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KEY POINTS
- Will the new structure help HMRC understand customer behaviour?
- An overview of the new local compliance structure.
- Office location and staffing issues.
- Measuring success and benefits.
- Does HMRC have the manpower to deliver results?
The recent buzz on the new crackdown on tax havens prompted me to see what HMRC were doing to measure the tax gap these days. I finished up looking at their Departmental Autumn Performance Report 2008 and found answers to the more intriguing questions that had been puzzling me for a while.
Increasingly, I was getting correspondence from HMRC with letterheads that meant little or nothing to me let alone their ‘customers’. Two hit my desk this week from ‘Local Compliance, I & PB Capital Gains Tax’ and ‘Local Compliance, Appeals Cross Cutting Group’.
I’m OK with most of this, but ‘I & PB’ meant nothing to me, and why should I or my client be interested in whether the appeal was ‘Cross Cut’ or cut in some other way? On page 57, the annual report states:
‘We have also taken steps to improve our understanding of our customers and their behaviour. An example of this was in Local Compliance. They successfully reorganised into customer focused groups: large and complex, small and medium enterprises, individuals and public bodies and a cross-cutting group.
‘The reorganisation has enabled us to:
- deliver benefits to our people and customers;
- work in a group and build expertise that focuses on specific customers; and
- respond flexibly to national risk issues.’
I wasn’t aware of what was obviously a significant reorganisation, let alone one which drew individuals and public bodies together in one ‘customer focused’ group.
The last I heard, HMRC ‘districts’ had morphed into ‘areas’. Searching the HMRC site for ‘reorganisation’ returned nothing relevant.
This is what I’ve discovered about the ‘steps’ HMRC have taken to improve ‘understanding of customers and their behaviour’ and how a re-organisation of Local Compliance is an example of such a step.
At this stage it’s a rough guide, but the answers to some of the questions that had been troubling me might also be of interest to other readers.
Reorganisation and understanding
Is there any connection between the reorganisation and improved understanding?
The idea of understanding customers’ behaviour seems to go back a few years and is looking to distinguish between those who under-declare their tax liability by reason of confusion or simple error and those who set out to defraud or unacceptably avoid.
At the base of the pyramid are the vast majority of entirely compliant customers and at the top are the small minority of hardened tax evaders.
The Departmental Report 2008 that in improving understanding of customer behaviour HMRC have reviewed studies by other tax authorities, academics, other government departments, and the Home Office (page 49).
Essentially, though, HMRC understands behaviour by numbers, and an important number is the extent to which Local Compliance customers under-declare their liabilities in their self-assessed returns of those liabilities.
This is judged by looking at the results of random enquiries. There are all sorts of caveats about the accuracy of the figures, but the Autumn Report shows that over a five-year period the percentage of total liabilities under-declared by individuals is consistently in excess of 10%, and over a four-year period the total liabilities under-declared by corporation tax payers in the small and medium enterprises band ranges from the low teens to single figures, so again about 10%.
So whatever the reason, year on year there is a serious level of under-declaration despite the department’s quite accurate headlining of the fact that the majority of taxpayers want to pay the right amount of tax at the right time.
As to why individuals, for example, behave that way, most people would probably understand that it’s because they feel there’s a good chance they can get away with it. I’m not clear how putting these ‘Is’ in a customer group with ‘PBs’ helps understand their behaviour.
The new structure
What is the new structure and how will it help?
Local Compliance used to be organised on a regional basis. It is now organised on what HMRC calls a ‘functional’ basis, the functions being defined by the ‘customer groups’ involved as shown by Diagram 1.
The guidelines for ‘large’ are the EU definitions. Generally such businesses will be companies, but unincorporated businesses turning over more than £5 million; large partnerships and cases of special difficulty form part of the same group as ‘complex’.
It seems likely that the style adopted by L&C will be that of the Large Business Service (LBS) with, for example:
- a dedicated customer relations manager as a first point of contact;
- advice on how much of a risk any given business is considered to be by HMRC; and
- light touch regulation and minimum compliance costs where appropriate.
Hidden Economy and Civil Investigation of Fraud teams will be attached to the SME group.
This is logical enough, as it’s hard to imagine an unregistered business which should be within L&C and any fraud by an L&C company would have to be a matter for the Revenue and Customs Prosecution Office or Special Civil Investigations.
There is presumably some sub-division of the SME with the ‘small’ segment, say, below the VAT threshold. Clearly, your local corner shop has little in common with a company turning over £25 million and employing 150 people.
If dealing with under-declaration is the question, presumably the answer is that risk is better identified and tackled by teams specialising in relatively well-defined areas.
In the new structure, all customers in the L&C and SME groups will have all tax matters:
- income tax;
- corporation tax;
- value added tax; and
- employer compliance,
dealt with in the same one-stop shop or business unit. There should be a benefit for all customers here in that there will be a single point of contact for all tax issues.
The rest of the old structure
What happens to everything else from the old structure?
Local Compliance now has a national group which provides services and supports ‘cross cutting’ across the boundaries of the customer groups, as shown by Diagram 2.
Most readers will have a fair idea of these groups’ responsibilities. TEEL is more of a novelty. You will probably recall a whole series of HMRC ‘interventions’ that were trialled a couple of years ago.
The idea was to get the right amount of tax paid by customers nearer the base of the pyramid at minimal cost, and in particular by avoiding formal enquiries.
What were business support teams will now provide assistance to people in getting their returns right and dealing with minor errors by telephone. This is a combination of education and enabling.
Leverage relies on letting customers know what areas of under-declaration HMRC are interested in and leaving it to them to respond or not.
This could be specific information on property or interest in a particular business sector. A formal enquiry always remains as a possibility.
Location, location
Where will my local business unit be?
Although defined by function or customer group rather than geography, both SME and L&C will maintain what amounts to some sort of a regional presence.
Since the merger, HMRC have been engaged in an exercise to cut costs by reducing office space.
That is determined by practicalities such as the length of leases and how far staff can reasonably be asked to travel to a new work location.
In these circumstances the location of HMRC’s reduced office space will be the deciding factor in determining where business units for each customer group are located. Many smaller offices are closing and work is being transferred.
Staffing issues
How is a business unit staffed?
The letters from Local Compliance Group will usually incorporate the name (not the phone number) of the business head and less often the team leader. In SME, the business head is likely to be a grade 7 or grade 6 or, in old Inland Revenue parlance, an inspector principal or senior principal (the typical grade of the district inspector).
The business head will run a team, or a number of teams, of officers of grades ranging from clerical through to grade 7. Depending on the case, there will be input from the direct and indirect tax people and their employer compliance colleagues.
In L&C, the business head will be a grade 6 and again the teams will be multi-graded. The majority of the inspector caseworkers in the team outside a large urban conurbation will be grade 7.
In major centres there may be grade 6 caseworkers reporting to grade 6 team leaders who report to a grade 6 business head. In L&C most cases up for review will involve input from all disciplines in the team.
Success
How does the department know that the reorganisation has been successful?
This is difficult to understand, as the reorganisation was barely complete at the time that the last autumn report was being compiled.
Doubtless there will have been a massive cost benefit exercise undertaken, but it would seem far too early to judge the success in either monetary or other terms.
Benefits delivered?
Has the reorganisation delivered significant benefits to ‘our people and our customers’?
HMRC’s staff surveys have consistently shown low morale across the board. It’s hard to see how another set of organisational changes (not forgetting job cuts) are going to turn this around at least in the short term.
Clearly, a perceived benefit for customers is a shift away from an enquiry from the inspector followed some time later by an employer compliance review and later still by a visit from the VAT team with little evidence that relevant information is being passed around.
The theory, at least, is that all checks and enquiries should happen at once or in a short space of time and in a pre-arranged fashion.
HMRC’s current guidance on complaints suggests that the first contact should be made with the person you are dealing with or someone in their office, but if you are still dissatisfied then you are pointed towards a formal route that is through Complaints and Assurance within the Cross Cutting Group.
In my experience every effort should be made to address issues with the team leader and/or business heads and if you get no joy there, the chances are that the complaints team are not going to upset the apple cart.
Enabling expertise
Will the reorganisation enable people to work in a group and to build expertise that focuses on specific customers?
Major drivers in this reorganisation must have been getting relevant staff from the old departments working closely together and saving money on office space.
Certainly, people with very different skill sets are now increasingly sitting in the same office working on the same cases at the same time.
National risk issues
Will the reorganisation enable Local Compliance to respond flexibly to national risk issues?
The reorganisation may help focus resource, but isn’t the most significant issue whether HMRC really have the resources to properly tackle the most significant risks?
A constant criticism in National Audit Office (NAO) and Public Accounts Committee (PAC) reports in recent years has been the tendency of HMRC to pick the ‘low hanging fruit’ at the expense of more challenging cases.
Customers at the top end of the SME group will be very significant concerns. Do the relevant business units really have the number and quality of staff to satisfactorily address non-compliant customers at the top end?
These will be difficult, time-consuming and technically demanding enquiries being handled by quality advisers.
Even if non-compliant behaviour is fully understood, the 10% under-declaration of liability is unlikely to diminish by much if there really is a serious underlying manpower problem.
No ‘reorganisation’ will solve that one.
Chris Chadburn advises on HMRC investigations. He is a founder of venntax, an association of tax specialists providing advice across a wide spectrum and can be contacted by telephone on 0844 736 5966 or by email.
