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- KEY POINTS
- No annual report from HMRC.
- Capital gains tax receipts down from 2008/09.
- Tax debt collection has improved.
- Problems with PAYE.
- Errors and fraud in tax credits still present.
HMRC published their 2009/10 annual accounts on 20 July. They are accompanied by an audit report from the comptroller and auditor general Amyas Morse (head of the National Audit Office). 
Once again, the audit report is qualified because of uncertainty about the level of error and fraud in tax credit payments.
In the past, HMRC have produced an annual report to accompany their accounts; for 2009/10, however, only the accounts have been published.
An HMRC press spokesman explained that the current Cabinet Office specified that no departments will be issuing annual reports, and that an appendix in HMRC’s accounts contains ‘all the information we normally include in our annual reports’.
He added that the intention is not ‘to keep important information away from the public’, but that it will be ‘much easier and most cost efficient for us to publish the same information as used to be contained in our annual reports in our accounts and on our website’.
Having had a quick look at HMRC’s annual report from 2008/09, there is no way that all the information contained in its 98 pages can be summed up in a few pages added to the accounts.
Certainly much of the information in the report is factual, e.g. talking about who is who and what each person does, but there is also a lot about the department’s policy initiatives, how it is meeting them, etc. which will be missed.
On the other hand, snippets of information can be found in the accounts. For example, a table provides numerical details of complaints to the Parliamentary Ombudsman in 2009/10.
A total of 1,896 cases were received by the Ombudsman. Eight complaints were accepted for investigation, with 26 reported on.
The number upheld was 14 (54%) and upheld in part was seven (27%). Five were not upheld. Surprisingly, there was no corresponding table about complaints to the Adjudicator, only a note saying that the 2010 Adjudicator’s annual report would be available in September.
Towards the end of the accounts, a section covering contingent liabilities refers to HMRC being ‘engaged in legal proceedings with taxpayers across a range of cases’.
It goes on to say that ‘legal cases are unpredictable’ and the department cannot give an assurance that the amount set aside to cover their potential cost, namely, £5.5 billion, will be sufficient.
Money in
Moving on to actual figures, rather than estimates, the accounts showed that total revenues from taxes and duties in 2009/10 were £435.1 billion, a decrease of £5.9 billion (1.3%) on 2008/09.
Breaking down the different types of tax received in 2009/10 shows there was a £6.3 billion decrease in capital gains tax compared with 2008/09. This, according to HMRC’s accounts was ‘due to a drop in the number of disposals in 2008/09 – as individuals brought forward their asset disposals to benefit from the capital gains tax reforms in the 2007 pre-Budget report which allowed for a lower capital gains tax rate from October 2007 to April 2008’, as well as falls in asset values.
The amount of corporation tax collected also decreased with £37.9 billion collected, which is £3.9 billion or 9.3% lower than in 2008/09. HMRC explained the reduction as being ‘mainly due to the economic downturn’.
Receipts of VAT were down on 2008/09. While accounting for 17.7% of total revenue at £77.1 billion, the amount was £1.4 billion (1.8%) lower than in 2008/09.
Again, the Revenue attributed this to the economic downturn, but also to the temporary reduction in the VAT rate to 15% in December 2008 and back to 17.5% from 1 January 2010.
Interestingly, stamp taxes, which account only for 1.9% of total revenue, coming in at £8.1 billion, were £0.5 billion (6.6%) higher than the previous year. According to the accounts, the increase was largely ‘due to recovery in the UK property market’.
Accrual adjustments
The accounts show that the total of receivables and accrued revenue receivable, i.e. before the provision for doubtful debt, increased by £14 billion (15.1%) between 31 March 2009 and 31 March 2010 to £106.8 billion.
Receivables decreased by £1.6 billion (5.8%) compared to a prior year increase of £2.7 billion. HMRC said that they have improved their debt collection performance in a number of ways, including:
- collecting more in debt receipts;
- improved debt collection rates from 75.1% in 2008/09 to 78.5% in 2009/10; and
- removing non-collectible debt by write-off, remission and adjustment.
Commending HMRC’s enhanced debt management, the NAO said that the Revenue should devise a consistent set of measures, including their cost and effectiveness, so that comparisons can be made across campaigns and over time. In addition, it should set ‘specific targets when planning individual campaigns’ to assess the performance of each campaign.
Noting that HMRC intends to extend their campaigns-based approach to embrace all of its debt collection activity, the NAO said that the department needs to ensure it has the resources to undertake such campaigns.
Thus it should compile a plan showing the number and type of staff skills, training and management required across all campaigns and review the plan while campaigns are running.
Turning to accrued revenue receivable, i.e. tax and duties yet to be paid, for the year ended 31 March 2010, this increased by £15.6 billion (24%) to £80.7 billion.
Along with the additional £2.5 billion bank payroll tax, these increases mainly relate to VAT (£4.3 billion), income tax and National Insurance (£5.7 billion), and corporation tax (£2 billion). The increases reflect the improving economy, and bring the accrued revenue receivable levels close to those at 31 March 2008 (£80.6 billion).
More interesting matters
So much for the facts and figures, it is now time to look at matters to which taxpayers and advisers can relate with more feeling.
HMRC referred in their accounts to the implementation of a new system for PAYE, i.e. the National Insurance and PAYE Service (NPS), in July 2009. An important feature of the system is that every taxpayer is allocated a single record.
However, the tougher validation on NPS combined with the unreliable quality of pre-NPS data led to more data anomalies than were expected.
As a result, rather than the predicted 13 million notices of coding (P2s), 25.8 million were issued. Data inconsistencies and other factors meant that many of these notices were incorrect, but HMRC said in their accounts that ‘as soon as this became evident, a recovery programme was put in place to ensure that only correct P2s were issued to taxpayers and the correct codes were issued to employers to enable them to revise employee codes in time for the start of the new tax year’.
HMRC said that problems are likely to continue through the first year of operation, but they are reviewing the annual coding exercise to see what lessons can be learned.
Overall, the department said that it is ‘confident that NPS represents a significant step forward in the modernisation of our systems and will deliver substantial benefits’.
In its report, the NAO recommended that HMRC should review their systems ‘for capturing and processing data before it enters the new service and assess the scope for improving data through more stringent validation’.
Outstanding reviews
The accounts note that at 31 March 2010, 18.2 million PAYE records remained unreconciled. These relate to 2007/08 and preceding tax years, affecting 15.4 million taxpayers.
HMRC said they are giving priority to 2007/08 underpayments and overpayments for low income taxpayers and hope to clear 1.2 million cases in 2010/11. Analysis suggests that tax repayments could amount to £3 billion and underpayments to £1.4 billion.
Commenting on the uncleared cases, the NAO report said that the department ‘has not made significant progress in reducing the backlog of cases of potentially overpaid or underpaid tax from 2007/08 and earlier’.
Noting that the exact amounts of tax overpaid and underpaid and the number of taxpayers affected cannot be determined until these cases are resolved, the NAO said that the department should:
- give priority to taxpayers who have overpaid tax;
- consider using automated solutions to speed up clearing the backlog; and
- identify and exclude cases where collecting underpaid tax will not be value for money.
The department is changing its approach to collecting tax debt, running campaigns concentrating on debts for each type of tax and tailoring its collection activities accordingly.
The department's evaluation suggests that these campaigns have increased collection rates and it intends to extend the use of campaigns to all tax debts by October 2010.
Tax credits
Tax credits have long been a problem for HMRC in their accounts. As mentioned earlier, the vague estimates of the levels of fraud and mistakes have led the comptroller and auditor general to qualify his opinion of the accounts each year since 2003.
The figures involved are substantial. In 2009/10, HMRC paid £27.3 billion in tax credits to more than six million families. They estimate (based on 2008/09 finalised awards) that error and fraud resulted in incorrect payments to claimants of between £1.95 billion and £2.27 billion.
However, in 2009/10, the department launched a new strategy for reducing error and fraud which has yielded positive results, preventing an estimated £569 million of error and fraud in the year. This strategy is aimed at HMRC gaining a better understanding of claimants and includes:
- improved support for claimants by providing help with applications and when reporting changes in circumstances;
- identifying non-compliance as soon as possible and taking appropriate action; and
- better risk management processes and tools.
The NAO report added that part of the strategy is to ensure that staff dealing with tax credits have the correct skills to enable them to do the job.
Looking at HMRC’s success in collecting overpaid tax credits, unlike for tax debts, this did not improve. At 31 March 2010, the value of tax credits debt had increased to £4.5 billion, compared to £4.4 billion at 31 March 2009.
The NAO explained that this is partly because claimants face financial difficulties and are unable to pay, but also because the department prioritised collecting higher value tax debts, rather than the comparatively lower value tax credits debts.
The department plans to improve its assessment of tax credit debtors’ ability to pay their debts, focusing initially on the overpayments identified in the 2010 renewals process.
The NAO report said that HMRC need to extend this approach to older debts so that they can pursue debts that can be recovered cost effectively, and write off the others.
More to do
HMRC’s accounts make for mixed reading. The number of incorrect notices of coding issued at the beginning of the year, despite, or perhaps more accurately, because of the department’s new PAYE system, caused considerable unnecessary confusion among taxpayers and employers, and the accumulation of uncleared cases is shocking.
On the other hand, it does seem that HMRC have made headway in improving their tax debt collection procedures.
