pac – TaxWatch

Public Account Committee questions resourcing of HMRC

18th January 2023 by Alex Dunnagan

A new PAC report argues that the government is “missing the opportunity to recover billions”

Tax Debt stands at £41.6bn, over £20bn more than pre-pandemic levels, with HMRC estimating it will take “some years” for this debt to be reduced.
New PAC report argues that the government is missing the opportunity to recover billions by not resourcing HMRC compliance effectively.
Chancellor Jeremy Hunt to consider giving HMRC more funding if the department can improve upon the 18:1 return on investment currently seen with compliance activity.

A new report by the Public Accounts Committee (PAC) has argued that “The government is missing the opportunity to recover billions in lost revenue by not resourcing compliance.”¹ The report also highlights disappointment in the amount of money lost to fraud and error in the Covid-19 support schemes, stating that there is a “moral duty to pursue fraud to ensure fairness and maintain a level playing field for individuals and businesses that did not abuse the schemes, rather than HMRC being seen to reward those that were dishonest.”

The committee also recommended that HMRC publish a three-year plan to monitor and improve customer service, saying that taxpayers are “still not receiving an acceptable level of customer service”

Tax Debt

Much has been made of the tax debt owed to HMRC,² with Dame Meg Hillier, the PAC Chair, saying “the eye-watering £42 billion now owed to HMRC in unpaid taxes would have filled a lot of this year’s infamous public spending black hole.”

HMRC’s Annual Report and Accounts for 2021-2022 state that “The debt balance hit its lowest point since the start of the pandemic in January 2022 at £38.8 billion. Since then, it has steadily increased to £41.6 billion at the end of March 2022.” The main reason for the tax debt increasing is that as people struggled to pay taxes throughout the pandemic, HMRC allowed taxpayers more time, rather than aggressively pursuing debts.

However, while the debt balance has actually reduced from £57.5bn in 2020-2021, it is nowhere near the pre-pandemic levels. HMRC state that the balance is likely to remain above the pre-pandemic average of 2.4% of tax revenues for “some years”. The debt balance in 2017-2018 stood at £18.2bn, and in 2018-2019 was £19.1bn. HMRC was due to publish a plan to tackle the “mountain of tax debt” in September 2022, however, this has since been postponed to January 2023.³ It’s important that HMRC make clear what they mean by “some years”, in order for a greater understanding to be gained as to when this debt will be paid and the overall debt reduced to similar pre-pandemic levels.

HMRC debt balance 2017-2018 through 2021-2022

While this £41.6bn figure is staggering, it is important not to conflate this with the Tax Gap. The debt balance is what HMRC are intending to recover, and is therefore expected to be available to the exchequer at some point.

The Tax Gap on the other hand is the difference between the amount of tax that should be collected, and the amount of tax actually collected. It is the sum total of all of the evasion, avoidance and non-payment that leads to the loss of tax revenue to the government. Almost half of the tax gap, which stood at £32bn in 2020-2021, is resultant from fraud. ⁴

Returns on investment

On 15 January, the Treasury Minister Victoria Atkins acknowledged that 1,043 HMRC tax compliance staff had been reallocated to work on cases relating to Brexit in 2021-2022.⁵ This is in addition to the 1,250 staff that had been reallocated to tackling Covid Relief related fraud and error. HMRC’s 2020-2021 Annual Report and Accounts lists 1,237 staff working on ‘COVID-19 response’. This is presumably the administering of the relief schemes, rather than in Covid compliance work.

In order to combat the fraud in the Coronavirus Relief Schemes, a Taxpayer Protection Taskforce was set up. This team is set to wrap up in March, despite collecting less than 25% of the amount lost to fraud and error in these schemes, with HMRC estimating that at least £3.3bn in fraud and error will be outstanding at the end of the financial year. The PAC said they were “disappointed” at the amount set to be recovered. TaxWatch research revealed that staff redeployed to the Taskforce could have produced significantly higher compliance returns in their original teams.⁶

The lack of returns ultimately stem from HMRC being under resourced, a fact highlighted by the difficulties the department is having in dealing with the sheer amount of fraud that occurred throughout the pandemic, and simultaneously having to deal with the impacts of Brexit.

That said, HMRC compliance work still delivers a very healthy return on investment. The PAC report notes that “for every £1 that HMRC spends on compliance activities, it recovers £18 in additional tax revenue”. Despite this, the Autumn 2022 budget saw an increase of only £15m per year to HMRC for compliance work, a paltry sum compared with the extra £112m per year the Department for Work and Pensions (DWP) is set to receive to tackle fraud.⁷

In a letter to the Chair of the Treasury Select Committee, the head of HMRC, Jim Harra, stated that the increase seen at the Autumn Budget is “expected to deliver a return of over 9:1 over the period from 2023-24 to 2027-28 with a return comparable to the 18:1 in 2027-28 when staff taking up these roles are fully trained and experienced in post.⁸” While still a healthy return on investment at 9:1, this highlights the time lag between investment and results. The sooner HMRC is given adequate resourcing, the sooner it can hire and train staff, which ultimately results in greater returns.

In a Treasury Select Committee session on 23 November 2022, Emma Hardy MP (Labour) put some of these figures to the Chancellor Jeremy Hunt, highlighting the 18:1 return on investment, as well as the discrepancy in DWP and HMRC funding models. Hunt responded: “That is why he [Jim Harra, head of HMRC] got an extra £79 million. I hope he maintains that 18:1 ratio. If he can do even better, I will consider giving him even more money because it is very, very important that we do that.”⁹ The idea that a return of £18 for each £1 spent on compliance is not enough to warrant more investment is baffling. Tackling the tax gap should be a high priority of the government.

TaxWatch has submitted written evidence to a recent PAC inquiry entitled ‘Managing tax compliance following the pandemic’, with our submission touching on many of the themes present in this recent publication. In our submission we argue that HMRC’s long term under-resourcing has been highlighted by the timings of Brexit coupled with the pandemic, with tax administration in the UK facing a difficult task without equal in modern times. We argue that the impact of the stress of the past few years could cause long term damage to the tax administration if government does not invest significantly more funds in tackling non-compliance.

Parliamentary copyright images are reproduced with the permission of Parliament.

1HMRC performance in 2021-22, Public Accounts Committee, 11 January 2023, https://publications.parliament.uk/pa/cm5803/cmselect/cmpubacc/686/report.html

2The Times and The Financial Times both ran articles centred on the £42bn debt referenced in the PAC report.

3Treasury Minutes Progress Report, HM Treasury, December 2022 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1121672/E02829734_CP_765_Treasury_Minutes_Progress_Report_Web_Accessible.pdf

4HMRC’s Tax Gap 2022 Edition – TaxWatch Briefing, TaxWatch, 27 June 2022, http://13.40.187.124/tax_gap_2022/

5UK tax billions go uncollected as staff tackle Covid fraud and Brexit, Financial Times, https://www.ft.com/content/63ce3722-56bd-46d2-9aad-0ae666e69b3c

6Funding of Taxpayer Protection Taskforce raises serious issues, TaxWatch, 14 November 2022, http://13.40.187.124/taxpayer_protection

7Opportunities Missed – Autumn Statement 2022, TaxWatch, 17 November 2022, http://13.40.187.124/autumn_statement_2022/

8Email from Jim Harra to Harriet Baldwin MP, 06 January 2023, https://committees.parliament.uk/publications/33540/documents/182481/default/

9Treasury Committee Oral Evidence Session, House of Commons, 23 November 2022, https://committees.parliament.uk/oralevidence/11933/pdf/

TaxWatch calls for scrutiny over “sweetheart” tax deal between HMRC and GE

23rd September 2021 by Alex Dunnagan

The deal

TaxWatch has written to the Public Accounts Committee (PAC), the National Audit Office, and the Treasury Committee, requesting that inquiries be held into an out of court settlement between HMRC and General Electric (GE).

Following a lengthy tax dispute regarding a tax avoidance scheme that saw billions of dollars transferred around the world, it was revealed in the trade press on 15 September that the two parties had reached an out of court settlement, with HMRC settling for a deal that involved no cash payment and just £82m added to GE’s deferred tax charge, and agreeing that there had been no wrongdoing by GE.

GE revealed in their 2020 accounts that if HMRC were successful in their claim, they could face a liability of $1.1bn, before accounting for interest and penalties, stating:

The United Kingdom tax authorities disallowed interest deductions claimed by GE Capital for the years 2004-2015 that could result in a potential impact of approximately $1.1 billion, which includes a possible assessment of tax and reduction of deferred tax assets, not including interest and penalties.¹

Civil penalties for the deliberate non-payment of tax can be up to 100% of the tax owed, doubling the potential liability.

A GE spokesperson said the company is “pleased to have reached an agreement with the U.K. tax authority, resolving this dispute in its entirety with no fault attributed to either party.” The spokesperson added that “as part of the settlement, GE has agreed to a reduction of interest expense that results in a deferred tax charge in discontinued operations of about 10 percent of the potential impact previously disclosed in [its] filings.”² [emphasis added]

The All Party Parliamentary Group on Anti-Corruption & Responsible Tax took to Twitter to criticise HMRC, stating that “Sweetheart deals like this one see the taxpayer lose out on millions in lost tax revenue.” HMRC’s press office responded to the tweets, stating that “HMRC does not do sweetheart deals. All settlements must be fully in line with the Litigation and Settlement Strategy.”

Although HMRC are claiming that this is the best outcome they could have expected, given the seriousness of the allegations, the deal raises a number of questions as to how HMRC ended up settling for such a small amount.

The case

As detailed in our report, Around the world with $5bn, GE moved $5bn between the US, Luxembourg, the UK & Australia in just four days as part of a complex “hybrid arbitrage” tax avoidance scheme, that allegedly generated a tax benefit for GE in the UK of up to £760m over a period of 10 years.³ These multi-billion dollar transactions allowed GE to claim deductions against tax in three different jurisdictions – a so-called “triple dip” scheme.

The UK has long had rules in place to prevent these kinds of schemes from having any effect. However, in this case HMRC cleared the transactions and agreed that it would not apply anti-avoidance legislation after receiving assurances from GE that the structure was not designed to avoid UK taxation, and that any tax benefit arose in Australia. However, after receiving information from the Australian Tax Office, which revealed that GE had told the ATO that the scheme was designed to avoid taxation in the UK, HMRC started proceedings against GE in the High Court asking the court to annul the agreement on the ground that GE’s failure to inform them of the nature of the scheme amounted to misrepresentation. Although the allegations included doctored documents by GE, initially HMRC argued that GE’s failure to inform them of the nature of the deal amounted to an innocent misrepresentation. Later, HMRC sought to change their claim to allege fraudulent misrepresentation.

In April, HMRC suffered a setback in their case when the Court of Appeal found that the tax authority had run out of time to bring their claim under the Limitation Act 1980. HMRC applied to the Supreme Court for permission to appeal the decision of the Court of Appeal.

In support of HMRC, TaxWatch took the preliminary step to intervene in the case.⁴ TaxWatch’s submission argued that the Limitation Act excludes the recovery of taxes from time limits imposed under the act, meaning that HMRC is not prevented from bringing a claim based on an allegation of fraud in this case.

After considering HMRC’s application to appeal and TaxWatch’s submissions, in July the Supreme Court agreed to hear the case in a full hearing.⁵ But before the Supreme Court could hear the case HMRC and GE settled the substantive case out of court.

Unanswered questions

The deal raises serious questions about HMRC’s conduct in relation to this case. The Court of Appeal recently held that HMRC was not able to introduce the allegations of fraud in this case as the evidence they relied upon had been uncovered over six years ago. This issue would not have arisen in the first place if HMRC had alleged fraudulent misrepresentation at the start of proceedings when it inexplicably alleged only innocent misrepresentation.

Why did HMRC wait years before introducing their claim?

HMRC was appealing this decision to the Supreme Court, which had agreed to hear the appeal having taken into account submissions from TaxWatch in support of HMRC. TaxWatch had also applied to the Supreme Court for permission to intervene in the case to make submissions in the public interest on a point of law that would have enabled HMRC to introduce the allegations of fraud regardless of the outcome of its arguments with GE. HMRC was opposing our intervention, despite the fact that our intervention would benefit HMRC.

Why did HMRC agree to a settlement which exonerated GE before the appeal was heard?

The behaviour alleged by HMRC would clearly constitute a criminal offence if proved, so why was there no criminal investigation into the scheme? It emerged in the proceedings in the High Court that the matter was referred to HMRC’s Fraud Investigation Service three times but they failed to conduct a criminal investigation.

These kinds of settlements between large multinationals and HMRC have been the subject of intense controversy in the past, and following a highly critical report by the Public Accounts Committee in 2011, HMRC committed to more transparency and revised its Litigation and Settlement Strategy.⁶

Given the very large amount of money at stake in this case, and the broader consequences that this settlement may have for the tax system, we believe it is of the utmost importance that Parliament and the NAO reviews this settlement.

1GE 2020 form 10-K General Electric, pg 89, https://www.ge.com/sites/default/files/GE_AR20_AnnualReport.pdf

2HMRC Settles $1B General Electric Tax Fraud Lawsuit, Law360, 15 September 2021, https://www.law360.com/articles/1421663/hmrc-settles-1b-general-electric-tax-fraud-lawsuit

3Around the world with $5bn – HMRC’s allegations of tax fraud at General Electric revealed, TaxWatch, 04 August 2020, http://13.40.187.124/ge_hmrc_tax_fraud_allegations/

4TaxWatch intervenes in GE tax fraud case, TaxWatch, 21 May 2021, http://13.40.187.124/taxwatch_intervenes_ge_fraud/

5GE Tax Fraud Case to be heard by Supreme Court, TaxWatch, 28 July 2021, http://13.40.187.124/ge-tax-fraud-case-to-be-heard-by-supreme-court/

6Public Accounts Committee – Sixty-First Report, HM Revenue & Customs 2010-11 Accounts: tax disputes, Public Accounts Committee, 14 December 2011, https://publications.parliament.uk/pa/cm201012/cmselect/cmpubacc/1531/153102.htm