatives but believes that—with support from the Government—HMRC could go much further. 2.5 We should mention that we greatly welcomed the launch of the Hidden Economy Advisory Group in Autumn 2009, and have had a meeting with the HMRC officials involved. We have raised most of the ideas in this paper with them, but have been disappointed to note that the Group has not been particularly active in recent months.

3. Improving and Promoting the Tax and Benefits Confidential Helpline (TBCH) 3.1 The TBCH was launched in 2000, following recommendations in Lord Grabiner’s Report on the Informal Economy. It allows an individual to disclose their past earnings to HMRC on an anonymous basis, and to be told what taxes they owe, before deciding whether to reveal their identity. It has the power to forgive small amounts of unpaid taxes and NIC (up to £2,000 in total). In some cases it is a very welcome facility, and many of TaxAid’s clients—especially those on very low incomes—have used it as a “safe” route into the formal economy. 3.2 However, it has severe limitations, including: 3.2.1 The TCBH refuses to help anyone who is already reflected anywhere on HMRC’s systems. So a caller who has been self-employed for several years cannot enter the formal economy through the TBCH if they have had any earnings taxed within PAYE during that period (even for just one week)! cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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3.2.2 The service offered by TBCH is completely unpublicised, and is difﬁcult to ﬁnd on HMRC’s website. It cannot be found on a “search” of the HMRC website. 3.2.3 The scripts used by operators on the TBCH can be unhelpful. The calls are answered simply “HM Revenue and Customs”, and the terminology is not always user-friendly (for example, callers have been told they need to have “business accounts”, when it might be better to ask if they have “worked out their income”). 3.3 For such reasons, it is hardly surprising that the TBCH has had limited success as a bridge into the formal economy; a 2008 report on Tackling the Hidden Economy by the NAO stated that just 65 taxpayers registered with HMRC through the TBCH in 2006–07. This is a shame as the facility was launched with some fanfare back in 2000, and if HMRC were given a clear mandate to promote it, we believe that it could be considerably more effective.

4. Recommendations Speciﬁc to Undisclosed Income 4.1 HMRC to be encouraged to promote and improve the TBCH. This could be done by prominent advertisement on its website and elsewhere, by improving the “scripts” used on the TBCH, and by other procedural improvements. To maximise the scope for success, this should be done in consultation with TaxAid and other VCS organisations. 4.2 The TBCH should be allowed to write off tax that would have been covered by working tax credit (WTC). Many low income workers in the informal economy are evading less in tax and NIC than they are losing out by failing to claim Working Tax Credit (WTC). But the HMRC cannot give any credit for WTC which the worker has failed to claim (beyond the last three months). Such an offset would enable greater numbers of low income workers to enter the system without unaffordable tax debts, without any real cost to HMRC, and we would urge that the rules be changed to allow it.

5. Streamlining the Disclosure Procedures to Support the Role Played by the Voluntary and Community Sector (VCS) 5.1 The majority of those who approach VCS organisations for help in moving into the formal economy face tax arrears above the waiver limits operated by the TBCH. They may have been working untaxed for several years, and have reached the point where they cannot carry on worrying about “a knock on the door” or prosecution for tax evasion, or their spouse/partner has threatened to leave unless they get their tax affairs in order. 5.2 In such cases TaxAid will advise on their legal obligations and the benefits of registering with HMRC, which will invariably require the completion of tax returns covering a number of years. It will also be necessary to deal with HMRC’s Debt Management and Banking (DMB). 5.3 In most cases, the worker is unable to manage this alone. They may lack the necessary understanding, they may be overwhelmed by stress at the enormity of their situation, and many of them have diagnosed mental health conditions. 5.4 So in most cases potential taxpayers need: 5.4.1 help to prepare a number of tax returns and anticipate and understand the outstanding liability (including interest, surcharges and penalties); 5.4.2 assistance in explaining their personal circumstances, reasons for their non-compliance, and any assumptions or estimates that have had to be made in completing the forms; 5.4.3 help interpreting the computer-generated statements and correspondence that is received from HMRC; and 5.4.4 help in any arrangement needed with DMB. 5.5 This support should be immediately accessible, as the “taxpayer” is likely to walk away from the disclosure process if it drags on for any length of time. 5.6 Potential taxpayers evidently do not seek out HMRC for help in coming forward to declare undisclosed income. TaxAid has been funded in previous years to assist as a bridge, but we are concerned that the procedures operated by HMRC make this an unnecessarily cumbersome and time-consuming process, and we could help considerably more people if the rules were streamlined. 5.7 In particular we make the following recommendations: 5.7.1 There should be a clear “gateway”: At present, there is no clear gateway to register a long- existing non-compliant business. It is often unclear to which processing office returns should be sent, and time is wasted getting the forms to the right office, or sending duplicates when forms go missing within HMRC. 5.7.2 There should be clearer agreed guidelines about tax returns required: There are no published rules on how many years’ returns will be required. HMRC will rarely go beyond six years, but it could do if it wished. Nor is it clear whether returns should be made for the years when profits cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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fell below the tax and NIC thresholds—there seems little point in producing such forms, but in theory they could be required by HMRC. At present TaxAid has to rely upon its professional “feel” as to how many years’ returns are needed, but this is unsatisfactory. And time is inevitably wasted because, to protect the client, we will err on the side of caution producing forms that may not be needed. 5.7.3 HMRC should share information more willingly: Quite often HMRC will hold some information that is needed to complete the required returns (but which is no longer held by the client, or was never given to them), eg income earned under the construction industry scheme or casual work taxed under PAYE. HMRC contact centres are reluctant to give this information out (“the customer is expected by law to have records”) and, even where they do agree, insist this must be done by post. All of this slows down the process and adds to the time devoted to each case. 5.7.4 HMRC should review and explain its policy on “enquiries”: Quite often the client will have incomplete business records and so it is necessary to help them to make estimates, which means there is the risk that the amounts declared will be challenged by HMRC, and the tax liability increased. Until recently, we found that HMRC was willing to accept returns prepared by TaxAid without enquiry, if we provided a good explanation of our review of the client’s income and circumstances in a covering letter (and it was clear that the client would not have the funds to pay additional taxes anyway). In effect HMRC would generally be content to accept the tax and NIC shown, plus late filing penalties, interest and a 10% surcharge. But in recent months we have had cases where such returns have been referred to compliance teams for enquiry, increasing the uncertainty for the client and the burden on TaxAid in providing support and advice. We understand HMRC’s right to make such enquiries, but it does have an impact on the number of clients the VCS can help. It also reduces our ability to reassure a person, who is unsure about “coming clean”, that we can predict the likely demands they will face, and so increases the risk they will opt not to register. 5.7.5 A clearer procedure is needed for those who have worked while on benefits: Although this is not a problem created by HMRC, some of our clients are worried about joining the formal economy because this risks admitting that they were working while on benefits. It would be very helpful if HMRC could collaborate with the DWP to establish a set of ground-rules, so that there is greater clarity about the DWP’s prosecution policy and a “safe passage” into the formal economy for a worker guilty of a minor infraction. 5.7.6 HMRC should provide an effective channel to resolve “disguised employment” cases: Some of the workers who approach TaxAid for help in joining the formal economy are not self-employed, but appear to be employed by an organisation that is simply failing to account for PAYE (and indeed, in many such cases there is/has been some uncertainty over whether tax was being deducted). In such cases, HMRC’s published policy is to seek to recover any taxes due from the organisation first, rather than the worker. However we have not found any channel for referring such cases to the appropriate part of HMRC (Employer compliance). Often it is simply impossible to get anyone within HMRC to tackle the employer’s non-compliance. This makes it very difficult to help such a person regularise their situation. November 2010

Written evidence submitted by the Society of Trust & Estate Practitioners (STEP) Executive Summary 1. Certainty and the ability to resolve queries quickly are hallmarks of efficient tax administration and play a key role in creating a fair and internationally competitive tax system. STEP has been increasingly concerned that the UK tax system is failing to meet the required standards in these key areas. Certainty is threatened by the increasing use of non-binding HMRC guidance to fill the gaps left by legislation which has often failed to consider the issues that arise in practical application. HMRC’s ability to respond quickly and effectively to taxpayers’ queries on more complex issues has also been undermined by a growing shortage of experienced, well qualified staff in key areas. The targets for cost cutting laid out in HMRC’s new Business Plan for 2011–15, alongside plans announced to focus remaining resources on tackling tax evasion, further threaten HMRC’s ability to provide a competitive tax administration system to the great majority of law abiding taxpayers. We would particularly highlight our concern at reported plans to alter fundamentally the scope of HMRC’s High Net Worth Unit, diluting its current focus on the very largest personal taxpayers and threatening its ability to understand their often complex affairs and deal effectively with them.

TheHallmarks of anEfficientTaxSystem 2. The Society of Trust and Estate Practitioners (STEP) is the worldwide professional body for practitioners in the fields of trusts and estates, executorship and related issues. STEP members help families secure their financial future and protect the interests of vulnerable relatives. With almost 6,000 members in the UK (and over 15,000 members around the world), STEP promotes the highest professional standards through education and training leading to widely respected professional qualifications. cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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3. STEP welcomes the opportunity to make a submission to the Sub-Committee’s inquiry into HMRC. We believe that efficient tax administration plays a key role both in creating a tax system that is fair for all and also in creating a tax environment which is internationally competitive. Certainty regarding the meaning of tax provisions and liability to tax and the ability to resolve queries quickly are important issues for any efficient tax system and we are concerned that they are not being given sufficient priority in the UK. The problems flow from both the way we formulate the tax laws which HMRC have to implement and from the resources given to HMRC.

Lack ofCertainty forTaxpayers 4. In recent years there has been a marked shift to Parliament passing tax legislation which contains little detail as to practical implementation, with reliance being placed instead on HMRC producing written “guidance” on how the legislation will be applied in practice. A recent example of this are the “fit and proper persons” charity provisions contained in para 4, Schedule 6 FA 2010. The guidance issued by HMRC often covers issues which we believe should be exposed to Parliamentary scrutiny but the real problem for taxpayers and their advisers is that such guidance is often regarded as “non-binding” by HMRC. This has created a situation in which some taxpayers have taken care to arrange their affairs so that they are compliant with HMRC guidance but even so find themselves challenged by the tax authorities and subject to interest and penalties (there have been several high profile such cases recently regarding HMRC’s guidance on residence which was contained in IR20 and is now contained in HMRC6). It is therefore increasingly common for tax advisers to warn clients that there is no certainty as to how the tax authorities will view a transaction or their tax status since the guidance issued by the tax authorities cannot be relied upon. 5. The difficulties of establishing how HMRC will view an issue are compounded by increased difficulty in quickly and easily contacting HMRC staff with the technical knowledge and experience necessary to understand complex issues. It appears that in order to cut costs HMRC is putting greater reliance on relatively junior, inexperienced staff to answer front line queries. Taxpayers with more complex affairs are therefore finding it difficult to obtain information and guidance from HMRC on issues in an acceptable time frame.

HMRC’s Business Plan and Tax Simplification 6. Concerns about the adequacy of HMRC’s resourcing are compounded by the recently published HMRC Business Plan for the Period 2011–15. While there is frequent reference within the Business Plan to HMRC becoming more “customer-centric”—a highly laudable aim—the commitment to reduce costs by 25% suggests that it will be very difficult to maintain even the current numbers of experienced, highly skilled, and presumably relatively expensive, front line staff. 7. One way of squaring the circle between cutting HMRC costs while leaving taxpayers with good access to appropriately qualified HMRC staff is clearly to simplify the tax system as much as possible. Quite apart from any potential saving in HMRC administration costs, a simpler tax system is a desirable goal in its own right and STEP applauds the establishment of the new Office of Tax Simplification (OTS). STEP looks forward to meeting the OTS and hearing more of its planned work programme. We would highlight that areas such as Inheritance Tax appear to be long-overdue a radical rethink and ripe for simplification. The initial emphasis of the OTS nevertheless seems to be on simplifying business taxation with, for example, the launch of the Small Business Tax Review. The initial focus on business tax simplification may be warranted, but we would hope that any dramatic slimming down in the HMRC resources available to support individual and trustee taxpayers is only pushed through alongside, not ahead of, any commensurate move to simplify the tax system confronting them. 8. In this context we are particularly concerned by Ministerial commitments to introduce yet more complex anti-avoidance legislation. Not only does this result in a more complex tax system, but too often anti-avoidance legislation introduced in a hurried fashion without consultation simply opens up new loopholes for some taxpayers while hitting other taxpayers unfairly. We welcome the commitment of the Government to a new approach to tax policy making, consulting widely before making changes, but anti-avoidance legislation is nevertheless often introduced without consultation on the claimed grounds that urgent action is needed to avoid revenue loss. In reality the simple announcement that an issue is under review will often be sufficient to deter further abuse. We would therefore urge Ministers to be more robust in challenging HMRC as to whether urgent anti-avoidance legislation is either necessary or correctly targeted to achieve a sensible policy outcome. A more considered approach will often ultimately be far more effective.

The Resourcing of Anti-Evasion Initiatives 9. We would also highlight that the issue of HMRC resourcing should be considered when government is considering major new tax initiatives. For example, a consultation is currently underway on the possibility of introducing a general anti-avoidance rule (GAAR). STEP believes that the arguments for and against a GAAR are finely balanced. Experts generally agree, however, that an effective pre-clearance system would be an essential element of any efficient GAAR. Such a pre-clearance system would need to be well resourced in terms of senior, well qualified staff. While the running costs of such a system are clearly one potential issue, the additional burdens imposed on what appear to be an already scarce resource within HMRC deserve particular attention. cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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10. More generally, STEP believes that it is right to question whether the planned significant shift in resources within HMRC to tackling tax evasion is appropriate. HMRC’s Business Plan calls for a £900 million investment in anti-evasion work at the same time as overall costs are being reduced by 25%. Tax evasion is always to be condemned and HMRC asserts that the additional investment will bring in an additional £7 billion of revenues. This would clearly be an attractive return if achieved, although the basis of this calculation is far from clear. The benefit of any decline in evasion from deploying scarce resources on anti-evasion work nevertheless needs to be balanced against the possibility of increased costs and difficulties for the overwhelming majority of taxpayers who are compliant. 11. The increased emphasis on tackling tax evasion should also not be allowed to undermine HMRC’s ability to take a common sense approach to mistakes and tax underpayments. The Press reported widely earlier this autumn that Treasury Ministers were targeting a “five fold increase in prosecutions for evasion”.1 We believe it is wholly inappropriate for a tax authority to be set targets for how many prosecutions it decides to launch. Such targets pose a serious threat to the relationship between HMRC and taxpayers. The decision whether to prosecute or not should be always taken on the facts of the individual case under consideration rather than in the context of the need to achieve a target number of prosecutions set be Minsters.

HMRC’s Relationshipwith the Largest Taxpayers 12. In the context of HMRC shifting resources towards anti-evasion strategies, we are particularly concerned about the outlook for the High Net Worth Unit (HNWU) formed by HMRC in 2009 as part of its strategy for dealing with the personal tax affairs of the UK’s wealthiest individuals. HMRC statistics suggest that over 25% of income tax receipts come from the top 1% of taxpayers. Such individuals typically have complex tax affairs. The HNWU has thus focused on the very largest UK taxpayers with over £20 million of investable assets, handling the tax affairs of around 5,000 individuals. 13. The strategy of tax authorities developing an enhanced relationship with the wealthiest personal taxpayers is considered international best practice and has been endorsed by the OECD. In the UK it also mirrors an equivalent HMRC strategy of developing an enhanced relationship via the Large Business Service with the top 800 or so UK businesses that pay over 50% of the business taxes collected. The Large Business Service, with 1,750 tax specialists, accountants, auditors and other specialists, has been widely judged to be a success from the point of view of both HMRC and major businesses. 14. STEP similarly generally welcomes the development of the HNWU, even if there have been initial teething problems largely related to the lack of HNWU staff with adequate expertise on the tax issues that arise in this area. The statement made by the Chief Secretary earlier this autumn, therefore of a “major clampdown” that would see the HNWU’s focus extended to all those paying the 50 pence top rate of tax (around 150,000 taxpayers), seems to both misunderstand the HNWU’s purpose and jeopardise the beneﬁts that ﬂow from HNWU’s tight focus on the UK’s wealthiest taxpayers. It would appear unrealistic in current circumstances to believe the HMRC has the resources to focus closely on the tax affairs of 150,000 individuals, many of whom are likely to be relatively low risk employees on PAYE, in the way that the HNWU currently focuses on the tax affairs of the very largest taxpayers. November 2010

Written evidence submitted by the Institute of Chartered Accountants of Scotland The Institute of Chartered Accountants of Scotland welcomes the opportunity to present evidence to the Treasury Sub-Committee which is looking at the administration and effectiveness of HMRC. We have found the constraint of a submission limited to 3,000 words difficult and members of the Institute’s Taxation Committee would welcome the opportunity of supplementing our written submission with oral evidence and perhaps amplifying some of the more difficult areas where HMRC is failing to offer an effective and cost efficient service. In responding, it is often important to make the point that the perception of something can be different from the reality. HMRC does a difficult job and in many instances does it well and to a high quality. Human error inevitably leads to mistakes and deserved criticism of HMRC. Nobody likes to pay tax and people who are inconvenienced by HMRC errors often react or comment in a way which is disproportionate to the underlying error or failing. The Institute of Chartered Accountants of Scotland has always supported the principle that everyone should pay the right tax at the right time. No one should condone evasion and we support the Government and HMRC in making tax compliance a priority. HMRC correctly identifies that taxpayers form a spectrum ranging from those who can and do comply, to those who deliberately evade tax taking advantage of their perception that HMRC will not be able to identify the evaders or ever collect the tax which is being evaded. We have a great deal of sympathy for the position in which HMRC finds itself. Tax legislation in the UK has become excessively complex and is quite inappropriate for a self assessment regime. Research has shown 1 See for example, BBC News (http://www.bbc.co.uk/news/uk-politics-11359306) cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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that the more complex the fiscal regime the higher the level of non-compliance. Non-compliance can occur because of mistake and misunderstanding but it is not helped by a feeling that the system is too complex and therefore unfair. As complexity grows the confidence that there is horizontal equity between taxpayers is lost and this is a disadvantageous attitude to compliant taxpayers who may feel that others are getting away with things that they ought not. As an organisation, the merger of what was the Inland Revenue and Customs & Excise to form HMRC has earned criticism. The changes within the procedures adopted by the organisation have meant that some experienced staff have felt uncomfortable and unhappy. During a period of change this is almost inevitable and it has had adverse effects on staff morale and staff performance. There is evidence of a culture of fire fighting indicative of management redeploying staff to deal with immediate crises without there being in place a coherent plan and understanding of the staffing compliments necessary to achieve the organisation’s business outcomes. The invitation to present evidence poses the following questions to which we would answer as follows:

1. Is HMRC’s performance as an organisation acceptable and is it delivering its key aims? HMRC is a large and diverse organisation. It is a political decision that it deals with so many different business streams including the collection of tax and the payment of tax credits to claimants. The job of HMRC is to enforce the tax laws which have been enacted and it faces a Herculean task. Parliament deserves considerable criticism for enacting so many complex and unnecessary pieces of tax legislation. Over the last two decades, the level of Parliamentary debate and scrutiny on Finance Bill clauses has been poor. As a result, a great deal of poorly drafted bad legislation has been enacted yet never repealed even though most people recognise the deficiencies. For example, IR35 when it was enacted was predicted to produce a yield of £200 million a year yet in total since it was enacted, a recent Parliamentary question revealed it has only produced a yield of £9 million. It is bad legislation which does not achieve its purpose. HMRC are faced with the impossible task of trying to enforce legislation which should never have been enacted but, having mistakenly been enacted, should have been repealed immediately its deficiencies became apparent. There are many deficiencies within our fiscal legislation. At one extreme, we have Blind Person’s Allowance which is available to all UK resident individuals who are registered as blind, and the allowance can be transferred to spouses or civil partners if the blind person’s income cannot use the allowance. This requires nearly a whole page of detailed legislation at Sections 38 and 39 ITA 2007. In practice, many deserving people fail to claim the allowance to which they are entitled or fail to transfer the unused allowance to their spouse as the law intended. HMRC’s vision is to close the tax gap and make ordinary citizens feel that the tax system is simple for them and even handed. To that extent, they face an impossible task as Parliament is responsible for having drafted complex and voluminous legislation that makes taxpayers feel it is unfair and difficult and often results in deserving claimants not claiming the reliefs to which they are entitled. HMRC aims to be seen as a highly professional and efficient organisation. Individual experiences will vary across the spectrum, with those who have a good interaction with HMRC believing that that vision has been achieved and those who have a poor interaction believing otherwise. Unfortunately, in the case of HMRC, it is difficult even to have such interaction because HMRC deserves the criticism which it receives for being difficult to contact and even harder to communicate with. HMRC has lost many of its experienced staff but many new staff have been recruited and, as is common in any large organisation, the staff have a spectrum of abilities ranging from appallingly poor to being seen as highly professional and highly efficient. The current perception is that there are too many poorly trained, inefficient and inexperienced staff within HMRC for them to be seen in the way that they wish. HMRC’s inefficiency and poor performance actually creates difficulties. It is well known that HMRC has serious arrears of post and that staff are redeployed to deal with post at crisis levels, sorting the particular problem but creating another one elsewhere as a result of the staff being redeployed from their first task. Communicating with HMRC is a difficult task and HMRC deserve criticism for the arrears of post, the length of time which they take to respond to simple requests and the difficulty in contacting them by other methods such as the phone. The number of calls which go unanswered is unacceptable. Dealing with a call centre is a very variable experience. People can be fortunate in getting good service, but far too many experience appallingly poor service dealing with call centre staff who seem to lack an understanding of their customer or the customer’s needs and who are unable to help the customer resolve things and get it right. HMRC needs to improve its communication with its customers in a massive step change. Its current performance is not acceptable and it needs to move towards ways of improving performance by making use of email and by improving the knowledge and experience and judgement of its call centre staff but allowing an efficient escalation process where knowledge at a higher level is required. Some staff within HMRC are excellent and do a very good job in often very difficult circumstances. Other staff need to improve their performance by a step change. cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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As a society, the UK is perceived as being comparatively compliant. Taxation works by being acceptable to the vast majority of the population and it is important that politicians remember that taxation is effective where it is acceptable. Other jurisdictions admire the way in which HMRC achieves its level of compliance and the UK citizenship’s cultural attitude is something to be preserved and valued. It would not be in anyone’s interest to move to a different cultural attitude such as seen in some Soviet bloc countries and others where tax is enforced by officers being required to carry arms and sanctions include (as in China) the death penalty for tax evasion. For this reason, HMRC’s purpose is to make sure that money is available to fund UK public services and the general feeling is that it achieves that purpose with reasonable efficiency and effectiveness. There is however little doubt that HMRC could do more to do it better. HMRC makes too many mistakes and is responsible for too many burdensome failures in respect of its database which is often full of dirty data which should have been cleansed. HMRC also has a long history of implementing new IT projects and systems in a manner which leads to criticism because it was not done following best practice. Often this is as a result of cost cutting and the need to make efficiencies and savings. In the short term this may be achieved but in the longer term the damage to HMRC’s reputation and the measure of its professionalism is considerable.

2. What are the implications of HMRC’s spending review settlement? Over the years, HMRC has announced a number of initiatives to close the tax gap including spend to save with the promise that by investing more the tax yield would increase. These were laudable objectives to be supported. Unfortunately, there is a strong suspicion that HMRC fails to deliver. Following the merger, there was a perception that many experienced officers who could have contributed their knowledge and experience towards closing the tax gap were actually encouraged to leave or take early retirement with the result that the overall skill set within HMRC was perceived to have reduced. The head count of HMRC has fallen consistently over the last five years since the merger occurred. The problem is that losing ten experienced and knowledgeable officers to be replaced by five new call centre staff does not really measure the change which has occurred within the organisation. HMRC always had the scope to improve its effectiveness and performance. In many areas a failure to invest in new technology and new training meant that old inefficient processes were retained. HMRC is undergoing considerable change and it is inevitable that there is some pain associated with that change. Commenting at this instant in time of 2010, HMRC would be criticised for having lost too many experienced and knowledgeable officers and criticised for those new recruits lacking training and lacking the ethos of HMRC so that they do their job inefficiently, ineffectively and with a great deal of apathy. Our understanding of the spending review settlement is that HMRC will lose 13,500 staff but will recruit a number of new staff leading to a net overall reduction of 10,000 staff. The new staff recruited and the investment in IT systems should lead to improved compliance helping to close the tax gap and by improving PAYE and benefits reporting, helping to better match income with claims to tax credits. Measuring income is a difficult process, especially for the self employed. The tax credit system also seems to have been designed without proper regard to the day-to-day needs of people and the measurement of income which is generally on an annual basis. As a result the two systems do not sit well together. That is the fault of the politicians who enacted such poor legislation which does not seem to have taken proper account of self employed claimants’ needs. The result is that HMRC is often faced with a difficult task of looking at the family unit in respect of entitlement to benefits but looking at issues of confidentiality in relation to income declarations by individuals. It could have been done better but it is not HMRC which deserves the criticism, it is politicians for enacting such poor rules. We support HMRC in trying to close the tax gap and trying to administer the tax credit system and entitlement to various benefits better. In the short term we anticipate that this will require considerable investment by HMRC in new IT systems and training and that there will be a further deterioration in HMRC’s performance before it begins to get better. Comparisons with other fiscs on an international basis would suggest that further economies within HMRC and further efficiencies of process are there to be harvested but perhaps now is a good time to take stock in the UK. The cost of compliance for individual taxpayers and for employers is increasing even though the cost of the collection of tax incurred by HMRC is decreasing. The real measure of what might be a success is to reduce the overall cost of compliance by looking at the process from end-to-end. Instead in recent years much of the change has been driven by the process within HMRC aiming to achieve savings there without regard to the additional cost that this imposes on taxpayers. There are many areas where HMRC could make economies, and equally it is unfortunate that HMRC has made economies when it ought not to have done so if it had considered the overall impact of the changes proposed.

3. Whether HMRC is able to deliver to Government’s aims on tax compliance? No one should condone evasion and we support the Government and HMRC in their efforts to close the tax gap and counter evasion and fraud. There can be little doubt that targeting resource at those areas where the cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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risk of non compliance is greatest is a sensible use of those resources. However taxation is excessively complex and the level of compliance could be improved if there was simplification of the system. In the short term with the current complex fiscal regime, it takes time to train an officer properly to be an effective investigator able to challenge non-compliance in an effective and efficient way. So in the short term we doubt that HMRC is able to deliver the additional yield with which it has been targeted. In the longer term, with recruitment of the right staff and the right training supported by the right systems and good risk assessment methods, we think that this is possible.

We are concerned however at the cultural attitude to taxation within the UK. We believe that within the UK the level of tax compliance is high in comparison to other jurisdictions and that the level of voluntary compliance is comparatively good. It is important that HMRC does not change the perception that it has. HMRC should be sensitive to the criticism it earns when it takes inappropriate action. All too often, HMRC does take inappropriate action as a result of failures within its system to identify that tax has actually been paid when HMRC adopts an aggressive collection policy threatening or forcing bankruptcy in inappropriate cases.

HMRC could improve its communications better and, when mistakes occur, could improve its means of dealing with these mistakes, correcting them quickly and efﬁciently. HMRC’s complaints and redress procedure needs to be improved considerably.

4. Whether PAYE reform is necessary?

The UK PAYE system still works remarkably well. Recent changes including making it mandatory to file electronically have merits and demerits. For large employers, using technology has many advantages but for small employers imposing a mandatory requirement to use electronic filing and processing when it is probably simpler and more efficient to do it manually is wrong in principle. The defect is that one size was never going to fit everyone and at some point it is appropriate to consider whether it is desirable to reform PAYE rather than leave till when it becomes necessary to reform PAYE.

Looking at the fundamental, the PAYE system is being imposed in situations where it is probably not appropriate and it might be better to consider making individuals more responsible for their taxation affairs. This could be the case in very small employer situations including domestic employment where it is believed there is a very high degree of non-compliance.

There is growing concern that the burden which PAYE can impose on some employers is excessively onerous. Especially in cases where there are frequent changes in the workforce, part-time working and ﬂuctuations in pay, it might be desirable to look at PAYE and consider whether a fundamental reform might be appropriate. We have a self-assessment regime as well as independent taxation and it might be appropriate to require more people to self-assess, removing the responsibility of deducting tax at source or simplifying the requirement.

Our response to this question would therefore be that we doubt if the reform of PAYE is necessary at this stage but it might be desirable, and we recommend that a high level working party be formed to consider the technicalities and desirability of a constructive reform of the PAYE system.

5. What HMRC’s priority should be for the future?

We began this submission by commenting that HMRC does a difﬁcult job and in many instances does it in a very professional manner achieving high standards of efﬁciency, effectiveness and performance.

The HMRC Vision launched on 3 November 2008 sets out a series of visions covering purpose and methodology which are aspirational but would be a good outline for the future of HMRC. It is in everyone’s interest that the HMRC vision of closing the tax gap and making ordinary taxpayers feel the tax system is simple for them and even handed is achieved. It is even more important that HMRC be seen as a highly professional and efﬁcient organisation.

HMRC needs to improve its performance and in the short term this is not achievable. In the longer term with appropriate training, examination of processes with a view to reducing the overall cost of compliance and hopefully reducing the excessive complexity of the UK system, HMRC can move towards being seen as a highly professional and efﬁcient organisation.

A copy of the Institute’s recent research paper commenting on HMRC errors can be downloaded as a pdf ﬁle at:

http://www.icas.org.uk/site/cms/download/TAX/hmrc_errors_survey_report_20101013.pdf November 2010 cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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Written evidence submitted by the Forum of Private Business

Summary This is a collection of evidence gathered by the Forum of Private Business to be presented to the inquiry into “The Administration and Effectiveness of HMRC”. We represent over 20,000 small and medium-sized businesses throughout the UK. In this submission we have collected together information and evidence from our members which highlight the problems with HMRC. From the evidence provided by our members it is clear that HMRC is not fulfilling its aims as an organisation. It is slow and inefficient, with many of its online systems too complicated for our members to use. In the following pages we explore the key issues and provide examples from small business owners that illustrate HMRC’s failings. We argue that the organisation needs to make major changes, such as reforming the PAYE system, significantly increasing the speed of its procedural systems, improving its treatment of customers and generally simplifying the tax system. These issues must be addressed before HMRC is awarded the extra funds to tackle tax avoidance, as granted by the Chancellor in the spending review. If HMRC cannot undertake its current duties effectively then any funds given to the organisation to achieve new aims will be wasted; it must deliver its main functions before any other extra duties are undertaken.

HMRC’sPerformance as anOrganisation and whether it isDelivering itsKeyAims The Forum believes that HMRC is failing in many of its key aims, particularly when it comes to ensuring the tax system is simple and efﬁcient. HMRC also states in its customer charter that it will adhere to certain principles when dealing with customers, such as treating them as honest. Our members report they are not treated well by HMRC and much of the evidence we have collected reveals that HMRC does not adhere to the principles set out in the customer charter. In the following section we explore HMRCs treatment of customers and its attempts at delivering a simple and efﬁcient tax system.

Deliveringa Simpleand Efficient Tax System HMRC states that its main aim, under the title heading “our vision”, is to deliver a simple and efficient tax system: “We will close the tax gap, our customers will feel that the tax system is simple for them and even handed, and we will be seen as a highly professional and efficient organisation” (HMRC website).2 The general consensus that has emerged from our members’ feedback is that HMRC is not an efficient organisation. In fact, although HMRC would like to be seen as “highly professional and efficient”, this is far from how it is perceived by business owners. Members frequently report problems with communication, such as struggling to get through to the helpline, as well as long delays in receiving information or decisions, such as VAT numbers. In order to provide clarity for the Committee on the issues and problems raised by our members, we collated the evidence into themes and have presented them as examples below.

Example 1—VATInvestigation Due to concerns over fraud, HMRC often selects certain cases for more thorough investigation, from the list of businesses that have applied to register as a company in England and are waiting for their VAT number (known as extended verification). While we agree with the principle of further investigations, we are concerned about how this is being carried out in practice. There does not seem to be a great deal of clarity surrounding the criteria used to mark a case out for selection. Recently, after fraud was uncovered in the mobile phone and technologies industry, HMRC decided that any businesses with the words “mobile” or “chip” in its name would be investigated. This led to one business, a mobile fish and chip shop, being selected for investigation. The business’s application therefore sat on a pile waiting for someone to go through it in more detail. The business owner was unable to get through to anybody at HMRC that could tell him how long it would take until he was investigated. When his file was looked at it was immediately apparent that his business was not relevant to the current fraud investigation, as it was not a mobile technology business. A great deal of time could have been saved if these investigations were filtered out an earlier stage once they had been initially been selected, rather than a business having to wait weeks for a VAT number when their case did not really merit investigation.

Example 2—Slow andInefficientInternalSystems There have been several instances where HMRC systems have been shown to be slow and inefficient. At a recent meeting of the Joint VAT Consultative Committee (JVCC), attended by a Forum representative, the change in deadline for the acceptance of cheques to pay VAT was discussed. In the meeting it was suggested that business owners needed to be made more aware of this change and it was felt that this could be achieved by attaching a flashing message to the online VAT forms. However, HMRC representatives said this change would take around six months (which would be too late to inform the public of the date change) as the IT 2 http://www.hmrc.gov.uk/about/hmrc-vision.htm cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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system could not make the change quickly, due to the procedures that had to be undertaken. The JVCC meeting notes were then viewed by a minister who demanded that the change be made. Subsequently the flash message was added, but had it not been for the intervention of the minister, the bureaucracy of HMRC’s systems would have prevented the change from being made. Another problem with HMRC’s IT systems is their failure to update online application forms. For example, HMRC conducted a consultation on how to improve their VAT application forms. As a result of this consultation, the paper application form was altered, but they failed to alter the online application forms before the paper versions were sent out, because it was apparently not possible to make the changes. Some of our members find it easier to fill out the hard copies first and then submit the information online by copying the information on the paper copy. However, subsequently in this instance, the paper copy forms were filled in, but when members logged in online they found the online form was in a different format. HMRC should be trying to make the internet as easy as possible for business owners, particularly those who find it difficult to use computers. Members are keen to improve their use of online systems, but are often put off by the complexity of the forms. One member reported that the HMRC system kept logging out their session whilst they were trying to complete a VAT form. HMRC must focus on improving their IT systems and making online procedures as easy as possible for business owners, particularly as they intended to phase out all paper forms by 2012. Members have also reported problems with the letters they have received from HMRC. One member had an issue that was being considered by HMRC, and they were informed on the telephone that they would be able to contact somebody to discuss their issue while they were waiting for their case to be investigated. However, later that week they received a letter from HMRC which stated at the bottom that they must not contact HMRC under any circumstances. When this letter was later presented to their accountant, it was pointed out that the business owner is entitled to contact HMRC and that the letter is simply months out of date as the “please do not contact” line from the letter has yet to be removed. Both of these cases provide examples of the inefficiencies of the HMRC systems. With such systems the organisation will be unable to deliver its vision of a simple and efficient tax system. These examples highlight specific instances where the organisation has proved itself to be complex and inefficient. We have also received more general complaints about HMRC, with members pointing out that it is hard to deal with, as issues take a long time to resolve and it is often hard to get in contact with anybody with whom issues can be discussed. In the past, one expert would deal with one case and make decisions based on the circumstances of the business, which is particularly important when dealing with small and medium-sized businesses. This is no longer the way the organisation works—currently business owners feel they are constantly being transferred from one call centre operator to another, none of whom understand their business or are able to make decisions.

Treatment ofCustomers In its customer charter3 and vision, HMRC promises the following, amongst other things, when it comes to the treatment of customers: — To treat you as honest. — Do all we can to keep the cost of dealing with us as low as possible. — Make it easy for our customers to get things right. Our members feel that they are not treated fairly by HMRC and we have evidence that they are not adhering to their promised treatment of customers.

Example 3—Time To Pay From our members’ feedback it is clear that HMRC is not fulfilling the promises outlined above. Members feel that HMRC treats them as tax avoiders rather than honest individuals, and any contact with HMRC is difficult and time consuming; far from an easy process for customers. This is illustrated by members’ experiences of the Time To Pay (TTP) scheme. Since its creation in 2008, TTP has allowed struggling businesses to defer their tax payments until a later date. The Forum welcomed the scheme, as did our members, many of whom were initially complimentary about HMRC’s operation of the scheme. However, many members have felt that as the scheme has gone on, particularly in the last few months, HMRC have become a lot tougher with small businesses that use the scheme. These experiences are backed up by the research findings of Syscap,4 a finance provider, which found that in the third quarter of 2009, the total amount of TTP deals stood at £830 million but by the corresponding period this year that figure had dropped to £460 million. The value of TTP arrangements dropped by 16% in the last quarter alone, which shows HMRC are making it harder for businesses to defer their tax liabilities. There has also been a great deal of confusion surrounding TTP and members have found it hard to communicate with HMRC in order to come to any TTP arrangements. One member had previously accessed TTP and had repaid the amount owed. A period of time passed and she wanted to access the scheme for a second time. She contacted the helpline at HMRC and they informed her she was not eligible for the scheme 3 http://www.hmrc.gov.uk/charter/index.htm 4 http://www.creditman.biz/uk/members/news-view.asp?newsviewID=12589&id=1&mylocation=News&chksrc=NNow4251 cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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as she had already previously accessed it. She was unsure whether the information was correct, so contacted the Forum, who found out from a senior HMRC contact that the member had been misinformed and that firms could access the scheme more than once, providing they met the qualifying criteria. It took another series of enquiries and discussions with HMRC for the Forum to learn what steps the member would have to take if she wanted to initiate discussions with HMRC over TTP arrangements. This highlights how time consuming and unclear the TTP scheme is. In addition, while we realise that struggling businesses should not be able to keep deferring their tax payments indefinitely, this member is law abiding and had previously paid back the full amount owed. She should have been able to easily access the scheme, provided her business met the criteria; instead she frequently received incorrect information and was made to feel that HMRC was not interested in helping to support her business. Another business owner managed to access TTP, but had problems agreeing terms with HMRC once she was in the scheme. She was eager to pay the money owed from TTP back to HMRC. However, although her business was experiencing a period of growth, she was unable to pay back the full amount at that time. Therefore she made an offer to HMRC which would involve her paying some, but not all, of the money back straight away. A HMRC representative assured her this arrangement would be accepted; however a few days later the arrangement was rejected by HMRC. This case led to insolvency and HMRC has received none of the money owed.As the issue of TTP illustrates, small businesses owners do not feel they are treated as honest by HMRC and do not find their dealings with HMRC simple and cost-effective. Many members cannot get through to HMRC in the first place—which is backed up by the National Audit Office figures that revealed 40 million phone calls were missed into 20095—and even when members do get through they find their queries are not dealt with swiftly or efficiently.

What the implications are of HMRC’s spending review settlement and will it be able to deliver the Government’s aims on tax compliance

In the spending review it was announced that HMRC’s budget would be cut, yet it has been given extra funds to tackle tax evasion and avoidance. While we welcome the additional funds for tax evasion, we are concerned about the cuts to the HMRC budget, given that the organisation is struggling to deliver its current services efﬁciently and effectively.

In light of the evidence presented in previous sections it is clear that HMRC may struggle to deliver the Government’s aims on tax compliance, given that previous aims (ie delivering an efficient tax system) have not yet been achieved. Currently the system makes it difficult for our members to understand how to comply with the tax system. HMRC issues guidance on how to comply with the rules, yet it cannot guarantee that the information presented in these guides is correct and instead states that it is only their opinion rather than law. Therefore confusion exists as to how to comply with the tax system, with many of our members complaining that the system is too complicated. The system also seems too complicated for HMRC to fully understand (due to their inability to guarantee the advice in its guides is correct) which will make it hard for the organisation to police. Also, due to the number of loopholes that exist (a recent survey revealed there are over 1,000),6 it makes it difficult to see who is cheating the system and who is behaving in an honest manner. Our members, for instance, are eager to comply with the system, but many struggle to get to grips with the rules. While we welcome the Government’s efforts to tackle tax evasion, until the system is simplified, it will remain difficult to police, regardless of the money invested. Therefore we feel that HMRC must address some of the problems already discussed before any extra funds are spent on tax evasion.

Whether PAYE reform is necessary

In light of the recent well publicised PAYE problems, it seems that reform of the system is needed. Members whose businesses provide financial services are particularly vocal about the problems with the PAYE system. HMRC’s charter clearly states that it will “accept that someone else can represent you”. However, accountants are finding it increasingly difficult to act on behalf of their clients. One of the main complaints at the moment is with the computer system which runs PAYE. Accountants have had difficulty accessing the codes they need to process clients information, with many receiving out of date codes. This is making it hard for them to do their jobs, despite HMRC’s assurances that it will aid those who represent its customers.

Another member—an accountant—complained that Government departments do not work together to ensure the smooth running of the system. She gave the example of incapacity beneﬁt, as HMRC often fails to tax this and allows arrears to build up. A client was not properly taxed by HMRC as it allowed arrears to build up for two years. HMRC said it had not been informed by the Department for Work and Pensions (DWP) that the client was receiving incapacity beneﬁt, while the DWP claimed that HMRC had been informed. This resulted in HMRC eventually admitting its mistake and writing a letter to the client, a copy of which is held by the Forum, in which it admitted “We have not dealt with your tax affairs very well.” This highlights that the system is failing to collect the necessary taxes and reveals that there is a lack of communication between departments, resulting in serious errors. 5 http://www.thisislondon.co.uk/standard/article-23795466-hmrc-unacceptable-as-taxman-ignores-44-million-calls.do 6 http://www.managementtoday.co.uk/news/1040085/osborne-heavy-tax-relief/ cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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What HMRC’s priorities should be for the future? HMRCs main priority for the future must be to ensure that its vision (as outlined on page 2) becomes a reality. In order to achieve this it must address the following: — Simplify the tax system. It needs to be clear to business owners how to comply with the system and it must also be easier for HMRC to identify those who are breaking the rules. HMRC should be able to provide guidance that businesses can rely on and follow, rather than providing guidance that is only advisory and has been shown to be incorrect in the past. — Improve communication, both with customers and with other departments. HMRC’s helpline is missing too many phone calls and the figures must improve. When customers do reach the helpline, HMRC needs to make sure they receive the correct information, as the TTP evidence proves this is not currently the case. PAYE problems also highlight that there are communication problems between HMRC and other departments, such as the DWP. This needs to be addressed in order to prevent errors in future. — Improve the general treatment of customers. The TTP scheme highlights that HMRC is becoming increasingly heavy handed in its treatment of business owners. HMRC must treat customers as honest and must work with them to help businesses achieve their goals. — Ensure that as few individuals as possible deal with a business’s case, rather than referring a business owner from one HMRC representative to another. This would improve the standard of customer service. — Ensure VAT extended verification cases are sifted through at an earlier stage to ensure that the correct businesses are investigated. — Improve the IT systems and simplify procedures to enable alterations ie to online forms, so any alterations can be completed quickly, thereby enhancing the efficiency of the organisation.

Sources 1. Business Credit Management “Businesses should no longer rely on HMRC for ‘time to pay’” http://www.creditman.biz/uk/members/news-view.asp?newsviewID=12589&id=1&mylocation=News&chksrc= NNow4251 2. HMRC “Our Vision” http://www.hmrc.gov.uk/about/hmrc-vision.htm 3. HMRC “Customer Charter” http://www.hmrc.gov.uk/charter/index.htm 4. Management Today “Osborne to get heavy on tax relief” http://www.managementtoday.co.uk/news/1040085/osborne-heavy-tax-relief/ 5. This is London “HMRC ‘unacceptable’ as taxman ignores 44 million calls” http://www.thisislondon.co.uk/standard/article-23795466-hmrc-unacceptable-as-taxman-ignores-44-million- calls.do

About the Forum of Private Business The Forum of Private Business is a proactive, not-for-proﬁt organisation, providing comprehensive support, protection and reassurance to small businesses. The organisation aims to deliver an exceptional service to its members, adding value through the provision of practical, tailored solutions that promote business success, and by being their voice in government. November 2010

Written evidence submitted by the Chartered Institute of Taxation 1. Introduction 1.1 The Chartered Institute of Taxation’s (CIOT) is pleased to have the opportunity to submit comments to the Treasury Sub-Committee inquiry into the administration and effectiveness of HMRC. Our comments are made against the background of the Spending Review. 1.2 We have not commented speciﬁcally on matters relating to the unrepresented and tax credits. These are dealt with in the response from our Low Income Tax Reform Group (LITRG), whose submission has our support.

2. ExecutiveSummary 2.1 Performance and delivery — The CIOT shares HM Revenue and Customs’ (HMRC) objective of ensuring taxpayers pay the right tax at the right time. We support HMRC’s intention to create a leaner, more efﬁcient organisation, which uses the latest technologies to deliver a more efﬁcient service. cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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— However, we are unconvinced that cuts through the previous “significant efficiency programme” have produced efficiency savings rather than cuts in service. — We have concerns that this round of cuts will simply lead to service reductions rather than true efficiency gains.

2.2 HMRC’s spending review settlement — Unlike some other departments, HMRC has already been subject to a series of very challenging budget reduction targets since 2004. — Further cuts may simply lead to the displacement and shifting of the burden to taxpayers, agents and employers rather than overall economic efﬁciency. — HMRC’s leadership must address low staff morale and get the department focussed on essential tasks.

2.3 Whether HMRC is able to deliver the Government’s tax compliance aims — Tax revenues should not be compromised. HMRC needs sufﬁcient resources to enable it to properly identify and collect the tax revenues that are due. Properly targeted HMRC resources can deliver a very good return on investment for Government. — We are concerned that spending reduction targets are being sought without real understanding of the impact on HMRC. — Taxpayers have a growing perception that HMRC do not have adequate resources to tackle evasion. — Better incentives and ease of complying are needed in addition to penalties. — We recommend a general and fairer disclosure facility.

2.4 Whether PAYE reform is necessary — We are supportive of any discussions that aim to improve the accuracy of PAYE and reduce the burden on employers. However, the CIOT has concerns over some of the proposals and doubts over whether administrative savings would ﬂow to employers. — We think a period of stability is needed before any further signiﬁcant changes.

2.5 What HMRC’s priorities should be for the future—can it work better? — The way forward must include a fundamental reappraisal of the tasks HMRC carries out. In short, it would be better for HMRC to do six tasks really well than attempt ten it cannot fully deliver. — Any reorganisation must be truly customer centric. — There is scope to improve links between HM Treasury (HMT) and HMRC over tax policy development. — HMRC need to improve its communications with taxpayers and maximise partnerships with professional bodies. — In short, we are happy to work with HMRC to improve the efﬁciency and effectiveness of the UK tax system.

3. HMRC’s performance as an organisation and whether it is delivering its key aims 3.1 The 2007 Treasury Committee report noted that underpinning the 2004 Gershon recommendations was “the notion that efficiency gains can be achieved without an adverse effect on quality of service, and that monetary savings will therefore not be reported as efficiency savings unless quality of service is maintained”. The Committee was clearly concerned as to whether this was the case and said that more needed to be done to ensure that efficiency savings did not lead to a reduction in the quality of services delivered or products provided. 3.2 On the evidence we have seen, the concerns of the Treasury Committee were well founded. The Comptroller General’s recent report on HMRC’s 2009–10 accounts highlights several specific areas of concern and how significant numbers of staff had to redeploy to firefight problems. This illustrates well the pattern of staff being cut in anticipation of efficiencies (eg through e-filing) but in advance of those efficiencies being delivered. 3.3 We include below some typical members’ comments on some of HMRC’s key aims,7 to illustrate the problems tax agents face: 3.3.1 Aim—Maximising revenue flows: — HMRC have received a considerable amount of bad press this last year, which leads to concerns over whether it can maximise revenue flows as its reputation diminishes. 7 http://www.number10.gov.uk/wp-content/uploads/HMRC-FINAL-Business-Plan.pdf cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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— The tax gap appears to be growing. However, the figures continue to be questioned as the methodology is constantly evolving. — Tax enquiries are often prolonged which can lead to taxpayers and agents agreeing to pay amounts considered not technically due just to close an enquiry—leading to skewed HMRC statistics, including their counting of “errors”. 3.3.2 Aim—Improving customer experience: — Customer experience is at an all time low—helplines and letters go unanswered. Members report cases of taxpayers turning to them in despair having given up trying to get through to HMRC offices. — HMRC errors continue to cause problems. These were highlighted in the National Audit Office’s 2007 report8 on HMRC errors, and anecdotal evidence suggests things have not improved and may have worsened, eg recent PAYE coding notices. — Debt Management Unit (DMU) officers try to collect incorrect amounts of tax because of unprocessed mail from taxpayers. — Call centre staff and processing staff do not have the expertise to deal with involved issues, such as most agent contact. The Agent Account Manager (AAM) network is promising and needs to be fully implemented and resourced. HMRC must recognise the “multiplier” effect of working properly with agents. — Direct contact with HMRC experts is being withdrawn—HMRC require most contact to go via contact centres or AAMs. — Inadequate and poorly timed communications, so that taxpayers, agents and the media are not warned about the nature and extent of potential problems, such as incorrect coding notices and PAYE underpayments. — HMRC’s guidance is too often cited as equivalent to legislation though it is not always in agreement. 3.3.3 Aim—Reducing [HMRC] costs in a sustainable way: — Closure of local processing centres is having a knock on effect for HMRC and our members in practice and taxpayers. Time is wasted chasing mail around the country as it is moved to large processing offices without informing the sender. — Cost reductions are leading to shorter hours for help desks; as more services move online this can pose a problem to agents and their represented clients. — Cost reduction results in costs displacement within HMRC and especially externally.’ — A huge amount of agent (and taxpayer) time is spent progress chasing. If HMRC could deal with matters more quickly and do so on a “single handling” basis, much time would be saved on all sides; likewise many calls would be obviated if agents could easily check where something had got to in HMRC’s processes. 3.4 HMRC cannot be expected to deliver an adequate service yet continually reduce its resources. The solution to these problems may not be additional funds, but a more radical solutions, eg: — by reducing the numbers of areas for which HMRC is responsible—perhaps by abolishing or amalgamating some taxes such as NIC and income tax; — by allowing taxpayers and agents to “self-serve”; or — by separating out complex work and dealing with it separately. However, radical overhaul needs to precede, not succeed, cost reduction. 3.5 We must acknowledge HMRC’s success in improving its service to large business. The customer relationship manager (CRM) system has made a real difference, with a positive impact for all sides.

4. What the implications are of HMRC’s spending review settlement 4.1 We fully understand and support the need to review and where appropriate reduce spending by government departments. 4.2 However, unlike some other departments, HMRC have already been subject to a series of very challenging budget reduction targets since its formation in 2004. These have led to savings of around 27% over the six-year period since 2004 (staff numbers were 98,337 in the 2007 Treasury Committee report and 69,300 in HMRC’s latest annual report). This is not to say that further reductions are not possible—but these need to be considered in the context of past savings. 4.3 The recent PAYE reconciliations and under/overpayments issues reinforce our concerns and emphasise the need for HMRC to work in real partnership with the tax adviser community, including making more effort to help advisers understand HMRC’s problems. 8 “Accuracy in processing income tax” at http://www.nao.org.uk/publications/0607/accuracy_in_processing_income.aspx cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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4.4 A particular concern with HMRC’s discontinuing something is that other parts of HMRC, taxpayers and their agents have to do the work instead, ie there is displacement and shifting of the burden rather than efﬁciency. Cost savings may not be achieved, other parts of HMRC struggle to cope and, rather than HMRC dealing with an issue for the many, those many all have to do the task individually and less efﬁciently. An example of this is the proposal to withdraw copying mail such as coding notices to agents. This is likely to result in more incorrect PAYE deductions, more calls to HMRC and more work for HMRC and agents to get things corrected. 4.5 We see plenty of evidence of low staff morale at HMRC and the staff’s perception of weak HMRC leadership, as demonstrated by the 2009 staff survey.9 This concerns us greatly: we all need a properly resourced, skilled and motivated HMRC. There are real leadership challenges here.

5. Whether HMRC is able to deliver the Government’s aims on tax compliance 5.1 HMRC needs sufficient resources to enable it to properly identify and collect the tax revenues that are due. We fully support HMRC’s efforts to tackle evasion; no proper tax adviser has any sympathy with those who seek to cheat the tax system. It is especially important for the integrity of the tax system that HMRC have the staff resources to tackle, and be seen to tackle, tax evasion and criminal attacks on the tax system. 5.2 We welcomed the additional sum of £900 million allocated to HMRC to tackle: — avoidance; — evasion; — attacks by organised criminals; and — improve debt collection capacity. We were particularly pleased to see the increased emphasis on combating evasion. This seems to have been relatively neglected in recent years in favour of tackling avoidance. 5.3 There needs to be a reconsideration of the balance between incentives and penalties. HMRC’s new powers effectively only provide them with sticks and few carrots. Many members also point to the lack of equivalent sanctions—or compensation—where HMRC make errors. We hope there will be proper investment in helping avoid simple errors—which can also contribute to reducing the tax gap. 5.4 HMRC need to make it easier to comply. The increasing mandation of online filing causes us concerns. While more online filing does offer real efficiencies, it does bring problems (eg there have been delays in iXBRL corporation tax software for all but the smallest and largest companies). HMRC also need to maintain alternatives to online filing for those without access to secure broadband services. 5.5 A general and fairer disclosure facility might deliver useful tax revenues. The recent disclosure facilities, which have been aimed at selective groups, give the impression of rewarding evasion. The balance seems wrong. 5.6 Finally, we query the effectiveness of the litigation and settlements strategy, which seems to stifle attempts to negotiate a settlement so that the result is often an inefficient stalemate.

6. Whether PAYE reform is necessary 6.1 The recent adverse press coverage of the PAYE saga has led commentators to call for a reform of PAYE. However, given the other changes that are happening within HMRC and the efforts to reduce costs, we caution against hasty reform. 6.2 The PAYE system saves many taxpayers from the need to complete annual returns. The system is intended as a tax collection mechanism that arrives at approximately the right answer for most people, and it still performs that task very well for many people. However, we have long pointed out that changing working patterns mean PAYE needs to evolve. 6.3 Recent problems are not with the PAYE system itself, but more with: — teething problems with the new NPS computer system, which will cope better with changing work patterns; and — poor communications from HMRC over the NPS problems. Once the new system has fully bedded down these issues should diminish, provided HMRC also addresses the longstanding failure to communicate that PAYE is not guaranteed to deliver accurate tax deductions. The average taxpayer has assumed they need take no interest in their tax affairs. 6.4. The media coverage of the NPS problems might not have been as acute had HMRC adequately warned taxpayers, agents and the media of the nature and extent of the problems. 9 http://www.hmrc.gov.uk/research/ss-spring2009.pdf cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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6.5 The CIOT gave a cautious welcome to the recent PAYE consultations10 though we raised some concerns on the specific proposals on real-time information (RTI) and centralised deductions (CD). There are strong concerns over CD and doubts over whether administrative savings would flow to employers if RTI comes in but not CD. 6.6 The key reasons for PAYE reform seem to be more in connection with benefits reform, rather than income tax per se. If such reform is to take place, Government and HMRC should be quite transparent as to the reasons for reform and the advantages that will follow. 6.7 Some PAYE (relatively) quick wins might be possible, eg: — aligning income tax and NIC; — reengineering some processes rather than simply using the same forms, though electronically; and — aligning “tax months”, calendar months and pension NEST periods. 6.8 We urge caution in making further significant changes to a system which needs to bed down and which affects a large majority of UK taxpayers. A period of stability would be preferable. Any costs and benefits attributable to change and running “real time information” must be carefully explored.

7. What HMRC’s priorities should be for the future—can it work better? 7.1 HMRC needs to focus on making it easy for taxpayers to pay the right amount of tax at the right time. However, unless real strides are made towards a simplified tax code, taxpayers, advisers and HMRC will continue to struggle and HMRC’s vision will be merely an aspiration. 7.2 The current discussions on Tax Policy Making are promising but HMRC needs to ensure that Tax Policy development takes account of practical issues. This means improved links to HMT to minimise the problems HMRC (and taxpayers) face on implementation. 7.3 The resources of HMRC need to be based on what HMRC is required to achieve. HMRC’s resources could be cut considerably with the right policy changes to simplify the tax system. If resources are to be cut, then we think that the way forward must include a fundamental reappraisal of the tasks HMRC carries out. It may be that some of these are unnecessary and can be dropped without significant problems; some reengineered and delivered in a different manner; some may even be deliverable by others. 7.4 Any reorganisation must be built around satisfying the needs of taxpayers and other recipients of HMRC’s services—from education and guidance through to efficient transactions and better communications (including more email, faster post turnaround and taxpayer focussed call centres teams with proper escalation and follow-up procedures). Building the AAM network will also pay dividends and is an example of focussing HMRC’s resources. 7.5 Reflecting on the lessons to be learned from the current PAYE under/overpayments saga, HMRC need to improve its communications with taxpayers. 7.6 Providing taxpayers and agents with adequate accessible information will reduce customer contact and increase compliance. HMRC should consider: — further improvement of the HMRC website search engine; — reconsider the fragmenting of tax information over three websites—HMRC, Business Link, and DirectGov. Tax information needs to be in one place; and — keep the website(s) up to date. 7.7 The vast majority of HMRC staff we come into contact with work hard to deliver a good service, act professionally and to the best of their ability given the resources at their disposal. We are concerned that the cuts will lead to a further reduction in experienced tax trained staff, replaced by cheaper call centre staff, leaving HMRC less able to deal with complex issues. 7.8 Finally, we think there is considerable scope for HMRC to allow more recognition to qualified agents who are members of recognised professional bodies, providing them with better access to systems to “self serve”. HMRC can make more of their expertise in tax. We would be pleased to amplify our comments if that would be of assistance to the Sub-Committee.

APPENDIX THE CHARTERED INSTITUTE OF TAXATION The Chartered Institute of Taxation (CIOT) is a charity and the leading professional body in the United Kingdom concerned solely with taxation. The CIOT’s primary purpose is to promote education and study of the administration and practice of taxation. One of the key aims is to achieve a better, more efﬁcient, tax system for all affected by it—taxpayers, advisers and the authorities. 10 See http://www.tax.org.uk/tax-policy/public-submissions/2010/Improving_the_operation_of_PAYE cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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The CIOT’s comments and recommendations on tax issues are made solely in order to achieve its primary purpose: it is politically neutral in its work. The CIOT will seek to draw on its members’ experience in private practice, Government, commerce and industry and academia to argue and explain how public policy objectives (to the extent that these are clearly stated or can be discerned) can most effectively be achieved. The CIOT’s 15,000 members have the practising title of “Chartered Tax Adviser” and the designatory letters “CTA”. November 2010

Written evidence submitted by TaxHelp for Older People Background to TaxHelp for Older People TaxHelp for Older People (TOP) was set up by the Low Incomes Tax Reform Group (LITRG) of the Chartered Institute of Taxation in April 2001 to study the tax problems of older people on low incomes and to determine ways of helping them. TOP became a separate charity in 2004 and expanded to cover the entire UK, providing a free service for older people who could not afford to pay for independent tax advice. TOP provides its service through individual appointments at tax surgeries in Age Concerns or CABx staffed by volunteers from the tax profession, by home visits or by telephone advice from tax-trained staff at TOP’s head office in West Dorset. TOP’s aim is correct taxation for the individual and a level playing field between taxpayer and HMRC. TOP also runs tax awareness courses and training programmes among both the general public and the voluntary sector. Consequently it has acquired a very large corpus of information over the last 10 years on the problems and difficulties of this constituency. The Committee asks for evidence on a variety of questions but we intend to concentrate on the heads which are most pertinent to the section of the population with which TOP is primarily involved.

ExecutiveSummary 1.1 Inadequate IT and staff training leave the taxpayer and non-taxpayer open to major errors in their tax affairs. 1.2 Lack of accessible information means that millions of older people are overpaying or underpaying tax unwittingly and at considerable detriment to their economic well-being. 1.3 HMRC forms and incomprehensible guidance make compliance with tax obligations difficult for the unrepresented taxpayer. 1.4 HMRC’s reliance on information published solely on their website deprives a substantial part of the population from knowledge of their rights and obligations. 1.5 Closure of Enquiry Centres deprives them further of access to help and information. 1.6 Contact centres do not provide an adequate source of help for most older people. 2.1 Reducing staff even further and expecting IT to fill the gap does nothing to cope with answering telephones and letters, the main means of communication for older people. 2.2 HMRC should consider innovative solutions to replacing Enquiry Centres with alternative forms of High Street presence. 2.3 HMRC should dedicate a tax office to providing a service to older people staffed by officers highly- trained in the problems of this sector of the population. 2.4 Constant mergers and re-organisations have undermined management effectiveness. 2.5 Written information should be re-introduced for the benefit of the digitally-excluded. 2.6 PAYE reform should go ahead provided that it is customer focussed and carefully constructed and tested. 2.7 The priority for the future should be to avoid major changes until the present system can be consolidated and effectiveness increased. Processes should be focussed on the customer and training enhanced. More staff should be promoted to the top of the department who have spent their careers in it and really understand it. 2.8 The voluntary sector should be supported financially to enable them to supplement the services which HMRC find difficult or disproportionately costly to perform well.

HMRC’sPerformance as anOrganisation 3.1 Compliance for the taxpayer (which for the purposes of this submission includes non-taxpayers who also need to understand the rules both generally and in order not to become accidental taxpayers) requires a knowledge of both their rights and responsibilities in order to ensure correct taxation. Reliance on HMRC processes to “get it right” leave the unrepresented taxpayer open to the errors, both human and computer, so vividly demonstrated by the recent introduction of the National Insurance & Pay As you Earn Service (NPS) cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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when millions of taxpayers received inexplicable or plain wrong coding notices. One TOP client11 received 33 serial coding notices until we felt that it was probably correct. It was certainly beyond his knowledge of the tax system and how codes work to be able to sort it out without expert assistance, in this instance provided by TOP, not HMRC. A National Audit Ofﬁce report12 in October 2009 estimated that some 3.2 million people were not receiving their age-related allowances. These when given in full are worth an additional £3000 of tax-free income each year, ie £600 of extra income. Even allowing for the fact that some of these 3.2 million will have incomes too low to beneﬁt from the age allowance, TOP client records suggest that at least two thirds are eligible but do not claim. It is unlikely that anyone would willingly and voluntarily forgo an effortless extra £600 a year in their pocket. The main reasons are ignorance of the existence of the allowance and how to claim it. Another contributory reason is inaccurate HMRC data. The same report notes that HMRC themselves estimate that 2.4 million people have not registered to receive the interest on their saving gross. Again, do people happily pay unnecessary tax? This is a concrete example of why we said above that we include non-taxpayers in this submission; they too need knowledge and understanding of the tax system.

3.2 A high proportion of TOP clients do not suffer from incorrect taxation but are merely bafﬂed by HMRC forms which they need to complete. For example in the last 12 months we have helped over the telephone 4570 callers ﬁll in the P53 form to reclaim overpayment of tax on trivial commutations of small pensions. Thousands of others attend appointments with our advisers simply to get help with P161 pension enquiry forms which everyone should receive on approaching State Pension age. Every case of bereavement among our clients receives a home visit to make sure that all the tax complications are explained and sorted.

3.3 We deploy the narrative above to illustrate the need for accessible and understandable information for a large and generally more vulnerable section of the population, a section which is likely, as compared with those of working age, to have more sources of income and thus greater susceptibility to error. The Office of National Statistics estimate the over 60 population at 13.8 million of whom 2.8 million are aged 80 or over. Among this sector 9.2 million have no internet access and the socio-economic figures show that such access declines steeply with both income and age.13 60% of people of 65 or over have never used the internet (ibid.). It is therefore unacceptable for HMRC to withdraw written leaflets and rely on placing information on their website. This denies information to those most in need of it, the older, low income and unrepresented (because low income) taxpayer. The relentless trend towards digital solutions brings with it even greater exclusion for these constituents.

3.4 While many older people pay too much tax, and thus fail to take advantage of reliefs provided by Parliament, similar issues cause many to pay too little tax, often just as inadvertently and for the same reasons.

3.5 This lack of accessible information is compounded by the programme of closure, contraction or amalgamation of Enquiry Centres (ECs), leaving huge numbers, particularly those disadvantaged by disability or transport difﬁculties, without practicable recourse to face-to-face help and advice. Even when there is an EC close at hand, the complexities of telephoning for an appointment and then getting past the barrier of a ﬂoorwalker whose primary task is to direct you to a telephone or computer militate against our constituency.

3.6 While understanding that many ECs are underused or historically stranded by population shifts, nevertheless we feel that insufficient effort has been put into providing alternative methods of supplying the face-to-face support within their communities. Telephone contact centres do not fulfil that role for most older people. Many call the TOP helpline because they have failed to get through to HMRC on the telephone, failed to understand the advice given if they did or lacked trust in the advice given. Furthermore older people, especially those with more limited literacy and numeracy skills, frequently need very hands-on assistance with form-filling and complying with their obligations. Another 81 year old TOP client14 sought help from her local tax office to assist her complete a repayment claim, because being partially-sighted she could not read and fill in the R40 form. She was refused because of “lack of resources”.

3.7 We are concerned that HMRC are pursuing a one-track policy of reducing their overheads while failing to put sufficient and expeditious thought into how to replace the services lost. While it is fully understandable that leaflets are expensive to produce and update, often annually, there must be a replacement of that information to which all taxpayers can have access. Likewise it is fully understandable that estate is expensive to own and maintain, especially when underused. Nevertheless there must be a High Street presence within sensible reach across the country where taxpayers can meet well-trained staff face-to-face to discuss and resolve their problems. Even those with access to the internet can only receive generic advice from a website, not advice specific to the individual and their particular circumstances. Current delays of up to three months of replying to letters make correspondence a communication channel of last resort.15 None of the above suggests that HMRC are fulfilling the vision of their recently-published Business Plan for a “customer-centric strategy…….tailoring our services to the needs, abilities and motivations of our customers”.16 Although 11 Client ID: 38468 12 HMRC: Dealing with the tax obligations of older people 13 ONS: Internet access 27 August 2010 14 Client ID: 21349 15 Client ID: 30865 Letter from HMRC dated 14 July 2010. “As we no longer log receipt of the correspondence received, I can only assume that your letter of 26 February is stockpiled to be dealt with in due course.” 16 HMRC Business Plan 2011–15 November 2010 A) Vision cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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answers to these problems are difﬁcult, the issues must not be ducked with the usual claim of stretched resources.

What are the implications of HMRC’s spending review settlement? 4.1 Clearly the problems described above can only be exacerbated by reductions in budgets and staff. The situation is already grave, especially in rural parts of the UK and can only get worse with cuts. Telephones and letters need to be answered by people, not machines, and no amount of computerisation of processes is going to help the customer who wants specific advice and information for their situation, especially the digitally- excluded. IT systems cannot undertake home visits to the disabled and housebound. 4.2 One route to explore is greater synergy and partnership with what is already in place locally. There is estate owned by local or central Government which could be utilised more fully providing accommodation for HMRC staff to offer face-to-face facilities.17 To illustrate, TOP has no premises around the UK apart from its head office, but shares with others, eg Age Concerns, CABx, libraries, sheltered housing, community centres, to operate face-to-face surgeries. In this way we bring the service close to the public in their local market town and High Street. Flexibility of opening hours would ensure greater use of F2F facilities—working people need evening hours or lunchtimes, older people don’t like going out after dark and so on. Part-time opening if well- advertised is adequate for the vast majority. Rarely are tax problems matters requiring instant action. Less rigidity of the 9–5 approach would enable staff to undertake far more home visits. (TOP statistics for the last calendar year show that we undertook more home visits than surgery appointments for the first time, indicating a great need for this service.) 4.3 A further efficiency would be the creation of a specifically pensioner-orientated and trained tax office responsible for both telephonic and written contact with older people. The tax problems which they bring demand a staff trained in the problems of this sector of the population and capable of handling their concerns more competently than the generalist staff around the country who lack the experience. 4.4 There would undoubtedly be value in the Board and senior management having sufficient operational experience to be able to understand tax and its administration at the front line and its impact on the ordinary taxpayer who lacks any understanding. 4.5 Re-introducing some basic written information may appear at first sight to be money-consuming, not saving, but taxpayers who can fulfil their obligations in an informed way do not make expensive demands on HMRC by either phoning contact centres repeatedly, completing forms incorrectly or failing to take appropriate action at various times. Preventive action by providing clear, simple and accessible information saves money. Such leaflets should be written in clear, plain English and distributed from the premises suggested above. HMRC’s Charter states that “we will provide you with information that helps you understand what you have to do and when you have to do it”.18 How many taxpayers even have a copy of the Charter? People doing the right things at the right time makes for an economical service.

PAYE Reform 5.1 We do not have much to say on the reform of PAYE. We think that in principle it should be helpful provided that it is focussed on the needs of customers. But we should be concerned that any new IT system is very carefully constructed and tested at every stage. All too often recently the HMRC systems have been introduced before they are ﬁt for purpose. We should not wish to see any further example of this.

HMRC’sPriorities for theFuture 6.1 Ten years ago the Inland Revenue had the reputation of being one of the best run Departments in Whitehall. Today HMRC’s reputation is in tatters as one disaster has followed another. The major reasons for this sharp decline have been primarily the succession of major mergers and reorganisations with staff savings being taken long before the inevitable transitional turbulence has been allowed to settle. Meanwhile, as noted above, there have been a series of IT systems problems, where systems have been introduced before they function well enough. In addition, many senior and experienced staff were encouraged to retire early and almost everyone in the top management of the Department has come from elsewhere—either from another Government department or from outside the Civil Service. 6.2 The priority for the future should be to allow matters to settle and to avoid further mergers or reorganisations until the present situation can be consolidated and effectiveness greatly increased. Meanwhile the current processes should be reviewed in order to ensure that they are focussed on customers. This will include training staff better so that they are not only more technically competent, but also that they look at issues from the standpoint of the customer rather than from their own. 6.3 To help facilitate this, more staff should be promoted to the top of the department who have been in it for much of their careers. It is good that there should be some people at the top who come from outside and 17 The JobCentrePlus nearest to TOP head ofﬁce is now only open to the public on Mondays & Fridays. The library is shut on Tuesday afternoons & all day Thursday. The local MP holds his surgeries in the Town Hall. 18 HMRC Your Charter Nov 2009 cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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can bring in new ideas and ways of working. But to do so almost wholly at the expense of insiders means that there is a lack of real understanding of the basic Procedures and how the Department operates at its grass roots.

FinalThoughts 7.4 In order to address the Committee’s questions we have had to catalogue the negatives. But there are immense positives. There is no question that HMRC people, at all levels, seek the same ends as we do, namely understanding of the system and compliance with obligations, by the Department and by taxpayers. The Department is fortunate in having many individuals, both those experienced in the Department and those newer to it, who are competent and who desire to provide a good service to all stakeholders. We have dealt with many over the years. 7.5 There is also a powerful positive underpinning the relationship between TOP and HMRC. That is that TOP works co-operatively with HMRC to achieve a shared mission of correct taxation for pensioners. And because TOP is well-placed and engages suitably-qualiﬁed volunteers, we are able to complement HMRC’s activities at the hard-to-reach edges of society, eg face-to-face and home visits. We ask the Committee to encourage HMRC as one of its priorities to use its reduced funding to provide further ﬁnancial support to TOP, and explore imaginative ways of strengthening the partnership. This would result in a very effective and cheap way of achieving the shared aim. November 2010

Written evidence submitted by VocaLink Executive Summary — The current PAYE system is largely a computerised version of the paper-based 1940’s original. — However, today’s employment market is completely different to that of the 1940’s—which is why we have seen so many recent newspaper headlines about PAYE. — The Coalition government has proposed reform to try to bring PAYE into the 21st century. — Problems over tax codes and end-of-year reconciliations underline the need for reform of PAYE. — Reform of PAYE would help to carry forward the work begun by the introduction of the NPS and would not require signiﬁcant investment in new IT systems. — HMRC should now press forward with the reuse of the existing payments infrastructure in order to collect accurate real-time earnings information from employers. — Reusing the existing payments infrastructure would reduce complexity and compliance costs for employers. — PAYE reform on these lines would also enable DWP to gather accurate earnings information to support its welfare reform agenda.

(1) About VocaLink Having pioneered electronic payments for over four decades, many of the world’s top banks and their customers, including the UK Government, rely on VocaLink to meet their transaction needs. Our platforms process over 90 million transactions on a peak day, including 98% of beneﬁt payments, and connect the world’s busiest ATM network of over 60,000 ATMs. We provide the central infrastructure for the UK Faster Payments service and process payments throughout the Single Euro Payments Area (SEPA). Our services operate on “never fail” technology which ensures total reliability and availability, 24 hours a day. VocaLink welcomes the Sub-Committee’s decision to hold an inquiry into HMRC, which is particularly timely in the light of the government’s proposals to reform PAYE. This submission by VocaLink will focus only on some of the questions posed by the Sub-Committee, and primarily from the perspective of the government’s proposed PAYE reforms.

(2) Is PAYE Reform Necessary? PAYE reform is necessary for both general and speciﬁc reasons. The main general reason why reform is vital is that the current PAYE system was designed more than 60 years ago, in wartime, and was introduced at a time when society, and especially the jobs market, was hugely different from how they are today. In immediate postwar Britain, most men worked; few women did. Most men sought, and many achieved, a job for life, whether in the public service, a profession or private enterprise. Many employees were still paid weekly, and in cash, or by cheque monthly. Very few people had more than one job; neither the expression, nor the practice of portfolio working was known. Today’s employment market is completely different: portfolio working is common; people move in and out of employment and self-employment; they may have periods of forced unemployment, or choosing not to work; some have pensions from one job but continue to work in other ﬁelds; almost everyone is paid by cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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interbank transfer direct to their account, usually monthly (more than 95% of salaries and wages pass through the Bacs system). Yet the income tax collection system is largely a computerised version of the original 1940s paper-based system. If this seems an exaggeration, consider the fact that the system is still based on tax codes. Codes made sense in a world where almost everyone had only one job, and they were relatively easy to administer with a static workforce; in today’s world, they are not fit for purpose. What is more, they are not even necessary, but to be able to abolish tax codes requires reform of the way in which earnings information for taxpayers is collected by HMRC. This leads on to the specific reasons why reform is needed. This has not been an easy year for HMRC. It began with the problems over inaccurate tax codes; and is ending with millions of disgruntled taxpayers facing demands for additional, often quite substantial, tax payments. This is again because of the collective failure of governments over the years to address the fundamental question whether PAYE remained fit for purpose. Manifestly it is not. But like tax codes, the end of year reconciliation process, which has spawned the current controversy over “inaccurate” tax bills, could and should now be consigned to the waste-paper-basket of history. How HMRC has played the hand it has been dealt is for others to comment on. What is most important from a VocaLink perspective is that the government is proposing a way forward for PAYE which will, over time and in a planned way, convert it from an automated version of a paper-based system to something more resembling a true product of the information age. The coalition government’s proposals would remove the need for end-of-year reconciliations and P45 and P46 job change notifications entirely, and can be achieved without significant investment in new IT systems. In fact, it is designed to work with HMRC’s legacy system and, in a sense, carry forward the process of reform which has been tentatively initiated with the introduction of the New PAYE System (NPS).

(3) The Bugbear of PAYE: Inaccurate Information The new NPS system has achieved an important breakthrough in HMRC’s relationship with its customers: it now has the capability to take a single view of each taxpayer’s tax affairs. But what is still missing is the accurate information. Given the nature of modern employment patterns, and given the challenge of dispensing with exercises such as end-of-year reconciliations which are fraught with the potential for errors and delay, what is needed is accurate real-time information. That is the focus of the HMRC consultation paper on PAYE Improvement, issued on 27 July. What HMRC has proposed is to reuse the payments infrastructure that underpins the Bacs and Faster Payment systems (which VocaLink operates), through which almost all salaries are paid, as a means of conveying accurate, real-time earnings information from employers to HMRC. The reason for reusing the existing payments infrastructure in this way—apart from the fact that it is already the channel through which salaries are paid net of (estimated) tax—is that accurate earnings information can be transmitted to HMRC at the same time and by the same mechanism as the payment of tax is made. This will make the provision of real- time information as straightforward as possible. It will reduce complexity and compliance costs for employers. Separating the provision of information from the payment process would increase complexity and compliance costs, above what employers already experience in operating PAYE.

(4) Further Uses of Real-Time Information Collecting accurate, real-time information will not only allow HMRC to take NPS to its next stage of development, it will also enable government to match entitlements more closely and accurately to citizens’ circumstances. For example, it would enable accurate real time earnings information to be used to enable DWP or HMRC to pay child benefit only to those entitled to it under the proposed new regulations, and it would also enable the Student Loans Company automatically to deduct student loan repayments on an income-related basis. Most significantly, real-time information would underpin the proposed universal credit, as the White Paper 21st Century Welfare acknowledged (July 2010), and support the government’s initiatives to reduce fraud and error. The main source of mistakes in the assessment of benefit entitlements is not “operator error” ie incorrect conclusions being reached by officials about a claimant’s entitlements, but inaccurate information being fed into the system. This was most clearly evident in the administration of tax credits where changes in personal circumstances, which are crucial to the level of entitlement, were logged way behind their occurrence, creating backlogs of over and underpayments and leading to real hardship for claimants.

(5) Conclusion What has bedevilled tax collection (and beneﬁt payment) in recent years has been the timelag in the collection of information about a citizen’s circumstances. This alone has led to underpayment of tax, with subsequent clawbacks; overpayments (with the need to refund tax collected); miscalculation of entitlements; and fraud and error on a huge scale. The answer to these problems is the collection of accurate real-time information on earnings. The government is proposing to reuse the Bacs system to piggyback on the payment of salaries and tax in order to pass real-time earnings data to HMRC. This will lead to much greater accuracy in the tax and cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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benefits systems, and to significant savings in back-office costs, as functions which are needed to cope with the implications of a creaking PAYE system (coding, reconciliations, fraud and error) are greatly reduced. There will also be savings in the compliance costs of business. It should therefore be a priority for HMRC to take forward PAYE reform based on the reuse of the existing payments infrastructure feeding accurate real time information on earnings into HMRC’s New PAYE System. In doing so, it is vital that it works co-operatively with DWP, so that the full benefits of the collection of real- time earnings information can be realised by the welfare system as it moves towards the government’s stated goal of a universal credit. The back-office savings which this will engender will also help HMRC to work within its spending review limit. November 2010

Written evidence submitted by The Association of Taxation Technicians (ATT) Executive Summary Performance and delivery of key aims The ATT believes that the performance of HMRC is below that which could be expected from a fully funded Government department and this leads to a failure to deliver all of the key aims of HMRC.

Implications of the spending review settlement The ATT considers that the spending review settlement, resulting as it will in reduced staff numbers, will only exacerbate the situation.

Ability of HMRC to deliver the Government’s Aims on Tax Compliance The reduction in experienced staff over the past few years, coupled with the proposed further decrease in numbers will make it extremely difﬁcult for HMRC to deliver the Government’s aims on tax compliance.

PAYE Reform The introduction of the new NPS computer system brought its own teething problems, but needs to be allowed to settle-in and prove its worth. Further tinkering with the system, plus the fundamental change which is proposed, may bring further problems to the system before any real improvements are seen.

HMRC’s priorities for the future HMRC has a wide and diverse brief. It has been overwhelmed by changes imposed on it. It needs time to consolidate and ensure all its systems are working correctly before any further changes are undertaken. It also needs to ensure that its staff are well trained, have better job satisfaction than at present and consider revisions to its method of operation to achieve those goals.

Performance & Deliveryof Key Aims 1. In its vision statement HMRC refers to “Customers”. Customers can go to another provider, but a taxpayer cannot unless they emigrate. How does this vision fit with customer experience? There is little point in projecting professionalism, but allowing the basic infra structure to fail through lack of funding for staff and training. 2. One of the main problems experienced currently is the inability to contact someone at HMRC who can solve the problem or help the taxpayer. Agents have a dedicated Help Line in relation to the Self Assessment system which generally works well but within the limits of the training given to Call Centre staff. Taxpayers do not have the same facility, it can take a considerable period of time for the telephone to be answered, only to be faced with a recorded message extolling the virtue of the website, but frequently cutting taxpayers off. Calls in relation to corporation tax are similarly difficult. For employers and agents acting as payroll bureaux, there can be an even greater problem. Callers are kept waiting for a considerable time, often the call centre staff are unable to help requiring a letter to be sent when the delay in answering is even more significant. The following examples illustrate this situation: — The National Insurance Office, Residency Section, suggest a faxed request for a ruling on contribution liability on foreign contracts. A faxed response can take up to three months. It follows that decisions have to be taken based on the understanding at the time which may prove to be inaccurate. Lack of assistance in these circumstances could be a contributory factor in relation to under declaration reported in the recent NAO report. cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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— CAR Residency declines to give individual rulings on residence, telephone contact is difficult and although e-mails are acknowledged and a response promised in five working days, this does not happen. A request for clearance in relation to payments on termination of employment can take up to five months, by which time the payment has been made. 3. Many professionals mourn the passing of the local Inspector who would be able to offer advice far more speedily and although the local account manager initiative may go some way to alleviating the problem each account manager is expected to cover a considerable area and some areas have had no support for some time. 4. Continuing the theme of communication, the HMRC website “What’s New” section is excellent for real time news, but other searches can produce out of date information and often the search engine is unable to locate the specific guidance sought even though the search parameter is explicit. There are problems with regard to the Self Assessment statement of account for individual taxpayers, particularly in relation to repayments, where often it states that there is a repayment due even though it has not been made in accordance with the request already submitted or it shows that the repayment has been made but the cheque has not actually been issued. 5. Another area of concern is the registration of agents to act for taxpayers. Although it is possible to do this on line, this has some drawbacks and many agents prefer to submit a paper form 64–8. This work was centralised in the CAA Team at Longbenton in the interests of efficiency compared to the forms being submitted to the office dealing with the taxpayer. Unfortunately, the turnaround times for these registrations is again considerably in excess of that predicted by HMRC. 6. The above examples fairly demonstrate the current poor performance of HMRC dealing with many aspects of correspondence submitted. This must be due, in part at least, to cuts in staff numbers and any further cuts will only make the position worse. 7. The average taxpayer assumes that when HMRC tells him something, or issues a Notice of Coding, it will be correct. When he receives a self assessment calculation, he has a right to assume its accuracy. The following are typical examples: — The pensioner taxpayer who forgot to show the tax paid against his pension on his paper Return. No reference to the PAYE record can have been made by the processor at HMRC, as the SA Calculation as issued showed a £2000 underpayment, the exact amount paid under PAYE. This is not an isolated incident. — The typical Mondeo Man, with company car and fuel: Forms P11D are submitted by the agent in May, with exactly the same car details. The taxpayer receives a new code in January, assumes the agent has a copy, and is very happy that he has £70 a month less tax to pay. Agent reviews the liability at the end of the year, phones HMRC to ascertain the reason for the new code, and is told it is based on P11D. — HMRC routinely issues a one and a half page letter indicating that it now thinks annual Returns are not necessary. The letter does say that changes may require a Return. Mondeo Man however will only see the first paragraph and act accordingly. 8. In view of the economic crisis HMRC introduced a system of “Time to Pay” arrangements. Originally, this worked well in the sense that HMRC were very flexible with these arrangements. This does not appear to be the case now as it is now more difficult to agree such arrangements. Also, liaison between the Debt Management and Banking Section with other sections of HMRC is not working well as the following examples demonstrate: — A Return completed with a Remittance Basis Charge and subsequently amended, held in the unopened post at CAR Residency. Staff were unable to access, and cannot accept a faxed copy. Debt Management Unit threatened legal collection action. Only the intervention of the line manager at CAR Residency got a one month extension. How would a non represented taxpayer have fared? — A recent case which obviously has other circumstances attached to it, involved a payroll bureau which owed HMRC, but which also had cash in another account with HMRC. Legal Department erroneously placed a Creditors Notice in the local newspaper, resulting in embarrassment, and lost reputation for the payroll bureau. This is not an isolated case.

Implications of HMRC’s Spending Review Settlement 9. Many of the failings described above are caused by lack of resource. The introduction of the Self Assessment system approximately 15 years ago changed the responsibility of calculating the taxpayers liability from the then Inland Revenue to the taxpayer. The old systems which at that time were familiar to Inland Revenue staff and tax agents were discarded and great reliance placed upon computerised systems. These changes should have produced significant efficiencies and cost reductions. Unfortunately, cuts were made in anticipation and not as a result of the efficiencies achieved resulting in the loss of many experienced tax staff at all levels. Part of the problem appears to emanate from poor appreciation by software writers of the diverse nature of the needs of HMRC and its customer base. Changes were introduced without adequate testing resulting in failures of the system at critical times. HMRC does not appear to learn from prior mistakes and cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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appears set on introducing a further change to the PAYE system before allowing the new NPS system to bed down so that initial teething problems can all be eliminated and the system prove its worth.

10. Self Assessment Returns are subjected to a “process now check later” system which means that a repayment may be made without a “sanity” check. Entries in the “Additional Information Boxes” of Returns are not reviewed when the Return is processed causing later amendments. This may be due in part to the software not ﬂagging up the additional information, or lack of staff to process at the time.

11. Software may be commissioned to extract information from Returns and calculate a tax code for PAYE. The fact that this results in many instances of incorrect code numbers may again be in part a software failure but also a lack of understanding by HMRC staff. For example, an individual with two code numbers, one giving full age allowance, only available if income does not exceed £22,900, and code DO meaning tax at 40%, which only applies for taxable incomes in excess of £37,400. The basic lack of attention to detail was demonstrated in the main issue of code numbers early in 2010 when it became apparent that old data had not been cleansed from the system prior to implementation, the NPS system.

12. It is accepted by all that tax is not simple and if further Budget cuts are suffered by HMRC the funds to ensure the systems are efﬁcient, or made efﬁcient, will not be available.

Can HMRCDeliver theGovernment’sAims on Tax Compliance

13. The ﬁrst question to ask is what is the Government’s view of “Tax Compliance”? There used to be a clear division between tax avoidance, which was completely legal, and tax evasion, which was and always will be illegal. The term “avoision” is used to describe this blurred position.

14. In “Tax Policy Making: A New Approach, (June 2010),” the Government sets out the measures it intends to take to prevent abuse of legislation. Given that the Complex Tax Return Unit has been replaced by the High Net Worth Individuals Unit, with fewer staff, and fewer taxpayers covered, it is difﬁcult to see how HMRC, with present and projected resources, will be able to effect compliance and police the income tax, corporate tax and VAT taxpayer base to extinguish this perceived abuse.

15. The recent announcements with regard to the number of reconciliations prepared by the new NPS system covering approximately 6,000,000 taxpayers for the years 2008–09 and 2009–10 and the further admission by HMRC that there were approximately a further 18,000,000 unreconciled cases for earlier years demonstrates that HMRC has been unable to carry out the necessary reconciliations on an annual basis. The only reason for this must be a lack of resources, be it experienced staff or computer backed facilities. Experience of the recent reconciliations is fairly limited at the present time, but many of those seen to date are either totally incorrect or reﬂect earlier errors by HMRC.

Is PAYE Reform Necessary?

16. The ATT has already made a detailed submission in relation to the proposals set out in the paper by HMRC suggesting PAYE reform some time ago. It is accepted that, when the PAYE system was introduced in the 1940s, the employment market in the UK was very different from that which applies today. The work force then tended to remain in the same employment for many years and only had one employment at a time. Today, there are many more job changes than previously and many people with more than one source of income subject to tax under PAYE. The fact that PAYE operates by reference to the taxpayers National Insurance number means that if an individual does not have a National Insurance number they may never get into the system in the ﬁrst place. If the National Insurance number was critical to all activities in the UK, as the social security number is in the USA, it would be easier to ensure that all employees are registered with the PAYE system.

17. The HMRC proposals with regard to the reform of PAYE are radical, but we believe it will be extremely costly to implement and, whilst the provision of “real time information” could be of assistance to HMRC in detecting beneﬁt fraud, the cost to employers in providing this information, in both time and money, could be extensive. We are also concerned, in view of previous performance, that HMRC’s systems will be unable to cope with the amount of data which they would receive on a weekly, monthly or even irregular basis of all payments to staff.

18. The second half of the proposals by HMRC refer to a centralised deductions unit where HMRC would be responsible for all of the calculations and payment of wages and salaries to all employees in the UK. Whilst it is agreed that the BACs system is currently used by many employers, it is certainly not used by all and, if this was to be adopted as the only method of payment of salaries and wages, is there evidence that the system could cope? The paper does not provide any evidence in support for this proposal.

19. We recommended in our response to HMRC that no further change to the PAYE system should be considered at the present time as the most recent change, the introduction of the NPS system in mid 2009, needs the time to bed down and prove its worth before any further changes are considered. cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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HMRC’sPriorities for theFuture 20. The brief of HMRC is very diverse, being the major collector of governmental funds as well as being responsible for paying tax credits to those on “modest” incomes. A collect with one hand and pay out with the other syndrome. Praise is due to many HMRC staff trying their best to cope with the system but frequently without the support and job satisfaction that they deserve. The changes introduced in working practices have removed much of the job satisfaction previously available to front line staff and the pressures put upon them are such that staff moral is at an all time low. The ATT believes that many front line staff are not sufficiently trained in tax to understand the questions or problems posed, in particular by experienced tax agents, which only adds to the frustration of dealing with HMRC. The policy of moving work around the country to where staff are available may seem attractive within HMRC’s terms, but the lack of consistency of the individual within HMRC dealing with a particular matter causes frustration to tax agents, inefficiencies within HMRC, extra costs for HMRC and contributes to the poor staff moral at the present time. 21. The priorities for the future must be to consolidate and avoid further changes, to improve staff knowledge and staff training so that their understanding of the system is not just simply pressing the button on a computer and provide a means of improving staff moral. Much of this is down to work practices, some of which we believe could be refined at no actual cost to HMRC, but the improvements which would follow in efficiencies and staff moral would actually prove to be a cost saving. It seems that the functions of the required software could be improved if software writers work side by side with experienced personnel so that the software fits into the jigsaw puzzle that the taxpayer diversity and complications of the tax system present much better than it appears to do at present. There would also need to be more rigorous testing of software before it actually went live. 22. Reference has been made previously to turnaround times for HMRC dealing with various items of correspondence. This must be addressed urgently as delays in responding to correspondence can be critical in some instances but in any event delays in dealing with correspondence involve, for example, a delay in changing a code number which could result in excessive tax being deducted for some considerable time or, alternatively a repayment actually due being delayed. 23. The ATT is concerned that these priorities will not be met by HMRC if there are further cuts in resources as the present shortcomings will not be adequately dealt with as the staff numbers will not be sufficient to catch up with the work which HMRC has failed to do properly over a number of years. HMRC cannot afford to lose any staff, let alone experienced staff who seem to be the ones who go when a redundancy programme is implemented.

Conclusion HMRC is an extremely complex organisation, it is the major collector of funds for the Government and, therefore, for Government to impose further cuts is likely to be counter-productive if HMRC are unable to operate efﬁciently and effectively. Further major changes such as are proposed within the PAYE system should at least be deferred. November 2010

Written evidence submitted by Martin Lewis (ex-HMRC employee) 1. Headlines This submission is made by a recently retired (June 2010) member of staff of HMRC. It describes the management culture of HMRC and suggests that, unless it is changed, HMRC will struggle to improve on its performance. In HMC&E in the late 1980’s the “Next Steps” process empowered middle managers and saw them becoming accountable for their decisions. This seems to have by-passed the former Inland Revenue. HMRC is run poorly, on a command and control basis.

2. Executive Summary — HMRC’s culture originates in the main from the Inland Revenue (§5). — SCS level managers in HMRC discourage middle managers (Grade 6 and 7) from providing upward negative feedback to them (§6). — SCS level managers in HMRC are largely unaware of the difﬁculties, problems, and obstacles that the bulk of the organisation faces (§7). — The role of middle managers is to meet targets and not to provide reasons why targets are not met (§7). — Staff are disillusioned and feel HMRC is becoming dysfunctional (§7). — There are exceptions in smaller more specialised areas (§9). cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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— Operational performance is driven by targets rather than desired strategic outcomes. The department is process driven and not customer focussed (§11). — A tax inspector or compliance ofﬁcer brings in additional revenue of ﬁve to ten times the cost of employing him (§13). — The deterrent effect of the compliance effort depends on the taxpayer believing that he and others will get caught (§13). — The NAO should check that HMRC has a system which ensures the right outcome of the largest of tax settlement cases (§13). — Cultural reform involving empowerment and accountability is needed and it starts at the top. (§15).

3. Introduction I retired from HMRC in June 2010 after 38 years service, the bulk of which was in HM Customs & Excise. I undertook work on Tax Compliance (including VAT and Large Traders) and latterly I contributed to HMRC’s central Research and Analysis capability. I was also an Internal Management Consultant and an elected Trade Union Ofﬁcial, both locally and nationally. That said, this contribution is my own and is neither prompted nor inspired by PCS.

4. Next Steps In the late 1980’s the Civil Service underwent reform under the “Next Steps” programme. As a Regional Trade Union Ofﬁcial, what I saw of this in HMC&E was: — That centrally produced written operating “instructions” to staff became “guidance” to staff; and — Middle managers (SEO to Grade 6) were empowered by this greater freedom and became accountable for their actions and decisions. Managers of all grades could no longer blame “the centre” but had to be able to justify what they did—both upwards (to their own, more senior managers) and downwards (by way of explanation, to their staff.) This was a signiﬁcant cultural change in HMC&E. I think this aspect of Next Steps in HMC&E was widely welcomed.

5. Merger& HMRC HMRC was formed in 2005. As well as an administrative merger, there was a cultural coming together too. It has evolved into what HMRC is today. Most of the people now at the top of HMRC are either ex-Inland Revenue or from other areas of public service and several from the private sector. My perception is that HMRC’s culture originates in the main from the Inland Revenue.

6. TheCulture in HMRC My ﬁrm perception is that senior managers in HMRC (at SCS level) discourage middle managers (at Grade 6 and 7) from providing upward negative feedback to them. Senior managers regard middle managers as responsible for implementing the operational arrangements they are charged with. Middle managers are discouraged from reporting back to the top “bad news” or news that projects and initiatives are becoming unmanageable or are going awry. Such reports are regarded as “negativity” and will damn career progress.

7. TheOutcome of thisCulture Thus at the top senior managers are largely unaware of the difficulties, problems, and obstacles that the bulk of the organisation faces. They know little of the scale of unanswered phone calls, and the unopened letters, the data quality of tax payers’ records and perhaps most importantly the nature and quality of the service provided on a daily basis to the taxpaying public. The role of middle managers is to struggle vainly and to provide the appearance that their targets have been met. They are not expected to provide reasons why targets are not met, they are just expected to get on and meet them. Staff are disillusioned because their knowledge of the way things really are, does not filter up to the top of the organisation in any meaningful way that would see prompt and effective action being taken. Instead they have to implement more ill-informed initiatives. Their view is that the organisation is becoming more and more dysfunctional and less fitted for purpose.

8. Evidence ofStaff’sViews andSeniorManagersResponse to them Staff surveys show low staff engagement, that staff believe their organisation is poorly managed and that senior managers do not provide leadership. HMRC’s position on the departmental league table is close to cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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the bottom. The CEO (who originates from DWP) reportedly feels this is because middle managers are not communicating her message to staff about the change programme. Senior managers do run three internal initiatives which enable staff to communicate with them direct: — There is an email route where questions and answers are published on a staff forum visible to all on the internal Intranet. — There are monthly telephone call-in opportunities, where one or two of the senior managers in turn take calls from staff mainly in their own business stream. — There are “town hall meetings” when senior managers will visit a locality and address a few hundred local staff and hold a question and answer session. These have become tightly managed events. Rarely will staff feel that issues raised are properly resolved. If they are resolved it will be a narrowly focussed issue with a seemingly straightforward answer. Otherwise it is a recital from the top on the way things have to be. Senior managers say they welcome these events, but that is not the impression one receives when watching them and listening to them.

9. Exceptions I have described a general culture—one that is stiﬂing, unresponsive and often unpleasant to work in. It also engenders cynicism. But there are exceptional areas, mainly the smaller and more compact and more specialised ones where the headcount allows much more face to face communication. In turn this can allow for a somewhat more enlightened atmosphere. Examples might be the Large Trade Control area and some of the smaller central functions like policy formation. But these are the exception rather than the rule. The general culture described applies to the three large areas where the bulk of the staff work: — Processing (Customer Operations); — Call Centres (Customer Contact); and — Compliance.

10. Relevance to theSubcommittee’sEnquiry The subcommittee’s focus is on: — Organisational performance and delivery. — Spending review settlement. — Delivery of Tax compliance aims. — Reform of PAYE. — Future priorities.

11. Organisational performance and delivery The twin problems of (1) senior managers not wishing to hear about operational problems and (2) middle managers being discouraged from reporting them up the chain, mean that operational performance is driven by the apparent achievement of middle ranking targets rather than desired strategic outcomes. The department is process driven and not customer focussed For example: — In call centres, it is more important to answer and deal with a call quickly than it is to get to the bottom of the issue the taxpayer is raising. Staff are instructed not to deal with visible errors in taxpayer records unless the tax payer asks about them. Operational performance and delivery will continue to be stiﬂed and whilst this “command and control” environment (without upward feedback) continues. Staff need to be empowered and accountable for what they do—then they will be able to do the job properly.

12. Spending Review Settlement Whilst I have strong views on this topic, it is not the main focus of this submission. I will leave others to deal with it. That said, a smaller and unreformed HMRC will do even less well than it does now.

13. Deliveryof Tax Compliance Aims These aims are many and various ranging on the one hand from facilitating cooperative and willing taxpayers to navigate their way around a complex system, to on the other hand detecting and addressing serious and large scale tax avoidance and evasion. HMRC could do much better at evaluating the many risks it faces and then deploy its staff in accordance with those risks. If it were better at handling routine enquiries from non-risk, so called “low value” customers, cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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it would be able to devote more of its effort to compliance checks on taxpayers who present a great risk and where the tax involved is more. The bog-standard tax inspector or compliance officer brings in, and has always brought in in additional revenue, from five to ten times the cost of employing him, depending on the nature of his work. And this extra revenue is less often from evasion and avoidance and more often from routine accounting errors which have fallen in the taxpayer’s favour. Fewer staff collecting less additional tax begins a vicious cycle where the honest tax payers begin to feel less inclined to be honest if his perception grows that “everyone’s at it”. The deterrent effect of the compliance effort depends on the taxpayer believing that he and others will get caught. There has been recent controversy about a tax compliance settlement involving Vodaphone. HMRC needs to recognise the growing expectation of openness and accountability in public life. Whether the sum involved in the case is £6 billion, £2 billion or £1 billion these are very large sums of tax. So large are they that they will affect public expenditure cuts. People’s direct tax affairs have traditionally been shrouded in privacy, something which suits the taxpayer and is convenient (but not necessary) for HMRC. The National Audit Office should satisfy itself that the public policy risks involved in the largest of tax settlements have been recognised and evaluated by HMRC and that it has systems to ensure such risks are mitigated. For example, HMRC should exercise due propriety and take sound legal advice and be able to demonstrate to the NAO that it has done so. Whilst the NAO is not there to second guess the size of individual taxpayer’s payments to HMRC, it is there to assure Parliament that HMRC has effective systems in place which ensures the right outcome of the largest of tax settlement cases.

14. Reform of PAYE My operational experience was not in PAYE, so I do not have a well-informed view. But I note that since retirement I have had to complete more tax returns in the last six months that I have ever done before. The PAYE system regards me as a complex taxpayer just because I have two sources of income—an annuity as well as an occupational pension. I wonder what will happen when I begin to receive a State Retirement Pension too.

15. Future Priorities Any failing organisation needs to take stock of its strengths and weaknesses and decide what it is in business to do. HMRC has a very wide range of responsibilities required of it by Parliament, ranging from — Helping the “ordinary Joe” to pay his tax, to — The enforcement of the minimum wage, to — The taxation of imported freight, to — The administration of tax credits, to — The detection and prosecution of criminal attacks on tax rebate and refund mechanisms, and — The provision of sound, high quality analysis on tax measures to Ministers. Whilst HMRC is not free to choose what it does, it is responsible for doing what it does properly and to deploy is resources efﬁciently and effectively and with an eye to risk. So long as senior managers turn a blind eye to many of the risks that its staff (and middle managers) know about, the prospect is bleak. Cultural reform involving empowerment and accountability is needed and it starts at the top. November 2010

Written evidence submitted by Lin Kiernan I work in the private client team at Mills & Reeve LLP solicitors. My job involves trust and estate administration, together with the preparation of personal tax returns, so I am acting for individuals (with a wide range of circumstances/sources of income), trustees and executors. I have around 25 years’ experience in dealing with personal tax matters. I am personally ﬁnding it increasingly difﬁcult and frustrating to liaise with HMRC on behalf of my clients. I gather that the standard response time for postal correspondence is now two months minimum, as they have such a backlog of post. When calling (even using the so-called “dedicated” agent lines), I am no longer surprised when I hear the message telling me to call back later. If I do manage to speak to a human being, after at least three minutes of recorded messages, more often than not that individual is not knowledgeable enough to help me with my query. cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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Another source of annoyance is where I am not able to speak to the person who has written to me, because that person/team cannot take telephone calls! The best the operator can offer is to send an email to the individual/team concerned, requesting that they call me back. Even if my message has been passed on, it causes delays and confusion. The original message often gets diluted or sometimes completely garbled. Any kind of communication with HMRC now seems to be more time-consuming and inefficient than ever, and I get the impression that the organisation has dumbed down considerably over the years. The time- consuming aspect is a serious matter when you consider that my firms fees are calculated on a time cost basis. The inefficiency of HMRC is costing my clients money, in more ways than one. I would like to point out that this is my personal opinion and that this is not a submission on behalf of my firm. November 2010

Written evidence submitted by Michael Blake I should like to make comments to the sub committee about the administration and effectiveness of HMRC. I have 35 years experience of working with the UK tax system both within the public and private sectors. I have worked for the last 10 years as a specialist tax consultant, before that I worked for 10 years as a tax specialist for two of the largest accountancy firms in the UK and before that I worked for the Inland Revenue as one of HM Inspectors of Taxes. My experience of dealing with HMRC is that: 1. The department operates inefficiently at almost every level where it comes into contact with its “customers” ie taxpayers and their advisers. 2. This state of affairs has existed for many years but appears to get worse as the years progress. 3. HMRC senior management appear either to be unaware of the difficulties experienced by their “customers” or do not care about them. It seems to me that the difficulties are caused because: 4. HMRC does not staff its call centres adequately. This is evidenced by the number of calls that go unanswered or are terminated by the caller because they are fed up of waiting for a reply. 5. Call centre staff and other HMRC staff who are expected to deal with the majority of straightforward and non contentious tax issues are not trained adequately to do the work that they are expected to do. This results in an enormous amount of duplicated work in the department. For example when I reached 60 last December I started to receive two small pensions in addition to my current earnings. HMRC needed to issue coding notices to the two pension providers. This should have been a very simple task but it took three attempts before HMRC got it right, ie the work was done three times instead of once. 6. HMRC does not staff other offices outside of the call centre system adequately. This results in correspondence sitting unanswered for several weeks, resulting in further inefficiency as HMRC staff have to deal with the “customer” chasing for a reply. Not so long ago the Inland Revenue had a target of replying to the majority of written enquiries within two weeks and all correspondence within eight weeks. It now seems rare to receive a reply to any written correspondence before six to eight weeks have elapsed. When chasing for a reply HMRC have often no idea of where the unanswered correspondence is as it appears to be routine for correspondence to be moved around the country with no record kept of where it has been sent. 7. HMRC does not train staff dealing with technical issues outside of call centres adequately and is not supervising their work adequately . For example it is common to receive letters from officers dealing with technical issues that contain statements and opinions that are completely wrong and run contrary to HMRC own published guidelines. This would not happen if officers were properly trained and there was a system of peer review which meant that correspondence was reviewed for obvious technical errors before it left HMRC. This peer review system is mandatory in private sector firms and used to be accepted practice within HMRC but seems to have been abandoned several years ago. This poor training and supervision results at best in inefficiency as HMRC have to spend perhaps three or four times the amount of time on dealing with an issue than they would if they got it right first time, and at worst injustice where unrepresented taxpayers are taxed incorrectly. I am not talking here about complex technical issues where there is room for a difference of opinion but on basic matters which you would not expect anyone properly trained and supervised to get wrong. As noted above I believe that these weaknesses in the present system lead to huge inefficiencies and duplication of work within HMRC which is not measured and which HMRC senior management are therefore either unable to recognise as a problem. I am not alone in experiencing these difficulties and shortcoming. The nature and extent of these problems could be verified by talking to any small or medium sized accountancy firm. They could also perhaps be confirmed by talking to HMRC staff themselves, assuming that they were free to talk candidly. The current difficulties within HMRC are also evidenced by the worryingly low level of morale and job satisfaction within HMRC revealed by the most recent staff surveys. cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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If staff numbers and budgets within HMRC are reduced further I suspect that the problems described above are likely to become worse rather than better. HMRC most pressing priorities for the future should be to review its current systems to ensure that all offices are adequately staffed, and that the staff in those offices are adequately trained and supervised, so that they are capable of getting most of what they do “right first time”. November 2010

Written evidence submitted by David Marsh Firstly let me say that a response deadline of 17 November is far too short for such an important enquiry and I think the deadline should be extended by at least a month + more publicity given to the existence of it. I started my career in “Tax” with HMIT and left the dep’t as an FT HMIT. I have a total of 39 years experience and deal with taxpayers and business’ that are genuinely “small”—not the upper limits of the governments idea of “small” (500 employees and a multi-million turnover). My clients have t/o’s up to £1 million and either no employees or just a handful. To do justice across the full range of interaction with HMRC would take pages and pages of case histories and details. The “bottom line” is that the quality of HMRC service has never been so appalling—and by service I don’t just mean service to taxpayers and accountants who are trying to get their Tax affairs sorted, I mean service to us all in terms of selection of cases for enquiry and how HMRC d/w those enquiries. Access to HMRC staff who actually know what they are doing is impossible. Contact has to be at the call centre and the majority of those staff simply don’t have the knowledge and/or training and/or authority to know what to do and how to d/w the problem. We do have an agent access line, but the general public will on many occasions have to wait 45 minutes to get through—totally unacceptable. On many occasions delays measured in months not days occur when waiting for a response. When you telephone (the call centre) they have no idea why there is a delay, they often say the letter I sent is not on record as being rec’d and the best I get is “I will send them an email”. I need to be able to speak to the officer actually dealing with the matter. Even although the agent contact details are on every Return I file I have had too many cases where HMRC have (wrongly) just amended a liability (eg when they thought the state pension was more than had been declared). I then get a call from the client, who assumes that HMRC could not possibly be wrong (what a joke!!!!) and then want to know why I got their Tax Return wrong. If the officer who thought the Return was wrong had just phoned me, I could have reviewed the matter with them and we would all have been spared a lot of grief and a huge waste of time. But they don’t!!! You are already aware of the almighty cock-up with the coding notices. I strongly urge you to read Alex Byrne’s article in Taxation magazine dated 4 November. It is HMRC’s fault that these overpayments and underpayments have arisen but they are yet again trying to avoid their responsibility by saying that taxpayers should have been aware of the wrong Tax codes. As Mr Bryne points out, if taxpayers could actually understand their tax codes why did millions of them who were overpaid not claim their repayments!!!!!!!!!!! Investigations. At District level (if there is such a thing these days) they are a waste of time. If what I am told is correct, the cost/yield ratio is less than 2:1. Why? The staff are not properly trained. The staff don’t have the right aptitude. The enquiries are selected by “risk assessment” done by a computer from almost non- existent details. The staff have little or no back ground information on the person. What little they do have is often wrong or incomplete. HMRC decided to adopt a policy of no composite negotiation. That has resulted in a huge backlog of unsettled cases. I understand that common sense has now prevailed on that point. HMRC can’t risk doing no investigations at District level. What they need to do is use proven successful investigators—and pay them properly. The amount of background information available to the IR is vast and so each investigator should have a team of say two staff doing the research. If my personal experience is anything to go by, they should easily get at yield of 10:1. I know that HMRC have set up a high net worth unit. It is supposed to be staffed by more experienced officers. The problem there is that they don’t know when to close a case. “Flogging a dead horse” is a waste of everyones time. I don’t have any experience of the larger company cases or the tax avoidance cases. From what I read, HMRC are having more success with them. I suspect the reason for that is that they are using trained and experienced staff. cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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When HMRC have computer failure, staff problems, relocation and dozens of other reasons for not doing what they should have, we have to accept it with no meaningful recompense. When we have those same problems our clients are subject to ﬁxed penalties. In general HMRC’s method of dealing with their failures is to legislate the problem away.

All of you should read the article by Simon McKie in Taxation magazine dated 14 October and Philip Fishers article , also in Taxation dated 7 October. November 2010

Written evidence submitted by Keith Aiden

HMRC’s Performance as an Organisation and Whether it is Delivering its Main Aims

1. I do not believe that HMRC has improved the extent to which individuals and businesses pay the right amount of tax.

2. This is delivered by highly qualiﬁed accountants, (Many not all I admit) have the necessary knowledge and experience to make sure that the right amount of income is declared and reliefs applied. Without which unrepresented taxpayers and taxpayers represented by lion tamers either pay to little tax or do not claim the reliefs they are entitled to. HMRC has repeatedly refused to recognise the important role professional accountants play in the smooth operating of the tax system and does not even have an idea of which accountants are good or bad.

3. HMRC needs to support good accountants by an increased awareness of when erroneous information is ﬁled. Much of this is apparent from the accounts which HMRC seem determined to remove the requirement for. HMRC also needs to improve its enquiry success often pursuing cases where no extra tax is found and missing the blindingly obvious cases that would result in an easy recovery.

4. Communicating with HMRC is a tortuous affair, you cannot get through on the phones and when you do you cannot speak to anyone who knows about tax, instead many staff (not all) are deliberately awkward and the helpful ones can only give you another telephone number to ring. The post is not much better, as I write, HMRC have not opened Augusts post and very often they lose important correspondence or only manage to reply to one point in the letter ignoring the rest. Very often we ﬁnd the only way to elicit a response is to submit several complaint letters. There are serious problems with HMRC’s post room!!

What theImplications are of HMRC’sSpendingReview

5. We welcome the additional funds available for combating tax evasion, although if these funds are directed towards PAYE earners paying 50% tax then it will be a wasted exercise as those on PAYE have little scope for altering their tax liability, and are more likely to submit false expense claims which is not HMRC’s issue. If spent wisely it would not be unreasonable to expect a tenfold increase in recovered lost revenue. Much would depend on HMRC’s ability to spot tax defaulters for which it appears to have no reliable mechanism. Better use needs to be made of money laundering reports and improved communication as by the time field officers get the information it is either to late or so filtered as to be of no real use.

6. HMRC cuts not a good idea—this is a bit akin to getting rid of your Sales and Production staff as a strategy for growth. There is plenty of unpaid tax out there so HMRC should be increasing its overall budget. Cutting back merely encourages more evasion as there is less chance of being caught.

Whether HMRC isAble toDeliver the GovernmentsAim onTaxCompliance

7. Much depends on its ability to clamp down on evasion which is currently rife. Compliance as already stated is delivered by good accountants, not HMRC. It would be cost effective for HMRC to support good accountants by chasing the bad if it knew which were which.

PAYE Reform

8. Why? This is the least of HMRCs concerns most PAYE is operated correctly when processed by competent agents the collection may be a concern, but HMRC already have effective ways of collecting that they do not use. The main weakness in the system would seem to be HMRC again, continually getting notices of coding incorrect and failing to enforce against defaulters.

9. OF large concern however are umbrella companies where large amounts of tax are missing through excessive expense claim allowances. The reason these are not clamped down on are that they are predominately used by the Banks and Government Departments. cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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What HMRC’s Priorities should be for the future? 10. The answer is: 11. Less rapid and poorly thought through change—the system is not keeping up with the pace of change causing major non compliance from tax payers and the denial of problems from HMRC eg the construction industry scheme—which has been a complete failure, one could also quote IR35 as an example. 12. More enforcement of existing rules using existing enforcement powers. 13. Expecting compliance with large penalties but little enforcement clearly does not work, the emphasis should be on those that deliberately do not pay, not the cross selling of penalties to your existing good customers. 14. Return Tax compliance to local ofﬁces, Local people Local knowledge. November 2010

Written evidence submitted by Ella Levy Executive Summary HMRC are entering into settlement agreements with the largest companies which is leading to a huge loss of tax for the Exchequer as well as encouraging aggressive tax avoidance by the multinationals.

Submission 1. I write to bring to the attention of the Committee a discrete but important point relating to the manner in which Her Majesty’s Revenue and Customs (HMRC) have dealt with certain of the larger companies over recent months. 2. I am a member of the public with a number of friends and contacts amongst the ﬁnancial community and the public service (including HMRC) and my views reﬂect, I believe, a widespread unease on this point. 3. In recent years, HMRC has reached a number of settlements with the large multinational companies in which very substantial amounts of tax have been written off in order to expedite payments to the Exchequer. The most spectacular example is the recent settlement with Vodafone where, despite the potential tax of £6 billion that was being argued over, the actual amounts agreed on were only £1.5 billion. 4. HMRC has in fact operated, at the instigation of its senior management, a policy of selecting the highest risk companies, ie those with a policy of entering into sophisticated tax avoidance arrangements such as Vodafone and “doing deals” with those companies. 5. Side by side with this, however, HMRC has delivered a consistent public message that such tax avoidance arrangements are no longer acceptable and will be vigorously challenged, if necessary through the specialist Tax Tribunal and the higher courts. This message is, in fact, enshrined in HMRC’s Litigation and Settlement Strategy. 6. It also appears that this strategy is being vigorously enforced against smaller companies and high net worth individuals. 7. I appreciate that the Exchequer is short of funds and that tax collection is a matter of national priority. However, it does seem to me that writing-off huge sums of tax will simply reward aggressive tax avoidance by our largest companies and penalise taxpayers who may often be less well represented and less able to protect their interests than the multi-nationals. 8. Overall, I cannot see that HMRC’s behaviour in this respect is in the public interest or indeed a lawful way in which to act. November 2010

Written evidence submitted by Russell Hibbin Summary 1. I am an unrepresented taxpayer with simple tax affairs. However I have taken an interest in the operation of Self Assessment and PAYE, having suffered many errors in both systems over the years. It is my perception that the tax system is too complicated for both taxpayers and many HMRC officials to understand. For the tax system to be effectively managed it needs substantial simplification. I have included some examples of errors I have experienced in the past, together with my views on how they could be fixed. I also have the perception that HMRC has become more unaccountable and I feel that there should be much more monitoring of HMRC’s performance, with more intervention where necessary. I have made some suggestions as to how this could be carried out. cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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Queries on the Evidence Already Brought Before the Treasury Inquiry HMRC’s Operation of PAYE System 2. I have several queries about the evidence that HMRC’s executive brought before the Treasury inquiry into HMRC’S OPERATION OF PAYE SYSTEM on the 15/09/2010. I wonder it if will be possible for you to resolve these during this further inquiry. 3. Dame Lesley Strathie’s response to Q56 concerning the PAYE disregard of £50. “We have a standard disregard of £50 within the PAYE system.” 4. It was HMRC policy not to divulge this value (see procedural guidance PAYE 93075): PAYE 93075—Reconcile individual: end of year reconciliation: tolerances. When you review a case you should consider the tolerances before you take any action. (This text has been withheld because of exemptions in the Freedom of Information Act 2000) 5. Please can you clarify with Dame Lesley Strathie why she deviated from the policy of not divulging this tolerance. 6. Dame Lesley Strathie stated in her answer to Q111 that “We need everyone to understand that PAYE is a payment-on-account tax”. However, David Fairley, Technical Adviser states: “However, in respect of HMRC guidance, ‘payments on account’ apply to those customers under ‘Self-Assessment’.” 7. Please can you ask Dame Lesley Strathie why HMRC guidance does not make it clear that PAYE is an payment on account tax as well as Self Assessment? 8. Dame Lesley Strathie replied to Q99 that HMRC would be crediting interest to taxpayers to whom it owes money under PAYE. Please can you clarify that interest will be calculated from the point that the taxpayer started paying the over deduction under PAYE? 9. Dave Hartnett discussed the penalty regime in HMRC in his answer to Q35: Self-assessment was constructed so that interest ran automatically and there were regulatory penalties. What I mean by that is a flat £100 penalty for certain failures, ……. 10. However in the case of an individual’s self assessment the flat £100 penalty is limited to the amount of tax that is owed. So if less then £100 is owed the fixed £100 penalty cannot exceed this amount. If no tax is owed the penalty is zero! Hence the flat £100 is a capped, geared penalty rather then a flat penalty. 11. Although the geared nature of the so called “flat penalty” is due to change in 2012, it remains unchanged in 2011. For this reason would it be possible to invite Mr Hartnett to correct this evidence?

PAYE Operation Beyond its Intended Design 12. PAYE was never designed to cope with net allowances (tax free pay) varying with the amount of gross pay. If a personal allowance is constant the PAYE system will correctly assign the employment income to the correct rates of tax regardless of the value of employment income. 13. However the basic personal allowance is normally adjusted to collect other sources of income and give further reliefs etc. Where these adjustments vary with the amount of employment income then PAYE will fail to collect the correct amount of tax. 14. Examples of allowances that vary during the year with the value of gross pay are age related allowance; and the basic personal allowance for taxpayers with high incomes. 15. Hence an estimated value of pay needs to be used, leading to inaccuracies. 16. As more allowances and dis-allowances are added interaction between the items can occur. 17. Although these can be solved mathematically HMRC have been tempted to skip the full and correct design of PAYE coding, as they are based on estimated values anyway. This leads to further inaccuracies. 18. I have practical experience of this with child tax credit (given via PAYE) which Andy Foot pointed out: However, the programme set up to automatically recode this tax credit uses the estimated pay shown on the system together with the net allowances shown therein excluding any Child’s Tax Credit. 19. Hence the code did not give the correct value of tax deduction for the estimated pay used due to a design ﬂaw in the recoding system. As you can imagine this caused a lot of work for me to understand the coding notice and for Andy Foot to sort out the coding notice manually.

HMRC Staff Understanding of PAYE Coding 20. HMRC are very keen to collect the tax on untaxed non employment income via the PAYE system. For instance if a value of non employment untaxed income of £1,000 is received then to collect this from employment pay the personal allowance will be reduced by £1,000. This will reduce the tax free pay under cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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PAYE by £1,000 and so bring another £1,000 of employment income into tax. This will be taxed at the highest employment marginal rate of tax If the tax rate due on the non-employment income is different from the employment rate then a correction factor is required. 21. So for an employment tax rate of 22% and a non employment income rate of 20% the amount of deduction from the code must be by multiplied by 20%/22% : £1,000 x 20%/22% = £909 22. Again this was not understood by the Inland Revenue employees who created one of my coding notices and no correction was used. Hence the estimated non employment income was assessed at the wrong rate of tax. This is a basic error to make and the officer concerned should be aware of the effects of adjusting tax code. 23. Although this was put right the complaints officer would not accept that the wrong rate of tax had been used; only that the wrong amount had been put on the coding notice: we simply did not recognise the correct amount to apply the legislation to. 24. This is untrue. The estimated value used was based on the last year’s value but no correction factor was used to ensure the correct rate of tax was applied to the estimated value. 25. It is not acceptable for a complaints officer not to have the right level of expertise to recognise how the error occurred and hence be unable to admit to what the error was. 26. Once the coding notice has determined the code the actual amount of tax deducted can be accurately determined from the gross pay.. Indeed, thousands of employers manage to do this successfully. It is absolutely vital that HMRC staff involved with PAYE can also do this. 27. However officer JH could not work out the correct tax deduction from pay on four occasions: 23/4/2008, 26/6/2008, 14/7/2008 and 4/8/2008. He never did succeed. 28. Officer AH could not work out the correct deduction on the 11/8/2008 and never made another attempt. 29. Officer PC could not work out the correct deduction on the 25/8/2008 and never made another attempt. 30. Officer AS could not work out the correct amount of deduction on the 7/11/2008, 5/12/2008 and 12/12/ 2008. AS finally calculated the deduction on the 13/2/2009 when AS recognised the correct method of calculation due to a freedom of information request. 31. So is HMRC running the PAYE system to an acceptable standard with their staff adequately trained to understand it? It is my opinion, based on my experiences, that they are not and there is a need to improve standards e.g. it is not acceptable for any staff concerned with PAYE not to be able to calculate tax deductions made under PAYE accurately. 32. However even if the calibre of staff recruited and the standard of training given were to be improved, it is my opinion that far too much is being asked of a PAYE system that was fundamentally not designed to cope with allowances that vary during the year with the level of gross pay. 33. In the light of this please can the Committee consider the following recommendations: 34. Hold regular marked paper examinations for staff which test their ability to calculate PAYE tax, Child Tax Credit and SA off line from any computer system. This will identify whether there are weaknesses in their knowledge and indeed whether the system is just too complicated for it to be operated effectively. Any individual weaknesses should be addressed by effective and monitored re training. 35. Where the system is shown to be inoperable the Government should seriously consider simplifying the law. It all very well for gifted and talented staff in the Treasury to create very clever tax systems but if they cannot be readily understood by HMRC staff and taxpayers they should be withdrawn.

Holding HMRC to Account 36. HMRC has to be accountable for how it operates. The more it is held to account independently, the more effective it will become. There are weaknesses in the accountability of HMRC. The audit ofﬁce do a good job in recognising operational shortcomings, but not all their recommendations are effectively acted upon.

Holding HMRC to Account: The Law 37. The law provides a standard to which HMRC must operate. However this standard can be weakened if HMRC are allowed to override primary legislation. An example of this is the right of a taxpayer to self calculate the tax that is payable under Self Assessment. This right is given in the form of primary legislation in the Tax Management Act 1970 9(1)b. 38. However Dave Hartnett has overridden this right under the authority of the Statutory Instrument 2003/ 282 Income and Corporation Tax (Electronic Communications) Regulations 2003, and the TMA1970, in directions he signed on 4 April 2008. cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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39. The direction signed by Dave Hartnett states: The Commissioners further direct that: (ii) the delivery of the relevant information; and (b) the form approved by them in which the relevant information is to be delivered; are the methods and form set out, at the time of, and for the purposes of, the delivery of the relevant information, in the terms and conditions for use of the Self Assessment Online service, on the HMRC website (www.hmrc.gov.uk). Terms and conditions on Customs website. 9.1 When using HMRC online filing services, you must use either our own software or, where available, online filing enabled third party software. 40. Both HMRC software and third party software do not permit the user to self calculate their tax so the right of a taxpayer to self calculate ha been repealed by the Hartnett direction. 41. However the right to modify entries on a return has not been repealed which means a taxpayer can calculate that tax but have to send it electronically first and then on paper to provide the self calculation. 42. If Dave Hartnett attends your inquiry I would like to you to ask him, as a senior civil servant, what he thinks about his powers to modify primary legislation such that a taxpayer has to submit a tax return twice? 43. Does the Committee think a senior civil servant should be given the power to override primary legislation? 44. Does the Committee think that the more HMRC change the law to suit their operations the less accountable they become?

Holding HMRC to Account: The Adjudicator 45. The Adjudicator provides a route for complaints against HMRC to be independently judged. 46. However the independent Adjudicator’s role is limited in holding HMRC to account as she cannot make any recommendations that breach to the rules and procedures of HMRC. She states this as follows: We cannot require HMRC to do anything outside the terms of their guidance on complaints. Nor can we ask them to act outside their current procedural guidance. We cannot uphold complaints where it seems to us that HMRC has applied its rules and procedures correctly, however unfair you may feel them to be. We cannot ask the organisation to widen or modify its rules or procedures, no matter how sympathetic we are to your situation. 47. This is effectively self regulation as HMRC can write the rules that it is independently judged against. Self regulation results in HMRC becoming less accountable.

Holding HMRC to Account: Recommendations 48. Strengthen the role of the Adjudicator in the investigation of complaints into HMRC by: — Allowing her to independently decide the standards that she will judge the HMRC against. — Allow her to contribute directly to the HMRC codes of practice. — Allow her to change HMRC rules and procedures where she sees shortcomings as a result of complaints. — Allow her to impose ﬁnancial penalties against HMRC. — Ensure that HMRC cannot opt out from her ﬁndings and has to implement her decisions. 49. Ensure that the Government does not enact legislation that allows HMRC to effectively repeal legislation requirements that have been democratically voted on by Parliament. 50. Ensure that the penalty interest and surcharge regime is equalised between the taxpayer and HMRC. So mistakes and errors made by HMRC are subject to exactly the same penalties as the taxpayers. For example, the current practice of only paying half the rate of interest on money owed by HMRC to taxpayers, as compared to the rate charged on money owed to the HMRC by the taxpayer.

HMRC Management of Information Technology and Processes 51. I have concerns over the way HMRC manage their IT systems, particularly over the management of security issues. 52. The security design of the HMRC tax credit online portal is so weak that criminals have managed to close the system down from 2 December 2005 to the present with no sign of it ever returning. Would any commercial bank or entity allow its online system to be closed for a period approaching ﬁve years? It would be commercial suicide. cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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53. As HMRC have clearly demonstrated that they do not have the ability to run an online tax credits system, should the administration of the replacement universal benefit be removed from their responsibility and allocated to another department? 54. The Poynter review proposed ten principles for information security in an electronic age. Have HMRC implemented these proposals? How is HMRC being held accountable for implementing them? 55. Poynter stated in his Pointer review page 57: 1. Data about an entity (be it an individual or a business) belongs to that entity. It can be entrusted to other parties but always remains the property of the entity to which it refers; 2. It follows that it is the responsibility of the entity to maintain its own data. 56. HMRC have introduced an online facility for a taxpayer to maintain his/her address data which partially works It does update some address records but not others. So I continued to receive three letters to my old address despite my online change (one was six months after I had made the change). This indicates how difficult it is for HMRC to implement the self maintenance of taxpayers’ data. There are just so many systems to link together to enable an update. Does HMRC have too many responsibilities and hence too many systems? Would it be better to break up HMRC? 57. Electronic communications can be more efficient then paper based systems but even introducing methods of sending encrypted and secure documents over the public internet between taxpayers and HMRC has not been introduced by HMRC due to their inability to design a secure system. Although this remains an aspiration, with the new budget cuts it is probably years away from implementation. 58. HMRC systems are under continual attack by criminals. For this reason access to personal HMRC online accounts should be at least equal to the best that commercial banks provide their customers. 59. However access only requires the full password to be entered every time it used. Most bank systems only require a partial subset of the password so that the whole code cannot be harvested in one attempt, by hidden keylogging software. As a further precaution most bank systems use mouse point and click entry of the password to bypass the keyboard and hopefully the keylogging software. 60. However HMRC should consider bringing in the system that HSBC use. This is a time synchronised one time password that changes every minute. The taxpayer would have a fob that would give the value of the one time password eg RSA Security. This is in addition to normal password. November 2010

Written evidence submitted by David Hickson Every call to the 0845 telephone numbers used by HMRC (and every other body that uses 0845 numbers) earns subsidy of its costs at the rate of around 1.7p per minute. The £5 million HMRC earns in this way will not clear the public spending deﬁcit, nor would one argue that it is a bad thing for public bodies to save money. The government should however only be taking our money through properly applied taxation, not by undeclared access charges levied on public service users. When we call these numbers our telephone companies reﬂect this cost to them in premium charges on us. (BT alone is regulated, so that it cannot itself charge for these calls, it can only recover the premium. BT customers are only paying the premium. Regulation prevents them from also paying BT, except through its standard call setup fee.) The answer to a parliamentary question, Revenue and Customs: Telephone Services—Written Answer—11 October 2010, reveals some interesting statistics. 97.1 million calls were made to the 0845 numbers used by the HMRC network of contact centres in the year to July 2010. 35.6 million of these got no response. I will make some (conservative) assumptions of the average durations for the three categories of call and the respective annual percentages given in the written answer: — Calls to an agent (54.2%)—5 minutes. — Calls to hear recorded information (9.1%)—2 minutes. — Calls which were never connected (36.7%)—1 minute. Given these reasonable assumptions about call duration (which I am happy to revise if alternative data is provided) the annual subsidy earned by HMRC would be as follows: — From handling enquiries—£4,772,012 (97.1 M x ((54.2% x 5) + (9.1% x 2)) x £0.017). — From not handling enquiries—£605,739 (97.1 M x (36.7% x 1) x £0.017). cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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Not only is HMRC subsidising its costs at the expense of those whose call it by over £5 million, HMRC is earning well over half a million pounds a year by NOT answering the telephone.

By failing to beneﬁt from the low rates and inclusive packages available for calls to “normal” (01/02/03) numbers, callers in general are effectively paying far more than this in premium charges. (As stated above, BT callers are only paying the premium, either through the call charge or their package subscription.)

To end this unacceptable rip-off, HMRC and other public bodies using 0845 numbers, must adopt the 0345 equivalent numbers (charged as a “normal call” in all cases).

I propose that, for example, 0345 3000 627 be offered for 0845 3000 627. I calculate that this would save an additional cost to callers of around £27.5 million a year, which dwarfs the £5.3 million that HMRC is earning. Smart procurement, in conjunction with other public sector bodies, along with retention of the 0845 number for those who beneﬁt from the perverse effect of regulation of BT, would mean that HMRC would not suffer anything like this in additional cost on making the alternative available.

This low-cost, quick and simple option is the perfect solution for the present environment when all budgets are under pressure and the expense of complex number changes is not worth considering. Instructions to swap the ﬁrst “8” for a “3” in every published number would be easy to communicate. The equivalent 0345 numbers are all reserved and ready for use within the term of any existing contract for telephone service. November 2010

Further written evidence submitted by David Hickson

I have been campaigning against the use of expensive (084x) telephone numbers in the delivery of public services for some time. I do so as a “concerned citizen” with an interest in the topic, I have no formal connection with the telecoms industry or any other interests to declare. My primary campaigning focus is on the NHS, but similar principles apply across the public sector.

“Free at the point of need” may be extended to state that public services should not be funded or subsidised out of financial contributions from users accessing the services, except where there is proper declared schedule of charges. There can be no principled objection to service users incurring normal incidental third party costs in accessing services eg the bus fare to attend an office, or the cost of a phone call to a “normal” number. With all 084x telephone numbers, part of the price paid to call is passed on to the benefit of the call recipient, using exactly the same mechanism as is used with “premium rate services”, although on a lesser scale. I do not argue that HMRC should pay bus fares or offer “free to caller” telephone calls, however it should not be receiving a backhander from the bus company which causes fares to be inflated, nor achieving the same effect by its choice of telephone number.

One result of my efforts was the production and publication of a valuable document on this topic by the Cabinet Ofﬁce in May 2009—“Clariﬁcation Statement on Telephone Number Ranges”. Sadly, the programme of cross-departmental work, of which this was the start point, was not completed.

HMRC has itself undertaken work on the issue of telephone contact, establishing a Joint Working Group on Customer Support Services, to include participation in a review of the HMRC Telephone Numbering Strategy. I am serving on this Working Group, which has only met once so far, in August 2010. I have not been made aware of any progress with this review, despite having an open channel of communication with the ofﬁcers involved.

If the issue of telephone access is of concern to the sub-committee, I trust that it will be keen to identify what progress may have been made.

The issue of telephone charges, different numbering ranges and the options available are not generally well understood. If I can be of assistance to the sub-committee, in helping with any understanding of these matters and by expanding on my views as to what should be done, I would be delighted to make myself available to present further evidence.

Written evidence submitted by Andy Wells

I am a partner in AVN Venus Tax LLP specialising in tax dispute resolution. I was formerly a partner in the accounting firm BDO Stoy Hayward. I am a member of the Chartered Institute of Taxation (I sit on the Management of Taxes committee) I was formerly a member of one of the CBI’s tax committees and I am a volunteer with the charity Tax Help for Older People (TOP). I deal with HMRC and small to medium sized accountanting firms who have to deal with HMRC on behalf of (generally) individuals and small to medium sized businesses on a daily basis. I have been engaged in tax work for well over 30 years, so I consider that I am probably one of the most qualified people there could be to express a view on the subject of this enquiry. cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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I have previously made public criticisms of the way that HMRC has changed under its present and previous management. I will not repeat what has been said here. A selection of published articles may be found following these links. The subject matter is all very relevant to this enquiry: http://www.taxation.co.uk/taxation/articles/2007/09/06/5324/no-end-sight http://www.taxation.co.uk/taxation/articles/2010/05/19/20427/difference-opinion (this one relates to how HMRC inappropriately and inaccurately estimate the “Tax Gap” that politicians may well be relying on. It’s not as big as you think!) http://www.taxation.co.uk/taxation/articles/2010/09/15/20981/no-no-no http://www.taxation.co.uk/taxation/articles/2009/06/03/18893/vision-thing I want to make it clear that whilst I am prepared to speak my mind when I perceive that something is wrong, I am in no way opposed to HMRC, or its front line officers who have a job to do in difficult circumstances. Nor do I personally support or indulge in tax avoidance or condone tax evasion. In my opinion, HMRC’s Management has lost sight of its true purpose (see the comments of the respected Low Income Tax Reform Group quoted in the fourth of the above articles) and taken unto itself a political role. I am afraid that successive Governments have allowed it to do this. In a democracy it is not appropriate for unelected officials (Civil Servants) to be dictating tax policy. Moreover, the current Permanent Under- Secretary for Tax is on the record for saying that it is HMRC’s role to collect the maximum amount possible from taxpayers (see the article “The Dave Channel” written by the editor of Taxation magazine on 2 April 2008—see comments by Mr. Hartnett under “Strategy”. I am afraid to say that relations between HMRC and the tax professionals who try and assist people to understand the complicated and demanding system that HMRC presides over, are almost certainly at an all- time low. At a recent event I attended in Leeds, a room full of over 40 tax accountants was asked “who would trust HMRC to behave with integrity” in a certain situation and not a single hand went up. I found that very sad but I accept it reflects the reality of 2010. There are certain basic things that HMRC does not do well. A prime example can be found whenever an alleged tax debt is passed to a Debt Management Unit for collection. There is apparently no communication between the collection and assessing arms of HMRC and supposedly no means to communicate. Well there should be! A taxpayer faced with demand for disputed tax is offered no explanation by the collection machinery that is unwilling even to put the matter on hold in order to fire off an email to the appropriate department so that the taxpayer might have some sort of explanation. There was a time when the Collector would have telephoned the Inspector and this could easily have been sorted out. Not these days. Try it and see if you don’t believe me. This is the complete opposite of taxpayer service and is something that, with the will, should be relatively easy to fix, but the modern HMRC says many fine things about “customer service” yet allows such basic faults in its system to occur. There is much much more I could add, relating horror stories about some of the cases that I see and deal with. However it seems to me that the key point is that things are likely to get worse as HMRC are required to shed further jobs. I see at first hand how officers currently struggle with large backlogs of work. Only recently I was advised by an officer (who was trying to be helpful) that my urgent correspondence could not be expected to be dealt with within two months and that if I wanted it seen sooner I should write in to complain to “bypass” the backlog. I don’t perceive that this was an untypical situation and I am sure the IRSF will have plenty to say about resources (or lack of them) within the department. It manifests itself by making life difficult for the poor and vulnerable in society who cannot afford accountancy advice. Tax can be especially complicated for low-income pensioners which is where TOP comes in. Enquiry centres were never any substitute for local tax offices as far as the poor and vulnerable in society are concerned. Unless you happen to live in a City, close to one they are remote and imposing and telephoning with anything but the simplest question has become a soul-destroying business. Try ringing HMRC with a query if you don’t believe that. The main suggestion I have for this committee is that the Board of HMRC does not tend to be populated by people with a genuine understanding of what goes on at the coal face. The present Chairperson was parachuted in from another Whitehall Department and had little or no previous experience of the UK’s very complicated tax system (according to her c.v.). So, I’d like to suggest that the Board of HMRC should always contain one or more people from outside the Civil Service on the appointment of the responsible Minister on one-year rolling secondment, in order to address some of the evident problems over delivery of service. I am, of course, not referring to captains of industry or the great and the good who don’t have to deal with HMRC themselves and would have no real idea of what goes on. That person could have the brief to listen to practical suggestions for improvements and to see that reasonable ones are implemented. It would not be hard to set up a website where practical problems could be highlighted together with proposed solutions. Clearly fixing things is not a board-level task but ensuring there are appropriate chains of command to get things fixed can be. I feel the current Board may not have much focus on such matters and may be slightly carried away with its war on tax avoidance and trying to calculate the “tax gap” which in my submission is a largely pointless occupation. cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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This idea would not work unless the person or people seconded are from outside the department and are very familiar with what actually goes on at the service level. I think it could do a lot to repair relations between HMRC and the taxpaying citizens of this country. If you want volunteers then you have my details. On one other note, HMRC has been waging a war on tax avoidance for some time. Mr. Hartnett said he would make it “not worthwhile” by 2009. He has made a decent job of achieving that, to be fair, but it still goes on and probably always will, as tax avoidance is driven by demand from people who resent the amounts of tax they have to pay. The surest way of defeating the tax avoidance industry is to reduce taxes and simplify the system but that is something that has eluded even Governments that had the will to do it (if there have been any). Anyway, If HMRC’s estimates of the tax gap are any use at all they must demonstrate that the “gap” continues to widen depite HMRC’s efforts. So my point here is why not seek the advice of people outside the Department who may have some different ideas that might work? Why should Civil Servants be the best people to understand what drives the tax avoidance industry? Investing relatively small sums in outside specialists might well prove fruitful for the Exchequer. I’ve even got some ideas myself that aren’t necessarily controversial or radical but nobody would think of asking me. November 2010

Written evidence submitted by Ian Holloway Executive Summary This memorandum has been written based on conversations with a number of colleagues within the payroll and HR industry. We believe that it is representative of the feeling within the payroll profession. Much has been written about HMRC in the press and the payroll media, mostly negative. This is understandable, as it is a body that affects everybody in the UK and it has been portrayed as inefﬁcient. Therefore, an announcement of cuts announced in the Spending Review initially gives us the impression that services will suffer even further. We believe this to be the case, though the impacts can be mitigated by a series of low-cost initiatives as follows: — Continued and expanded free information to employers via EmployerTalk. — Improved communication to employers using online tools directly rather than the reliance on employer groups. — Consultation directly with employers rather than the reliance on employer groups, some of whom are not exposed to the day-to-date payroll practices and whose input may not be the most relevant. Further, we believe that the introduction of Real-Time Information on a monthly basis is a progressive step towards compliance whilst easing the administration burden for HMRC and employers alike. However, any introduction must be with the full consultation of employer groups and employers who will be able to explain the problems of introducing this.

Question 1 HMRC’s performance as an organisation and whether it is delivering its key aims 1. As a collection agency for HMG, we believe that HMRC are operating effectively, given the resources that are available to them. 2. The major issue affecting the payroll profession and individual tax payers is one of conﬁdence in the IT structure at HMRC. 3. Further, the issue of communication between HMRC and the payroll profession as a whole remains poor. Certain organisations interact well with HMRC, however, this seems to be at the exclusion of other parties who may be interested in being involved in consultations and other advisory roles. HMRC must improve and review its basic methods of communicating, educating and consulting, ensuring that this is with the correct people.

Question 2 What the implications are of HMRC’s spending review settlement 1. There is little doubt that the implication of a massive reduction in funding from HMG (15% to 2014–15) will mean a reduction in current staff and, consequently, a reduction in the services that are provided. 2. The impact of this is poorer communication, education and consultation, all of which we identiﬁed as issues necessary to improve performance in Question 1, paragraph 3) above. 3. A further impact, given the reduction in employees and services, will be a further increase in response times to letters and telephone calls from employers, employees and agents.

Question 3 Whether HMRC is able to deliver the Government’s aim on tax compliance 1. The “ringfencing” of monies to tackle tax evasion give the impression that HMG is serious on this issue. However, this seems to be in conﬂict with the inevitable cuts in staff, therefore, we are not conﬁdent that the aims could be met. cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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Question 4 Whether PAYE reform is necessary 1. All processes should be reviewed from time to time to ensure that they are “fit for purpose” and up-to- date with current practices. 2. We question, however, whether HMRC will be able to deliver significant reforms given the reduction in their budget. 3. The PAYE system is, essentially, a robust one that has been tried and tested over a long period of time. Of course, reforms are necessary, as explained in 1) above, however, not along the scale of the Centralised Deductions which are universally questioned in the payroll industry. 4. Rather than considering reform, we believe that HMRC should concentrate on compliance with the existing system, save the comments in Question 5 below. This can be achieved in a cost-effective way by engaging the support of a broad range of employers and employer membership groups (Purely Payroll, IPP, CIOT, Payroll Alliance etc). Through effective support, communication, education and consultation, employers will be able to access and act on this information whilst employer groups will be able to pass the information onto their members. 5. Therefore, we believe that only major efficiency-benefiting reforms should be tackled, as detailed in Question 5 below.

Question 5 What HMRC’s priorities should be for the future 1. These are not listed in any order of priority, however, we believe that these are the priorities that should be adopted given the requirement for change (rather than change for change sake) and the reduced budget that HMRC will be working with: (a) Education to employers—continue and expand the EmployerTalk events. The desired effect of these is that employers should be able to attend, learn up-to-date information and then take this back for compliance at the workplace. These are welcome events and we have never heard a negative comment about them. (b) Communication to employers—there are many online tools available to HMRC to be able to interact with employers and people in the payroll industry. HMRC must realise that not all employers / agents are members of a representative body (IPP, CIOT etc) and, even those that are do not always take notice of the advice that is communicated. Online correspondence directly from HMRC to employer is more likely to be read and acted on. (c) Consultation with employers—more use needs to be made of employers at the consultation stage, rather than just relying on employer groups. From our experience, employer groups do not always get much feedback from their members when submitting a consultation response. Further, they do not always consult with members before attending a HMRC forum (ie Student Loans, Benefits etc). The people attending forums or submitting responses are not in the “live” payroll environment and do not experience the day-to-day issues that employers face. Therefore, they cannot be a true reflection of voice for the payroll profession. In short, more valid input can be obtained from a wider range of employers, agents or bureaux. From discussions with colleagues, there is no shortage of people willing to attend. (d) Real-Time Information (RTI)—there is almost overwhelming support for RTI, where employers would submit a return on a periodic basis and HMRC would be able to act on this. The feedback we have received is that this should be on a monthly basis rather than according to the pay period, say in line with the monthly payment made to the Collector. Of course, many factors may impact on the success of RTI (cost to employers, volumes of information received at HMRC etc), however, these can be addressed through the identification and consultation with affected employers plus a phased introduction. November 2010

Written evidence submitted by PCG Introduction 1.1 This paper outlines PCG’s concerns with regards to HMRC’s administration and effectiveness, in response to the questions posed by the House of Commons Treasury Sub-Committee. 1.2 PCG is an independent, not-for-proﬁt representative association, founded in 1999, for the estimated 1.4 million freelance professionals in the UK. 1.3 It is a membership organisation, funded by subscriptions from its 20,000 members. Our members work across all sectors, both public and private, in diverse ﬁelds such as oil and gas, IT, defence, the creative industries, and others. cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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1.4 Freelancers in managerial, professional and semi professional occupations contributed an estimated £82 billion to UK GDP in 2008. (Oxford Economics, 2008) 1.5 PCG has used extensive survey data of its membership to assist in its response.

HMRC’sPerformance as anOrganisation andWhether it isDelivering itsKeyAims 2.1 HMRC’s performance as an organisation is of particular concern to PCG members because of the “IR35” legislation. For the smallest of small businesses, it is crucial to assess whether this complex legislation applies. PCG members making every effort to comply with the law have been faced with heavy handed and aggressive investigations and a general lack of understanding by HMRC of their tax position. Rather than working with business to ensure compliance, too often HMRC’s actions ensure it is seen as working against the users of the tax system. 2.2 HMRC lists a number of obligations to the taxpayer in its charter: — What you can expect from us—We will: — Respect you. — Help and support you to get things right. — Treat you as honest. — Treat you even-handedly. — Be professional and act with integrity. — Tackle people who deliberately break the rules and challenge those who bend the rules. — Protect your information and respect your privacy. — Accept that someone else can represent you. — Do all we can to keep the cost of dealing with us as low as possible. (HMRC Charter 2010—http://www.hmrc.gov.uk/charter/index.htm ) PCG believes that HMRC has failed to meet all of its obligations in the charter, particularly its commitments to treat taxpayers as honest, to be professional, and to help and support taxpayers to get things right. 2.3 PCG believes HMRC’s performance as an organisation has much room for improvement. Regular surveying of our members has consistently revealed concerns surrounding HMRC’s conduct. In a survey of PCG’s membership, conducted by ComRes in July this year, some 84% of PCG’s members described HMRC’s conduct as an important issue for them, with the majority describing this as a “very important” issue for PCG to consider. HMRC’s conduct was thus second only to the taxation system as a whole as a concern for members. Simplification of the tax system would no doubt make compliance easier, but until this aim can be realised HMRC must improve the way it communicates with taxpayers, so it can better meet its aims of being fair and reasonable 2.4 HMRC has failed to effectively target its investigation and compliance activity. Of the 1,493 IR35 cases and investigations PCG has been involved with, HMRC has won just eight. This clearly demonstrates that resources are being wasted by targeting legitimate taxpaying businesses—not “treating taxpayers as honest” as the charter promises. Each of these cases has the potential to cause considerable distress and significant financial and administrative burden for the contractor being investigated. Coupled with the fact that HMRC’s compliance activity on IR35 raised just £9 million between tax years 2002–03 and 2007–08, it is clear that HMRC is underperforming in its aim to be an efficient body. 2.5 For each IR35 enquiry, HMRC sends on average 15 written communications, 20 telephone communications, and 19 email communications.19 Despite the cost20 and effort involved, HMRC was successful in only 7% of enquiries. This outcome is considerably lower than their success rate in random enquiries, which are around 32% for income tax and 40% for corporation tax. 2.6 PCG undertook a survey of its members who have been investigated for IR35 compliance in October 2009. This highlighted a number of areas of interest: — 58% of freelancers who have experienced an IR35 investigation found HMRC fairly or very unreasonable. — Almost half (46%) of those surveyed stated their investigation took more than five years and a further 17% said their investigations took between one and five years. — Three quarters of those surveyed stated that they felt intimidated by HMRC during their investigation. — A quarter of members surveyed said that their investigations went back more than five years. 19 The PCG keep a record of enquiries opened since the inception of IR35—this now stands at 1,485 enquiries. ComRes interviewed 1,869 members online between 28 September and 5 October 2009 (“the members’ survey”). 7% of those surveyed had suffered an IR35 enquiry; of those, 7% were found to be within IR35 with a further 5% of cases still open. The figures for enquiry length and number of communications come from this survey 20 There are no figures in the public domain of the average costs of conducting an IR35 enquiry, but the time and effort is clearly disproportionate to the yield. cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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These figures show a need for a better dialogue between HMRC and the taxpayer. Contractors legitimately working through their own limited company too often find HMRC an intimidating, aggressive body which doesn’t understand their business rather than a neutral, fair, and business-friendly collector of tax. Better communication and an increased focus on “helping and supporting the taxpayer to get things right” as described in the charter, are clearly needed. 2.7 Tax investigations cause particular distress to PCG members, and compliance activity is costly. Tax inspectors have been known to contact a contractor’s client without permission, putting the contractor’s future prospects at risk. 2.8 PCG’s 20,000 members are all businesses in their account, who all strive to organise their affairs in a legitimate manner, and meet all the legal duties required of them. Aggressive HMRC behaviour, and inefficient use of HMRC resources can make this an administratively and financially burdensome process. In some cases, this can even be a distressing experience, when contractors are subjected to lengthy and baseless IR35 investigations. PCG wishes to see HMRC better deliver on the pledges made in its charter.

What the implications are of HMRC’s spending review settlement and will it be able to deliver the Government’s aims on tax compliance

3.1 The 2010 Comprehensive Spending Review announced that whilst HMRC’s budget would be cut by 15% in real terms, £900 million of the resulting savings will be “recycled” into additional work against tax avoidance, evasion and criminal attack, with the aim of bringing in an extra £7 billion in tax revenue by 2014–15. 3.2 Before looking at overall compliance a distinction must first be made between tax avoidance which is completely legal and tax evasion which is, and clearly should remain, illegal. The inclination to treat them as the same thing must be resisted. If HMRC tries to seek a “one size fits all” solution, it is difficult to see how it can fully deliver the Government’s aims on tax compliance. 3.3 Simplification of the tax system must be one of HMRC’s priorities if they are to fully tackle tax avoidance. Presently unclear regulations, particularly for freelancers in the case of IR35, make it difficult to know whether one is complying fully with the appropriate regulations. This can make unwitting evaders out of people who are, to the best of their ability, seeking to comply with the law. To this end PCG strongly welcomes the formation of the Office of Tax Simplification. 3.4 PCG welcomes renewed investment in tackling tax evasion. However given that the real term budget cuts as set out in the CSR must ultimately lead to job losses one must question whether HMRC will have adequate resources to make the best use of the investment. The aim of bringing in an extra £7 billion in tax revenue by 2014–15 is admirable but unless a solid strategy is put it in place quickly, it runs the risk of looking like an arbitrary target.

What HMRC’s priorities should be for the future

4.1 It is essential that HMRC make it as simple as possible for taxpayers to understand the tax system. Taxpayers should also feel that the tax system is fair, consistent and predictable. All taxpayers, especially businesses, must have conﬁdence in HMRC to administer tax collection in such a way that they can be certain of what their tax liabilities are.

4.2 HMRC must endeavour to make it make it easier for limited companies to pay the right amount of tax. Presently thousands of the very smallest limited companies operate in perpetual fear that they may be subjected to a time consuming and damaging IR35 investigation. In many cases those companies cannot know whether they are caught by IR35 or not as the rules around IR35 are so unclear. In order to clarify this situation, HMRC must offer open and honest guidance to its customers.

4.3 HMRC must regain the trust of its customers. HMRC’s customer charter commits it to treating their customers as honest however PCG’s members frequently report that in practice they feel as though they are being treated as tax avoiders.

4.4 PCG’s members report that their relationships with HMRC have completely broken down. Limited company contractors are in many cases reluctant to seek advice from HMRC for fear that it will trigger an IR35 investigation. HMRC must change its emphasis from one of suspicion and interrogation to one of support and guidance.

4.5 HMRC must improve its communications with taxpayers, as evidenced by its handling of the underpayments which surfaced in September 2010. It is important that HMRC is perceived to be a professional and efﬁcient institution.

4.6 Communications have been badly hindered in the past by the difﬁculties that taxpayers have faced when trying to make contact with HMRC. More resources must be given to call centre and correspondence teams. cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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4.7 All tax policy making must be done at HMT and not at HMRC. HMRC must focus exclusively on collecting the right amount of tax from its customers and making that process as simple as possible. December 2010

Written evidence submitted by Professor John Seddon Summary HMRC’s failure should be a lesson in how not to conduct public-service reform. HMRC is the ﬂagship of UK public-sector reform. Its astonishingly bad results should be read as urgent warning signals—which unfortunately they are not, since to do so would be to fatally undermine the current narrative or set of beliefs/ideologies of the “reformers”. The shortcomings are the consequence of poor organisation design, which, in turn, is based on ﬂawed but conventional thinking. HMRC should give pause to all who believe in industrialising the public sector; it is a profound source of knowledge about what not to do.

1. Background 1.1 I, John Seddon, am managing director of Vanguard Consulting. Vanguard’s purpose is to help service organisations change from a conventional “command-and-control” design to a systems design. I have received academic awards for original work on the design and management of service organisations. 1.2 This evidence is provided at the request of the Committee, as I have “written about failure demand in the context of HMRC” (from your invitation to submit evidence). 1.3 I have had no opportunity to study HMRC on the inside; my evidence is based on what I have learned from public—academic research, newspapers, presentations by HMRC staff, announcements and articles by HMRC leaders—and private sources, essentially moles. The evidence also draws on my knowledge of service organisations. 1.4 I regard HMRC as an indictment of current approaches to public-sector service reform.

2. PoorResults should beSignals 2.1 It has emerged that 1.4 million people have unwittingly paid too little tax through the PAYE system, while 4.5 million have paid too much; another 17.9 million might have paid the wrong amount, but HMRC is not sure. This amounts to 23.8 million people whose tax affairs are uncertain, a sizeable proportion if not the majority of people who pay tax via PAYE. Apparently people on PAYE nowadays move jobs more often, and many more people have more than one job. The problem has occurred over the last two years. It is a signal that HMRC’s “reformed” service is failing to absorb the variety of “customer” (taxpayers and their agents) demands. 2.2 More broadly, the Committee has reported that HMRC is failing to collect £28 billion in owed taxes. Of relevance here is that this failure has become worse, twice as bad, over the last three years, ie in a period when performance might have been expected to be on an improvement track.

2.3 Failure demand 2.3.1 I define “failure demand” as “demand caused by a failure to do something or do something right for the customer” (Seddon 2003). It is a phenomenon I first observed in the mid-1980s and is critical to understanding and improving service organisations. All my sources indicate that HMRC does not study demand—a cardinal omission. 2.3.2 Accountants have established web sites to complain about the increasing number of transactions it is taking to resolve clients’ tax affairs, imposing extra costs which they believe should be met by HMRC. Customer blogs and HMRC’s failure to pick up high volumes of calls to call centres are likewise indicative of high levels of failure demand, which will cause increasing costs and reflect poor-quality services for users. 2.3.3 The only study of failure demand attributable, in part, to HMRC has been published by Advice UK (“It’s the System, Stupid”). Its report showed that as much as 40% of demand into advice centres is caused by the failure of HMRC and DWP to provide the primary service to citizens. The knowable cost is estimated at £500 million per annum; the unknowable indirect and knock-on costs will be considerably higher. 2.3.4 One example of these knock-on effects: A charity provides volunteers to resolve problems arising from the increasing difficulty getting adequate service from HMRC. The charity helps about 20,000 people a year. It estimates that 95% of this work would not occur if HMRC provided a service that worked. 2.3.5 Although all of the above illustrate palpable failure demand, HMRC management appears to have no knowledge of the phenomenon and its extent and causes. (It should not be assumed that reference to “avoidable contact” is the same as understanding and removing failure demand.) cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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2.4 Morale 2.4.1 Finally, morale among HMRC personnel is reported to be shockingly bad, along with sickness and absence. Instead of understanding that these are symptoms, HMRC management commissioned something called a “cultural inventory”—a waste of time and money—the results of which pointed to middle management as the problem. Any action among management will be counterproductive. Low morale is always a signal of poor job design and a malfunctioning system.

3. Results asaConsequence ofDesign 3.1 HMRC’s failures are systemic. That term is often used to infer that no one is to blame, but not here. The blame lies squarely with management as custodians of the system. It may be argued that ﬁnal responsibility lies in the Treasury, as HMRC managers do the Treasury’s bidding. 3.2 HMRC has, over the last few years, been an experiment in service industrialisation. Industrialisation is believed to generate economies of scale. In fact the reverse is the case. Industrialisation increases costs. For a more complete argument see: “Why do we believe in economies of scale?” This can be downloaded from: http://www.systemsthinking.co.uk/6-economies.asp 3.3 Two of the features in HMRC: 3.3.1 Activity (the calls workers take and the folders they work on) is assumed to equate to cost, so all workers’ activity is monitored and managed. Close monitoring and lack of autonomy are the primary cause of low morale. It is simple to establish the counterintuitive truth that 95% of the variation in workers’ performance is due to the system—the way work is designed and managed. Working on the “5%”, the people, is not only a cause of demoralisation, it is to ignore the enormous potential for improvement in attending to the system. 3.3.2 The assumption behind standardisation is that it will reduce costs. This is false. Management is concerned with reducing transaction costs—the cost of a telephone call or other discrete process— but the true costs of service are end-to-end from the taxpayer’s or agent’s point of view. Standardising work simply prevents the system from absorbing variety. It increases the volume of transactions (causes failure demand) and thus drives overall costs up. 3.4 The ideas of work standardisation and activity management have been reinforced through HMRC’s so- called “lean” PaceSetter programme. This travesty of “lean” has made the mistake of treating both organisational problems and the tools developed in the Toyota System as universal, thus ensuring that the real lessons are lost in translation. Rather than become an economic exemplar (as Toyota did), HMRC performance has worsened. For the full argument about the folly of “lean” see “Re-thinking lean service”. It can be downloaded from: http://www.systemsthinking.co.uk/6-brendan-jul09.asp 3.5 It is a travesty, for example, that under the guise of lean, HMRC employees are encouraged to problem- solve management’s wrong problems; why they haven’t met today’s targets. Employee initiative is directed away from where it could be of enormous beneﬁt. 3.6 HMRC’s enormous investment in IT systems will only exacerbate the situation. IT is notoriously bad at absorbing variety. The costs of the new IT will continue to rise as more effort is poured into attempts to solve the wrong problems.

4. Policy-basedEvidence, notEvidence-basedPolicy 4.1 HMRC is an important lesson in the failures of service industrialisation. Unfortunately, just as HMRC managers ignore the signals, successive ministers and HMRC leaders have done the same. The reason is identical: the signals don’t fit the narrative. The narrative of reform that ministers adhere to is economies of scale. But economy of scale is a simplistic and dangerous myth. Economy comes from flow—minimising end- to-end time and effort—not scale, as was originally demonstrated by Toyota and is now being confirmed in a number of forward-looking public- and private-sector organisations throughout the country. See for example: “Managing for the Better” a review of a The Vanguard “Leaders Summit” by Simon Caulkin. Download from www.systemsthinking.co.uk . 4.2 Call centres, back offices, shared services, standardisation, specialisation, transaction-cost management, people management, IT-dominated processes—all these features of today’s scale approach to service reform can be shown to drive overall costs up. Evidence to support that claim does not need to be disputed, however: it is simply excluded from the narrative.

5. BetterDesignStarts withBetterThinking 5.1 A thorough understanding of “customer” demand would enable HMRC managers to design a service that would reliably and economically absorb the variety of (“value”) demand. This in turn would remove most or all the failure demand, with consequent dramatic impact on effective capacity. Advice UK, already mentioned, is an encouraging example of the principles at work in this sector (there are many examples in other sectors, including the private). It should be noted that Advice UK’s results have been achieved despite the lack of cooperation from government agencies—with positive engagement they would be even better. These cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:10] Job: 011830 Unit: PG01

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designs increase the amount of expertise provided at the point of transaction (while reducing costs), which in turn means better service and happier workers. 5.2 Examples from housing beneﬁts services show how service can be improved as costs fall. As well as delivering all beneﬁts in a matter of days, local authority exemplars provide a “complete” service to their clients, attending to their broader individual needs. The implications of such examples are profound. They demonstrate, as just one instance, how using these proven principles a single universal credit could be delivered locally, at much lower costs, today. But the exclusive belief in scale means we will wait for an industrialised design (one UK call centre and web-based service) that is to be delivered in seven years and is doomed to fail.

6. Some Recommendations 6.1 The Committee should: 6.1.1 Forcefully encourage HMRC senior managers to study the extent of and causes of failure demand. It is a vital re-educational step. 6.1.2 Demand evidence from those in the Treasury and elsewhere who promote the unquestioned belief in economies of scale (when Geoff Mulgan worked at Number 10 he commissioned such a study, unpublished, which failed to ﬁnd the anticipated beneﬁts). 6.1.3 Conduct a complete review of the true costs of service provision by HMRC as a lesson to others. 6.1.4 Call for a halt to further scale initiatives pending rigorous examination of the alternatives. January 2011

Written evidence submitted by CBI Introduction The CBI is the UK’s leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce. With ofﬁces across the UK as well as representation in Brussels, Washington, Beijing and Delhi the CBI communicates the British business voice around the world.

General Comments We welcome the opportunity to submit written evidence to the Inquiry into the administration and effectiveness of HMRC.

Answers to the Inquiry Specific Questions 1. HMRC’s performance as an organisation and whether it is delivering its key aims (a) Business priorities for a good working relationship with HMRC were discussed at length with HMRC in the run up to their 2006 Review of Links with Large Business. (b) Business and HMRC have continued to work closely together to deliver the Review’s principles. (c) Problems identified by business on HMRC’s performance are: (i) Lack of appreciation of taxpayers’ compliance costs as a key factor in the UK’s international competitiveness.21 (ii) Lack of commercial awareness in HMRC staff and ability to recognise materiality. (iii) Lack of authority at CRM level to manage the HMRC team (often located in different offices/ specialisms). (iv) Lack of continuity of relationship (understanding of sector/individual businesses)—too rapid turnover of key staff. (v) In many situations involving smaller quoted and private companies, there is now no pre-appointed HMRC officer as a point of contact to deal with issues and queries. Cases are only allocated from a central pool of Tax Inspectors and the person selected is determined by availability against a timetable when the enquiry period is about to close. (vi) There is very poor co-ordination between specialist districts that are called in to handle specific issues, eg between Capital Taxes Office and the Inspector examining the corporation tax returns. (vii) The interaction between HMRC and the Treasury does not seem to work very well. Policy does not seem to take proper account of implementation difficulties. This suggests there are insufficient HMRC specialists with the relevant knowledge. Recent examples include the remittance basis changes and the original rules on pensions tax relief. 21 CBI Tax Task Force Report, 2008 cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:11] Job: 011830 Unit: PG01

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2. What the implications are of HMRC’s spending review settlement (a) There is a danger of too much attention on exceptional avoidance with consequent lack of resources available for dealing with the vast majority of “would be” compliant taxpayers. (b) However, HMRC needs to have sufficient resources to tackle evasion fraud and the black economy. The continual linking of evasion and tax avoidance in statements by politicians/treasury/HMRC probably hinders the fight against illegal activity. Tackling avoidance needs a different skill set to those dealing with fraud and evasion. (c) There is a general perception that HMRC are under resourced, leading to cutbacks that simply displace the work involved without increasing efficiency eg withdrawal of form P86 to obtain information on foreign employees coming to the UK. Another illustration concerning telephone queries on newly issued tax codes has been the use of recorded messages asking callers to call back later as HMRC staff were too busy.

3. Whether HMRC is able to deliver the Government’s aims on tax compliance (a) Government aims on tax compliance must be seen in the wider context of bringing the UK tax system into the 21st century. (b) Compliance will be greatly enhanced by reforms which produce rational and understandable tax rules. These would also produce greater common understanding between HMRC and taxpayers.

4. Whether PAYE reform is necessary (a) Business has long called for the rationalisation of PAYE and NIC. (b) Progress on this rationalisation should not have to await the outcome of any attempt to change PAYE procedures. (c) PAYE reform should focus on reducing PAYE burdens for both employers and employees rather than shifting administrative burdens from HMRC onto business. For further detail see our response to HMRC’S Review on “Improving the Operation of Pay as You Earn (PAYE)” Consultation of July 2010—attached. (d) A major difﬁculty with PAYE is the time it takes HMRC to issue code numbers eg three to six months for NT Code numbers. Providing PAYE information in real time is not going to help if HMRC will not respond swiftly. HMRC already get P45s etc electronically. The submission of data is not always the issue. Real Time Information will put a greater expectation of a swift response on HMRC and currently they cannot deliver this. When computer systems are introduced they do not seem to cover the difﬁcult areas eg expats. (e) Any attempt to deem workers to be within PAYE (eg construction industry) should be abandoned.

5. What HMRC’s priorities should be for the future? (a) The ongoing priority should be the continuous dialogue with business on principles and practices which can enhance UK competitiveness. This should ensure that the UK can be and remain one step ahead of competitor jurisdictions. (b) Mechanisms should be found to resolve practical difficulties on a fast track basis as necessary. (c) Improvement of HMRC’s website to make it reflect user needs. (d) Acceptance that flexibility is needed to reflect differences in working practices and operational needs between types/sizes of business. (e) Taxpayers should be able to e-communicate with HMRC if they so wish. (f) HMRC should form part of a three-part relationship with HMT and business in examining tax proposals and reforms to ensure practicality. (g) Compliance cost assessments must become meaningful and should always precede decision making by Ministers. December 2010

Written evidence submitted by Tax Research LLP It is noted that a subcommittee of the Treasury Committee of the House of Commons is undertaking a review of the work of HM Revenue and Customs about which it says: The sub-committee’s inquiry will build on its predecessor’s work, which identiﬁed areas of concern in relation to the impact of the efﬁciency programme on HMRC’s performance, staff morale within the organisation and its performance on issues such as the payment of tax credits. Its inquiry will focus on the following questions: — HMRC’s performance as an organisation and whether it is delivering its key aims; — What the implications are of HMRC’s spending review settlement; cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:11] Job: 011830 Unit: PG01

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— Whether HMRC is able to deliver the Government’s aims on tax compliance; — Whether PAYE reform is necessary; and — What HMRC’s priorities should be for the future?

This submission makes comment upon these five issues and is made by Richard Murphy, the director of Tax Research LLP. Tax Research LLP undertakes original research on taxation issues as well as advising non- governmental organisations (NGOs), unions, and other organisations on taxation policy matters. It has undertaken research on taxation issues for the Trades Union Congress and the Public and Commercial Services Union (PCS). Richard Murphy advises the Tax Justice Network. PCS and The Association of Revenue & Customs are both affiliated to the Tax Justice Network. This submission is made on its own behalf with the assistance of financial support from the Joseph Rowntree Charitable Trust.

In the opinion of Tax Research LLP a well-managed tax system has to: 1. Deﬁne the tax base. 2. Locate what is to be taxed. 3. Count the tax base. 4. Tax the tax base at the right rates of tax. 5. Allocate the resulting revenues efﬁciently and to best social effect. Tax is not just about revenue raising, but is part of a whole revenue cycle that must also be properly managed. 6. Report—governments must be accountable for what they do with tax revenues or the democratic principle fails.

Of these six functions the ﬁrst four should, broadly speaking, fall to H M Revenue & Customs to manage and the last two should fall to HM Treasury. Given the scope of the investigation being undertaken comment will be restricted to the ﬁrst four issues and these will be used to assess performance in the areas of concern noted by the Sub-committee.

It might reasonably be said based on the priorities that HMRC’s job is to: 1. Collect the tax owing in the UK as a result of UK law; 2. Ensure UK law remains relevant and appropriate in deﬁning taxes due in the UK; 3. Undertake its activities at reasonable cost; 4. Interact with the taxpayers of the UK in an efﬁcient but appropriate fashion.

H M Revenue & Customs cannot be said to be making good progress against these priorities. The following issues are noted in support of this contention: (a) The Tax Gap. There is a significant and growing tax gap within the UK economy. HMRC estimate that this is a little over £40 billion a year; Tax Research LLP has, on behalf of the TUC and PCS estimated that the tax gap is substantially greater, amounting to a sum as high as £120 billion. The first difference between the two estimates is that although HMRC recognise that unpaid and late paid tax is a part of the tax gap when defining this issue they do not add unpaid and late paid tax (currently amounting to approximately £25 billion) into their total when issuing tax gap estimates, although they claim that a small part of the VAT gap may relate to unpaid tax despite this. That is misleading on their part, and represents confusing and misleading use of their own methodology. Tax Research LLP makes clear distinction on this issue and includes HMRC’s own published data on unpaid and late paid tax in its estimate of the total tax gap. It recommends that H M Revenue & Customs do the same. Secondly, H M Revenue & Customs do not break down their estimate of the tax gap between sums evaded and avoided. As a consequence it is difficult to determine the necessary action required to address the issues that HMRC identify in its own published data. This cannot be conducive to effective management of the issue. Tax Research LLP does split its estimates of tax evaded and avoided so that the particular issues can be assessed independently, which would assist management of the consequent issues arising. Thirdly, as a result of the different approaches HM Revenue and Customs use in estimating the direct and indirect tax gaps it is highly likely that the estimate that they use of the shadow economy is significantly understated. The implication of their work is that the shadow economy represents about 7% of GDP, but World Bank data suggests that it is about 13% of GDP, a figure remarkably consistent with that suggested by Tax Research LLP based upon the indirect tax gap. This difference is significant, and suggests that HMRC may not be using appropriate tax base data from within the UK economy to determine the tax they should collect. If that is true it is a significant failing on their part that arises from policy failure. cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:11] Job: 011830 Unit: PG01

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(b) There is significant evidence that HMRC are not keeping UK taxation law up to date to meet the needs of a modern economy. Particular weaknesses include: (i) A failure to address the domicile issue, which is the subject of continuing and ongoing abuse. Up to seven million people may be temporarily resident and therefore not domiciled in the UK at any point in time but are nonetheless UK tax resident. This creates enormous opportunity for abuse on their part of the UK tax system, much of which almost certainly contributes to the tax gap, but without being detected. It also provides a serious competitive disadvantage to some UK businesses owned by those who are domiciled in this country, whilst permitting discrimination on the grounds of national origin that may be illegal under the terms of the Race Relations Act. Failure to address this issue, which is virtually unique to the United Kingdom, both leaves the UK vulnerable to criticism that it is itself a tax haven (because it is undoubtedly leaves this country open for abuse in this way by those not domiciled in the UK) and vulnerable to significant loss of taxation revenue that should be due if a tax system consistent with international norms of behavior was adopted. (ii) HMRC has so far failed to address significant issues arising as a result of ambiguities in the laws on tax residence. Having withdrawn most of its own guidance on this issue it has left taxpayers in a state of uncertainty as to the current state of this law, which is unacceptable to taxpayers, creates opportunity for loss of taxation revenue, and presents significant uncertainty to those coming to the UK to work, which cannot be to the economic advantage of this country. This is a serious failing on its part. (iii) Despite serious efforts on the part of HM Revenue and Customs to tackle the problem of income shifting within family companies during the course of the last decade the issue remains unresolved. There can be no doubt that abuse continues as a consequence, but there is also a risk that those putting into place perfectly reasonable commercial arrangements might be subject to inappropriate challenge with regards to their taxation arrangements. This is an impediment to the management of small businesses in the United Kingdom and HM Revenue and Customs have failed to manage the tax base appropriately in this sector. There is a need for significant reform to ensure that small business has an appropriate corporate entity available to it for its use, suitable for the commercial environments that are faced in the 21st–century, but which is sufficiently tax transparent to ensure that administrative burdens are kept to a minimum, whilst tax is paid by those to whom economic reward from activity should flow. Far too little effort has been put into resolving this issue, at almost certainly cost to the growth of the small business sector in the United Kingdom. (iv) There is unambiguous evidence that the PAYE system has been subject to significant management failures over recent years. HMRC have failed to develop the PAYE system to reflect the needs and circumstances of the modern economy; an economy in which multiple employments are common in and which multiple sources of income in retirement are even more commonplace. There is need for radical rethinking of the basis for management PAYE, but the proposals currently put forward which suggests that the computation of taxation liabilities on payroll costs should be devolved from employers to HMRC, or their agents, are highly unlikely to address this issue, whilst creating complexity in centralised computer data management systems where there has been little indication of effective development or control by HMRC over a considerable period of time. The failure to keep the PAYE system up to date has almost certainly contributed to an increase in the scale of the shadow economy when those faced with excessive administrative burdens of handling the complexity of multiple employment administration have instead opted to join the cash economy. (v) H M Revenue & Customs have failed over recent years to appropriately tackle the problems arising from international transactions, and especially those relating to tax havens. There are numerous indications of this, starting with their lacklustre support for the United Nations initiatives on tax that are intended to help developing countries, to the recent agreement on a tax withholding arrangement with Switzerland which will allow those UK resident people holding illicit funds in that country to evade their duty to disclose them to H M Revenue & Customs. In addition, and perhaps most importantly, HMRC initiatives on controlled foreign companies and recent suggested changes to corporation tax that will allow those companies holding funds in tax haven subsidiaries to enjoy tax rates as low as 8% suggest that the long-standing international agreement between developed countries that they should have a combination of residence-based corporate taxation, controlled foreign company legislation and the taxation of remittances from subsidiaries, which in threefold combination ensure that the process of hiding profits from tax in tax haven locations is harder to achieve, has been broken as a result of HMRC policy changes and a failure to address issues in a timely and efficient manner. This is unfortunate. In addition, H M Revenue & Customs could have proactively supported calls for country by country reporting, which would require multinational corporations to disclose their profit and loss accounts and tax paid by country, an initiative which they have admitted in private would increase the U.K.’s tax yield, but have not done so. (vi) Other examples are, of course, available, but the above will suffice. (c) The issue of cost at H M Revenue & Customs is, of course, a sensitive one. All government departments have been subject to scrutiny as to their expenditure. In the case of HM Revenue and Customs such scrutiny does, however, appear to have been inappropriately directed. The issue is not cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:11] Job: 011830 Unit: PG01

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in their case whether cost is of primary concern, but whether the effectiveness of the Department in raising revenue is maximised. This is a much more complex performance criteria. When all other government departments are under considerable pressure, but H M Revenue & Customs alone generates substantially more revenue for each member of staff employed that it expends in that process, then the question of allocation of resources to raising revenue to meet reasonable demand for government service is the appropriate criteria for assessment, and yet it would appear that a measurement yardstick consistent with other government departments has been applied. This issue is compounded by the fact that H M Revenue & Customs is not just a cost centre or revenue raising department, it is also a service centre at the core of the relationship between the people of this country and the government that they elect and as such the effectiveness of its operations are critical to the health of our democracy. Any revenue raising department has not only to raise tax, but also be seen to do so fairly, appropriately, helpfully, and justly, and in the process it must properly differentiate those who are seeking to pay the right amount of tax in the right place at the right time (tax compliant behaviour) and those who are seeking to either avoid or evade their obligations. This requires a very visible presence in the community because it can rightly be argued that tax is the consideration in the social contract between people and their government, and that contract must be seen to have impact in the places where people live. Set against these criteria HMRC appears to have adopted the wrong strategic plan for undertaking its activities. It has established inappropriate key performance indicators, which appear heavily focused upon crude measures of labour productivity, and which ignore the social significance of tax collection and which also undervalue the important and highly significant contribution that experienced members of staff can make to the overall effectiveness of the organisation, and the supply of its service to the population of this country. As a consequence, H M Revenue & Customs is closing its offices in many locations, and as such is not being seen to be present in the communities it serves. In addition local knowledge and experience is being sacrificed for computer analysis and call centre processing, neither of which meet demand from the taxpayer or their agents for the level of service which matches the complexity of the tax system the modern economy requires. Furthermore, services that require significant human intervention, such as debt collection, are either being inappropriately outsourced to those without the appropriate sensitivity or are being ignored, with consequent increased cost in the tax gap. Reducing the level of staff employed by H M Revenue & Customs from just over 100,000 people in 2005 to approximately 56,000 people in 2015 may look like a move in the direction of efficiency but if, as Tax Research LLP has suggested, employing 20,000 more staff at an approximate cost of £1 billion per annum would reduce the overall tax gap by up to £20 billion a year (up to £5 billion of late paid tax, maybe £10 billion of evasion and up to £5 billion of avoidance) then it is a considerable false economy. The government’s claim that it will reduce the tax gap by £7 billion in total over a period of four years by investing £900 million over that period in additional staff focused on that issue is also misleading: those staff will be working in a service whose morale and infrastructure is being seriously degraded by ongoing cuts which are bound to reduce efficiency and the quality of information being transferred into specialist investigation departments. This measure is too little, and too decontextualised to deliver the suggested benefits, which are in any event, modest given the overall scale of the issue that needs to be addressed. The conclusion is obvious: if significant taxation yield is being sacrificed in the name of reduced cost then an implicit political choices is being made which must be made explicit. That choice is to leave tax evaded funds in the hands of those undertaking fraud; to leave tax avoided funds in those structures that H M Revenue & Customs have decided are beyond their reach such as tax havens and the complex structures created by the tax avoidance industry, and to leave those who owe significant funds to HMRC unattended by debt collection services whilst relatively modest sums of PAYE, and even more seriously, tax credits, are chased from those with limited means to pay. It is suggested that these are the wrong choices and that is why additional resources should now be allocated to HM Revenue and Customs. (d) As already noted, H M Revenue & Customs plays a fundamental role in the maintenance of the well being of the democracy of the United Kingdom by raising the revenue that supports our system of government. In so doing it has an extraordinary duty of care to those from whom it asks for payment, whilst at the same time having obligation to uphold the mutual and collective responsibility given to it by society to collect tax from all who might owe it. These obligations can, of course, potentially conflict and this places a heavy burden of responsibility on the management of H M Revenue & Customs. This duty does require that the tax system be assessed against the following requirements of an efficient tax system, which is that it be: (i) Comprehensive—in other words, it is broad based; (ii) Complete—with as few loopholes as possible; (iii) Comprehensible—it is as certain as is reasonably possible; (iv) Compassionate—it takes into account the capacity to pay; (v) Compact—it is written as straightforwardly as possible; (vi) Compliant with human rights; cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:11] Job: 011830 Unit: PG01

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(vii) Compensatory—it is perceived as fair and redistributes income and wealth as necessary to achieve this aim; (viii) Complementary to social objectives; and (ix) Computable—the liability can be calculated with reasonable accuracy. All of which facilitate the chance that it will be: (x) Competently managed. There is some evidence that a number of these criteria have not been met when HMRC has been interacting with the people of the United Kingdom. For example, there is clear concern amongst some in the United Kingdom population that the tax system is not comprehensive and that large companies do not pay tax that might be due by individuals and small companies if in similar circumstance. Tax avoidance is also a matter of concern to many, but perhaps of greater concern is the fear that the tax system is neither comprehensible nor compassionate. This is particularly relevant in the case of genuine mistakes. Tax payers are penalised for such errors and yet when what might be seen by many as reciprocal mistakes are made by HMRC, often arising from equally understandable human error, there is no understanding on the part of HMRC management of the necessary obligation to compensate the taxpayer for inconvenience, loss, distress and uncertainty arising as a consequence. As a result recent PAYE errors have been mismanaged; there has been an over-emphasis on the recovery of cash paid as a result of mistakes made by HM Revenue and Customs in the management of tax credits, and there has been a far too lenient regime offered to those who have tax evaded through tax havens. As example with regard to the latter, the Lichtenstein Disclosure Facility offers tax evaders a 10% tax penalty despite their having undertaken criminal activity when higher rates of penalty are frequently charged on those who have made an honest mistake in submitting a tax return. In addition, because so many local tax ofﬁces have been closed or are closing, the sense of remoteness of HM Revenue and Customs from the taxpayer has increased. All of this contributes to an environment in which the degree of hostility between our tax authority and those who have obligation to pay taxes has seemed to increase, and that must represent mismanagement of this critical relationship by the management of HM Revenue and Customs that their staff, suffering a shortage of resources due to the redundancy programme, have been unable to correct.

Based on the above analysis, and returning to the questions asked by the subcommittee the following conclusions can be drawn: 1. HMRC is not delivering on its key aims. The tax gap is too big; dissatisfaction with its service is too high; its staff are enduring work conditions that are unnecessary and the resulting relationship between the state and those it governs has become too strained as a result of the mistakes that have arisen to believe that this objective has been fulfilled. 2. The HMRC spending settlement perpetuates past mistakes by believing that efficiency can be defined as a function of labour productivity. This is untrue in the case of HMRC, and the cost to the country will be high unless this error is corrected. Greater revenue can be collected, at lower overall cost of the Exchequer, if more resources were invested in HM Revenue and Customs. It makes no sense in the current economic climate, where there is significant unemployment in the UK, for cuts to be imposed upon other government services when taxation revenues that could be collected by investment of resources in HM Revenue and Customs are being foregone. The political consequences of that choice are also significant with the apparent implicit endorsement of tax abuse inherent within them giving rise to a culture where tax compliance is likely to be harder to maintain. 3. HMRC is unlikely to deliver a programme of tax compliance without significant additional political support being supplied to it by the government and politicians of all parties. A culture where taxes seem to be “a bad thing” has been allowed to develop within the political parties of the UK, best exemplified by the fear of increasing the rate of income tax even when fiscal and social policy might require it. In this environment politicians implicitly endorse a strained relationship between HM Revenue and Customs and taxpayers in the United Kingdom, where a culture of tax non–payment is apparently endorsed by describing tax as a cause of social harm eg in restricting growth, undermining enterprise, acting as a disincentive to work, and to harming a culture of saving. This culture, and this representation of tax, is wrong. Tax is the bedrock on which we have built Western democratic states and mixed economy capitalism, where the interaction of a strong state supporting private enterprise through the protection of property rights in a regulated market space in which people can trade with confidence, knowing that a safety net has been provided by the state so that if markets, services, or personal circumstances fail the consequences will be mitigated has given rise to an environment in which prosperity of a previously unknown level has been enjoyed. All that, however, is conditional upon the payment of tax and politicians have the duty to support HM Revenue and Customs in collecting the taxes that are owed, as required by Parliament. It is an obligation in which politicians have not played a full part and it is beholden upon them to now play their full role in this relationship if a tax compliant environment is to be created in the United Kingdom in the future. cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:11] Job: 011830 Unit: PG01

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4. There can be no doubt that reform of PAYE is a necessary part of ensuring that the tax gap is closed and that tax administration is undertaken on a proper and timely basis. PAYE works well for those in regular, long-term employment, and is particularly inappropriate for those who have multiple short- term employment, as is increasingly commonplace. The solution is not to outsource the issue of PAYE compliance to one central agency, whether the probability of computational accuracy is no greater than might exist under current arrangements but with the opportunity for blaming all error on HM Revenue and Customs arising. The requirement is to redesign our tax system to reﬂect the economy of the 21st–century. This will require a re-evaluation of the mechanisms available through which people trade. It will also require a re-evaluation of the frontiers of employment, so that those who hold multiple short-term employments might be considered to be undertaking a limited form of trade from which payments on account of tax might be deducted when payment of earnings are made, but with the obligation to submit an account at the year end arising. This might prove to be surprisingly popular if refunds resulted. Almost inevitably if past errors are to be eliminated the number of people being required to submit tax returns will increase, and the number of staff required to handle the complexity of their tax affairs will rise commensurately and that is the price we must pay for living in a complex modern economy, which we should not resent. 5. Finally, both the government and HM Revenue and Customs should set out their vision for the tax system and this should be subject to periodic review. Some indication of the possible content of such a vision for the tax system is included in this submission, and is noted above. Given the importance of the relationship between tax, democracy and government the political failure to address this issue over many years is an indication of the decline in the strength of our democratic process, and it is now vital that politicians of all parties re-embrace this issue, and its signiﬁcance, to build a consensus around which the modern state is built to supply the services that the population of the United Kingdom require. January 2011

Written evidence submitted by the Federation of Wholesale Distributors This submission from the Federation of Wholesale Distributors (FWD) is in response to the Treasury Select Committee’s Inquiry into “The Administration and Effectiveness of HMRC”.

Summary — The FWD is concerned about the proposed budgetary and staffing reductions at HM Revenue and Customs (HMRC) and the impact this will have on HMRC’s capacity to tackle alcohol fraud. In turn this will negatively impact on the Government’s aims to deliver on tax compliance and its efficiency in revenue collection. — Alcohol fraud occurs where illegitimate wholesalers sell alcohol where the duty and VAT has not been paid. HM Revenue and Customs (HMRC) estimate that this fraud is costing the Exchequer over £550 million per annum on lost duty and VAT from beer alone. The revenue loss for all types of alcohol is estimated as being over £1 billion per annum in lost duty and VAT. Given the scale of alcohol fraud, HMRC should treat this as a priority area for action. The FWD is calling on the Government to clampdown on alcohol fraud which is leading to a significant loss of revenue to the Exchequer and is having a detrimental impact on legitimate wholesalers. — It is evident that HMRC investigation officers are already stretched to their full capacity. Given this, any reduction in funding or staffing levels in this area is likely to be counter-productive since it will have a significant, and negative, impact on the ability of the Department to combat alcohol fraud.

Background Alcohol fraud is a signiﬁcant and growing problem in the UK. This fraud occurs where illegitimate or fraudulent wholesalers sell alcohol where the duty and VAT has not been paid. Such traders are often selling this alcohol openly at prices where it is clear that the Duty and VAT has not been paid. HMRC measure the loss of revenue for alcohol fraud in the beer market. In its recent publication Measuring Tax Gaps 2010, the Government set out that this fraud was costing the Exchequer up to £550 million in 2008–09 in lost duty and VAT for beer alone. HMRC have not yet developed a mechanism for estimating the tax gap in wine fraud. It is estimated, however, that the annual loss of revenue to the Exchequer for all types of alcohol fraud is likely to be over £1 billion. In addition to this fraud costing the Exchequer much needed tax receipts this illicit trade is also undercutting prices and having a severe impact on the economic viability of legitimate traders. Some FWD members are reporting losses up to 40% on alcohol sales such is the scale of the fraud, and their businesses are subsequently being threatened with closure. There are also wider costs associated with the fraud since it is likely that the proceeds are being used to fund serious organised crime. There are also impacts on public health as people are able to buy excessively cheap alcohol as the duty has not been paid. cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:11] Job: 011830 Unit: PG01

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Types ofAlcoholFraud Alcohol fraud occurs in a number of ways and is a significant problem at the wholesale point of the supply chain. Alcohol is manufactured then either sold direct to retailers or is sold via wholesalers for onward sale to retail outlets. The majority of wholesalers are legitimate traders who are paying duties and taxes correctly. However, there are growing numbers of fraudulent wholesales who are adopting methods to avoid paying the duty and VAT that is due. These illicit traders are then able to sell cut price alcohol or sell the alcohol at full price but reap greater profits through the non payment of duty and tax and substantially undercut legitimate wholesalers. The two main types of the fraud are known as diversion and drawback. In diversion fraud, illegitimate wholesalers export alcohol under duty suspension claiming that it is for sale on the near continent. This alcohol is then diverted back onto the UK market with no duty being paid. In some instances, the goods are said to have been exported but never actually leave the country in the first place. Drawback fraud occurs where fraudulent wholesalers export alcohol to the near continent. They then claim the duty directly back from the UK Government through the drawback duty regime claiming that the duty has been paid in another country when no duty has been paid and then divert the product back to the UK market. Alternatively, fraudsters are exporting goods abroad, for example to France, where there is a much lower rate of duty paid on the goods but the products are then immediately diverted onto the UK market without payment of the higher UK duty. The FWD is calling for the Government to clampdown on all types of alcohol fraud but has become particularly concerned at the scale of drawback fraud in recent months. There is clear evidence of the widespread abuse of the drawback duty regime. Fraudsters are claiming millions of Pounds in recovered duty fraudulently from the UK Government. The evidence for this fraud is borne out in HMRC’s own estimates. Whilst they estimate that the legitimate market for beer on the continent is 75m litres per annum, 450m litres is currently being exported. This indicates that 375m litres is being exported fraudulently and the Government is being defrauded of duty on this amount since the only commercial reason for such a large drawback trade to the near continent is to feed the fraud.

Actions toClampdown on theFraud In 2009, the previous Government closed the Warehousing for Export Scheme which was a tax regime being exploited by alcohol fraudsters. Following the end of this scheme there was a reported dip in the sale of fraudulent alcohol but since this time fraudsters have moved to use other mechanisms and the fraud has continued to increase. The previous Government also published an “Alcohol Fraud Strategy” in 2010, issued new powers for HMRC to tackle the fraud and launched a communications campaign to warn fraudsters and alert legitimate traders to the fraud. This Government has, to date, said little on its strategy to tackle alcohol fraud but promised £900 million in the Spending Review to tackle tax avoidance, evasion, fraud and debt. In particular the additional resources were made available for the prevention of tobacco and alcohol fraud. This funding allocation is however, conditional on HMRC first delivering savings and efficiencies. Whilst we welcomed the Government’s potential increase in funding for this area, the FWD are nonetheless keen to ensure that tackling alcohol fraud continues to be treated as a high priority. In addition, from our discussions with HMRC and anecdotal reports from wholesalers, it is evident that HMRC investigation officers are already stretched to their full capacity. Given this, any reduction in funding or staffing levels in this area is likely to be counter-productive since it will have a significant, and negative, impact on the ability of the department to combat the fraud and collect significant sums of money for the UK Exchequer.

Recommended Policy Responses A wealth of anecdotal evidence on the growth of alcohol fraud has been passed by the FWD to HMRC but, to date, the Department has not provided a proportionate response to the scale of the problem. To ensure an adequate response to this challenge and reduce the loss of Exchequer revenue in this area, the FWD is urging the Government to undertake the following policy responses as a matter of urgency: 1. HMRC should clamp down on the widespread abuse of the “drawback” regime and urgently review the drawback regime to ensure that “at-risk” goods are being exported correctly and thorough checks are carried out before any duty is repaid. 2. HMRC should take a more robust approach to tackling alcohol fraud. They should use new powers to clamp down on those involved in alcohol fraud throughout the supply chain. Disruption of the supply chain and the seizing of goods can be a very effective way of stopping the fraud. The scale of resources needed to seize goods and harass those engaged in fraud should easily be proportionate to the revenue beneﬁts. cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:11] Job: 011830 Unit: PG01

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3. HMRC should explore putting measures in place to track the movement of all “at risk” alcoholic goods from or within the UK. According to HMRC there is a massive over-supply of beer under “duty suspense” to the near continent, which cannot be for legitimate sale on the continent. Given the beer product types at risk are not numerous, it should be possible for HMRC to “keep tabs” both on where and to whom the brewers supply to in the EU and all UK supplies of duty-suspended goods to third parties in bonded warehouses. Background to the Federation of Wholesale Distributors The Federation of Wholesale Distributors (FWD) is the membership body for food and drink distributors in the UK. Our members work with some of the largest brands to provide storage and delivery infrastructure to ensure that their stock can reach both large and small retailers, caterers and private businesses. Our members manage the distribution of goods worth around £25 billion per annum. FWD members are large alcohol and tobacco excise duty payers, both directly and indirectly. November 2010

Written evidence submitted by a former employee of HM Revenue and Customs Executive Summary The underlying reason for the problems at HM Revenue & Customs (HMRC) over the past few years has been that staff and other resources have been cut back too much and too quickly. The HMRC may have saved millions in staff costs but lost billions in revenue. Much of the work which should be done has not been done and will not be done. The cuts under the CSR will worsen the situation: loss of revenue and a poorer customer service. The computerised PAYE system should improve matters in the future, recent problems were caused by lack of staff manually working cases. The alternative would mean millions more submitting tax returns. One reform could be to pro rata the personal allowance for foreigners working for a few months in the UK so more pay income tax. Customer service is poor, potentially affecting every individual and organisation. Necessary work has not been done/will not be done resulting in billions of tax not being collected and lost through tax avoidance and evasion. Effectiveness (doing matters correctly and without errors first time even if initially this takes longer)—is more important than so-called efficiency and cost savings (doing matters too quickly but incorrectly and/or with errors and taxpayers having to contact HMRC several times). Past and future cuts have been demanded by government and implemented by the Board who have a responsibility to “speak truth to power”. Future cuts are likely to reduce compliance as tax avoidance and evasion are likely to increase. Cutting costs will be priority for HMRC and could include virtually all Self Assessment returns being submitted online. Tax relief on pensions costs £28 billion and could be restricted to a 20% subsidy. 1. The underlying reason for the problems at HM Revenue & Customs over the past few years has been that staff have been cut back too much and too quickly. Staff are reduced and therefore there are reorganisations where staff are moved from work they are experienced to work they are inexperienced in thus reducing effectiveness. The HMRC may have saved millions in staff costs but lost billions in revenue. In the last few years staff has been reduced by at least 20% (possibly by one third), by 20,000 (the PCS union says 30,000) mostly by redundancies and early retirements, mostly experienced and competent staff. The Resource for HMRC will be reduced from £3.5 billion in 2010–11 to £3.2 billion in 2014–15, a 15% reduction (per Treasury website). This is, in my judgement, will result in billions lost in tax received and poorer customer service— Resource should not be decreased and ideally increased. I hope that accountants and taxpayers have made submissions to your committee, as accountants realise that HMRC is inadequately resourced (see quote below from John Whiting, accountant) and many taxpayers know the service is inadequate and are beginning to learn about the considerable reduction in HMRC staff eg Panorama programme broadcast on 8 November 2010. 2. The problem concerning PAYE customers has been caused by work items not being manually worked. The new computer system which can automatically do the work has sent out P800 Tax Calculations advising that tax for 2008–09 and 2009–10 will be deducted from 2010–11 or if more than £2,000 it is to be paid within three months. In my opinion, reform of PAYE is not necessary as the problems have been caused by lack of resources and the alternative would be for millions more to submit tax returns, unpopular and administratively expensive. 3. John Whiting of the Chartered Institute of Taxation, who is also an advisor to the government’s Office of Tax Simplification, talking about the PAYE computer stated: “Assuming it runs okay, what it will do is check and tie up every year, and that in many ways has been the problem. We haven’t had that checking and tying up over the years, we have got an accumulation of problems, people haven’t been able to spot them, revenue has not had the manpower to spot them and whoosh, they all come out.” From Channel 4 News website dated 7 September 2010, link below: http://www.channel4.com/news/millions-get-wrong-tax-letter-after-hmrc-blunder 4. Many foreigners work for a few months in the UK and usually receive a tax rebate. One reform could be to pro rata the personal allowance for them so that most of them pay some income tax. cobber Pack: U PL: CWE1 [O] Processed: [27-07-2011 09:11] Job: 011830 Unit: PG01

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5. Obviously HMRC potentially affects every individual and organisation in the country. By having a poor customer service (eg backlog of post, calls to Contact Centres not being answered) it is frustrating and wasting the time/money of taxpayers/accountants and is pushing costs on to them. UK taxpayers are honest compared to many other countries but this will decline if when they try to comply they receive inadequate service and know that that non-payment, avoidance and evasion are increasing. Dishonest taxpayers will know that they are more likely to “get away with it” and so under-declare their tax even more. 6. Much of the work which should be done has not been done and will not be done. I worked in Debt Management & Banking. Basically debt work items of less than £10,000 were not being worked. Someone could have a Self Assessment debt with three work items of £9,000 ie £27,000 in total and these would probably not be worked. The office I worked at dealt with New Tax Credit (NTCs) overpayments. We could have been the only office collecting these debts for the whole of the UK and when we were made redundant/ took early retirement I doubt that these aforementioned debts were worked. Tax credits prior to NTCs for the area I covered were not being worked. In the case of Stamp Duty Land Tax debts these were not worked after a letter warning of distraint. Many debts were and will not be worked by DMB, hence tax which has been assessed not being collected. No doubt necessary work in other business streams (eg Compliance) has and will not be done so billions will be lost through tax avoidance and evasion. 7. HMRC has not distinguished between effectiveness and efficiency: for example often taxpayers have to repeated telephone calls or letters to deal with a matter instead of one call/letter. This is mainly caused by having inadequate staff of sufficient calibre, with the necessary training and experience. However large numbers of these staff have been made redundant or taken early retirement and the remaining staff are often reassigned to work they have no/little knowledge or experience of. It is better to spend 30 minutes resolving a matter than the taxpayers having making several calls averaging 10 minutes and the matter still not being resolved or not correctly resolved. Staff at Contact Centres are under such pressure and have instructions to take as short a time over calls as possible that matters are not resolved/fully resolved. 8. Taxpayers used to be able to telephone tax office “A” (and presumably other offices) on a variety of matters and their enquiry would be dealt with usually in that call or referred on to a colleague and quickly resolved. In contrast I was informed that students are working in Contact Centres. 9. A classic example of so-called efficiency/cost savings rather than effectiveness resulting billions being lost, terrible customer service and appalling publicity is New Tax Credits (NTCs). In about 2004 two colleagues who working at a Contact Centre in Liverpool told me that they were under so much pressure to handle telephone calls about NTCs as quickly as possible they were not being dealt with properly. In 2009 “A” Debt Management & Banking (DMB) took over collecting NTCs from “B” DMB. At the handover a “B” colleague said that she (and other colleagues) had been told by management to entry zeros on the computer system presumably to get the work “done”. This had resulted in overpayments of tax credits which they later had to deal with. 10. As shown by the 2009 Staff Survey staff have little confidence in senior management. One example of why they do not is shown by the following example of mismanagement. In 2009 direct debits to repay debts in instalments was transferred from one computer system to a new one. Letters were sent out to those repaying overpayments of tax credits (and presumably other customers with direct debits) which appeared to be informing them of a new direct debit. Many people telephoned as they were anxious that two direct debits were in operation. If more thought had been given to the wording of the letter this would not have happened. At the least an insert or separate letter should have been sent out explaining the situation if the letter could have been reworded due to the cost/timing of a computer system change. In addition there were numerous errors when the information was transferred to the new computer system presumably due to pressure on staff to get the work done and inadequate checking/quality control. 11. The reduction in the budget of HMRC is due to the past government and will be continued by the current government and it is the responsibility of the Board to implement these cuts to resources. However it is the responsibility of Board, in particular Mike Clasper, Chairman, Lesley Strathie, Chief Executive and Permanent the Chairman, and Dave Hartnett, Permanent Secretary for Tax, to “speak truth to power” ie inform ministers of the full downside of the cuts. In what extent they do in private to government ministers is obviously not in the public domain. When Mike Clasper was appointed on reading his work history I thought he has not of the necessary calibre to be charge of vital HMRC. Initially he developed the Vision which was received with cynicism by me and no doubt by other staff as the difference from reality was too great. Since then I cannot recall him being mentioned on the intranet or in the staff magazine. He is virtually not mentioned by the media. Strathie downplays problems eg her intranet message after the 2009 staff survey that showed HMRC morale was very low and poor compared to other departments. The attitude of Hartnett is shown by his lack of apology in his interview on 11 September on Radio 4’s Money Box. However I agree with him that there were not errors as such (the work had not been done manually) and the new PAYE computer system should improve matters in the future. 12. With the Resource to HMRC being reduced by 15% this will undermine the Government’s aim on tax compliance. Much assessed tax (basically declared tax) has not be collected and non-submission of returns inadequately dealt with, experienced, highly-trained inspectors and other staff who could have reduced evasion (undeclared) and avoidance have made redundant or given early retirement. The planned cuts are likely to cobber Pack: U PL: CWE1 [E] Processed: [27-07-2011 09:11] Job: 011830 Unit: PG01

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increase non-payment, avoidance and evasion. As mentioned below one of the biggest area of tax avoidance is tax relief on pensions, costing £28 billion. 13. One area where abuse is likely is that first-time buyers do not pay Stamp Duty Land Tax (SDLT) for properties under £250,000. Are any checks made to confirm they are actually first-time buyers? Someone who is not a first-time buyer could pay someone else to purchase a property and soon afterwards transfer ownership thus avoiding SDLT. 14. HMRC’s priorities for the future should be working effectively to collect as much assessed tax as possible and minimise avoidance and evasion. This needs adequate staff and other resources, which has not been the case in the past due to cuts and is most unlikely in the future because of the 15% reduction in Resource under the spending review settlement. As previously stated billions will be lost. I consider this would not make sense at any time but particularly with the massive budget deficit. 15. A great risk is taxation being reduced by companies being registered abroad even if most/much of their profits are generated in the UK. Individuals also reduce their taxation through off-shore companies. Many of them are registered in the Channel Islands and other dependencies which are financially supported by UK taxpayers (eg for defence and health) yet help companies and individuals reduce their tax to the UK. Pressure should and could be placed on the dependencies. Likewise pressure could be put on organisations involved in tax avoidance, for example banks who are reliant directly or indirectly on government assistance. If someone has a UK tax debt but is living abroad many countries cooperative with HMRC to collect debt however eg the Channel Islands do not cooperate. 16. According to BBC Radio 4’s Money Box which was broadcast on 13 November 2010, the tax relief on pensions cost £28 billion. This must be one the biggest area of tax avoidance and unfair as 40% taxpayers, in effect, receive twice the subsidy of basic rate taxpayers. I suggest that tax relief is limited to 20% but this is obviously can only be changed by the government. 17. Obviously a top future priority for HMRC is to reduce costs and increase tax payments and my suggestions are: — All Self Assessment returns to be submitted online, I understand that the US and Australia insist on this and that nearly everyone submits an annual return. — Withdraw the exemption to filing an employer’s annual return for employers operating HMRC’s simplified deductions scheme for domestic employees (employing a carer can exempt one) and reconsider the exemption on religious grounds as I do not know any religion which would object. — There are still large numbers of HMRC staff who work in London and the South East. If there are job cuts I suggest that they are concentrated on these affluent areas thus reducing the impact on poorer areas. — The work at HMRC is created by legislation and procedures and could be simplified thus reducing costs and making the system more understandable. 18. I have the following suggestions using (past) inside knowledge: — HMRC is charged by Mapeley (registered offshore) for using the offices it sold to it and a Aspire for IT services. In both case HMRC is charged in my opinion too high sums for ad hoc work done. An ex-colleague joked that a cleaner must have negotiated the Mapeley contract. I suggest you re- negotiate the contracts. — When I worked for HMRC I pointed out that too high a percentage of solicitors were not putting the house purchaser’s National Insurance number on the Stamp Duty Land Tax (SDLT) form. This would be useful if the SDLT is not paid and for compliance purposes. — A database which is used by Compliance (for example details of interest paid by banks etc to taxpayers) should be used by other business streams in HMRC (eg Debt Management & Banking staff, in theory they do but in practice they do not). People outside HMRC often comment that the HMRC does not make adequate use of information supplied to it, assuming officers would and are incompetent when they do not. 17 November 2010

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