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return on investment

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/

Opportunities Missed – Autumn Statement 2022

17th November 2022 by Alex Dunnagan
  • Minimal efforts to close the tax gap, despite HMRC producing a return on investment of up to 18:1 with compliance work.

  • DWP to receive an extra £112m a year to tackle fraud, but HMRC only to receive £15m. Once again, the government is prioritising going after benefits fraud while failing to take tax fraud seriously.

  • R&D tax relief schemes changed, but attempt to make relief less attractive to those claiming fraudulently will reduce benefits to small and medium businesses conducting genuine R&D, and will do nothing to recover previously overpaid amounts.

  • Changes in the threshold for the 45% tax rate aren’t as progressive as they seem. While someone on £150k will pay what is worth an extra 1% of their income, the change to someone on £1.5m is less than 0.1%.

 

On Thursday 17 November the Chancellor Jeremy Hunt unveiled his Autumn Statement 2022.

Hunt, the fourth UK chancellor of 2022, delivered this budget against a backdrop of financial uncertainty. The chancellor has called this a plan to tackle the cost of living crisis and to rebuild the UK economy.

While numerous news outlets have covered the major stories of the budget, at TaxWatch we are casting a forensic eye over the lesser covered tax stories.

 

Minimal efforts to close the tax gap

In an attempt to balance the governments books this budget features both cuts to public services and increases in taxes. There is a third option for the government to increase funds however, though it seems to have been overlooked – and that is reducing the tax gap.

HMRC estimates that in 2020-21, £32bn of tax went uncollected. Of this, 45% – or £14.4bn – is a result of fraud. These numbers are almost certainly an underestimate, as they don’t include profit shifting, which academic studies have found to be in the region of £20bn, nor do they include the amounts lost to fraud and error in the coronavirus support schemes, which is estimated to be around £4.5bn.

The solution to recovering significant amounts of this lost tax is through investment in compliance. Just last month during a Public Accounts Committee oral evidence session Jim Harra, the head of HMRC, said “On average, for every pound that we spend in our customer compliance group, we recover about £18 worth of additional tax revenues.” Dame Meg Hillier MP responded “that’s a helpful pitch to the treasury.” At TaxWatch, we agree.

Justin Holliday, HMRC’s Chief Finance Officer and Tax Assurance Commissioner, also stated during this session that “to get £1 billion off the tax gap, you would need between a twentieth and a tenth of £1 billion”.1 This is a ridiculously good return on investment.

Despite this, there was little in the way of investment in HMRC announced. There is to be “a further £79 million over the next 5 years” in order to tackle tax fraud. While any investment in HMRC is good news, £15.8m a year is small change. The Department of Work and Pensions is to receive an extra £280m between now and 2024-25 to tackle fraud, error, and debt in the benefits system – working out at £112m per year.

Last year TaxWatch revealed that the UK Government had given the DWP £613m to tackle pandemic related benefits fraud, while only giving HMRC £155m to tackle Covid related tax fraud. This is despite the fact that fraud and error in HMRC administered Coronavirus Support Schemes is thought to be worth billions more than the increase in Covid related benefits fraud.2

The Government have calculated that over the course of five years this £79m investment should see a return of £725m. That’s an investment gain of £646m, with a total return on investment of 818%. With such healthy returns for so little invested, it is unclear why the government is again choosing not to put more money into HMRC.

 

R&D reform (again)

Its no surprise that reforms to the R&D relief schemes were featured in the Autumn Statement. Looking at the past few years of budgets, reference is made to reforming R&D reliefs in the Spring Statement 2022,3 Autumn Budget 2021,4 Spring Budget 2021,5 Spring Budget 2020,6 and Spring Statement 20197 demonstrating the concerns around these tax reliefs. It’s likely that there will be further reform at the next budget/statement/fiscal event. Limited changes to the schemes were made in Finance Act 2022 (coming into existence in April 2023) to extend claimable expenditure to cloud computing costs and data and requiring more detailed information to be submitted with claims. These latest reforms however have been fairly substantial, and will affect claims from 2022-23.

Today’s announcement fundamentally changes the benefits in the two schemes, known as the SME scheme (Small and Medium-Sized Enterprise scheme) and the RDEC scheme (Research and Development Expenditure Credit) scheme which is mainly for large businesses but can be claimed by SMEs in some cases.

There have long been concerns about the increasing costs of R&D tax relief (from £1.1bn in 2010-11 to £6.6bn in 2020-218) and levels of error and fraud in the schemes9 . HMRC estimated fraud and error in R&D reliefs in 2021-22 was £469m but calculated that 7.3% of SME scheme claims were incorrect while only 1.1% of RDEC scheme were incorrect. t. The Chancellor referred to the high level of fraud and error in announcing a reduction in the additional corporation tax deduction for R&D expenditure in the SME scheme from 130% to 86% and the SME credit rate reducing from 14.5% to 10%. In contrast the RDEC scheme has been made more generous with the credit available increased from 13% to 20%. These adjustments have been described as a rebalancing of rates but in fact are predicted to result in a net reduction in the costs of both schemes across the next few years.

The statement describes the changes as a move towards a ‘single RDEC-like scheme for all’ with the intention of consulting on the design of a single scheme for the future alongside consideration of further support for ‘R&D intensive’ SMEs without significantly increasing the cost of the overall scheme.

The reduction in the SME scheme benefits appears to be a blunt instrument to deal with well-discussed problems with boutique R&D claims firms said to be using no win no fee arrangements to push the boundaries of R&D definitions and claimable costs10. This will likely make the scheme less attractive to those entities, as there will be a smaller amount to take their cut from, but will obviously have an immediate impact on the support given to SMEs carrying out genuine innovation in the field of science and technology. While anything intended to reduce the amount of error and fraud in the tax system is good news, this should not overshadow the significant sums already believed to have been erroneously claimed in earlier years. As mentioned above, investment in compliance work by HMRC is depressingly low compared with the potential return on that investment, and while there are suggestions that around 100 staff have now been deployed to pursue enquiries into more past R&D claims, there is a risk that significant amounts of overclaimed amounts will never be recovered.

 

Top rate of tax – not as progressive as it sounds

The 45% top rate of income tax was scrapped under Truss and Kwarteng, only for a U-turn to see it reinstated. Hunt announced today that the government will decrease the additional rate threshold from £150,000 to £125,140 in April 2023, saying “those in the highest income households will contribute more.”

Arun Advani, an Associate Professor at the Department of Economics at the University of Warwick, has conducted some analysis as to what this means in practice.11 Lowering the threshold will raise around £850m in year one, rising to just over £1bn by 2026-27, with the increase affecting the top 2% of earners. That’s not an insubstantial amount of money, but, its important to note that what it raises is not particularly progressive. A person earning £150k a year is going to pay another £1,250 in tax, almost 1% more of their income. A person earning £1.5m is also going to be paying another £1,250 in tax, less than 0.1% of their income. While it may make headlines, in reality, the very rich won’t really be affected.

 

1Public Accounts Committee, 20 October 2022, https://parliamentlive.tv/event/index/4b5df068-66e0-4d62-a65b-8a073cd65253

2Funding to fight covid related tax and benefits fraud, TaxWatch, 29 December 2021, http://13.40.187.124/covid_fraud_spending_dwp_vs_hmrc/

3Spring Statement 2022, Chancellor of the Exchequer, March 2022, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1062708/Spring_Statement_2022_Print.pdf

4Autumn Budget and Spending Review 2021, HM Treasury, 27 October 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1043688/Budget_AB2021_Print.pdf

5Budget 2021, HM Treasury, 3 March 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/966868/BUDGET_2021_-_web.pdf

6Budget 2020, HM Treasury, 12 March 2020, https://www.gov.uk/government/publications/budget-2020-documents/budget-2020

7Spring Statement 2019, Chancellor of the Exchequer, Spring 2019, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/785618/WMS_final_Commons.pdf

8Corporate tax: Research and development tax credits, Gov.uk, 29 September 2022, https://www.gov.uk/government/statistics/corporate-tax-research-and-development-tax-credit

9Huge cost to taxpayers of HMRC research & development initiative comes out in the wash, The Times, 31 October 2022, https://www.thetimes.co.uk/article/huge-cost-to-taxpayers-of-hmrc-research-development-initiative-comes-out-in-the-wash-czn9mxnhs

10Formal meeting (oral evidence session): Draft finance bill 2022-23, UK Parliament Committees, 14 November 2022, https://committees.parliament.uk/event/15744/formal-meeting-oral-evidence-session/

11Arun Advani, Twitter, 16 November 2022, https://twitter.com/arunadvaniecon/status/1592993284712173568

HMRC Investment Announced

11th April 2022 by Alex Dunnagan

A step in the right direction, but more to be done

  • £161m investment in HMRC compliance work – set to bring in an additional £3bn over next five years
  • New 50 strong HMRC team tackling R&D fraud to be in place by 2023

Fraud within the tax system costs the UK tens of billions of pounds a year,[1]The tax fraud gap – 2021 edition, TaxWatch, 16 September 2021, http://13.40.187.124/tax_fraud_gap_2021/ with HMRC recently put under intense scrutiny on their record of tackling the problem. [2]HMRC’s record on covid support and tax fraud under the microscope, TaxWatch, 14 February 2022, http://13.40.187.124/hmrc_record_covid_support_fraud/ Arguments can be made about the strategy HMRC pursues in tackling tax fraud, but ultimately, everything the department does comes down to resources available as a result of government decisions on investment.

While most media coverage of the Chancellor’s Spring Statement last month focussed on the cost of living crisis, one announcement that appears to have flown under the radar is an extra investment in HMRC’s compliance work and a new team tackling the abuse of R&D. Though these actions won’t see the eradication of tax fraud in this country, they are certainly a positive move.

HMRC Compliance

HMRC is set to see an additional £161m of funding for its compliance work, which is expected to generate more than £3bn in additional revenues over the next five years. With such a healthy return on investment, why isn’t more being spent on compliance?



The March 2021 Spring Statement revealed that refocusing attention on covid fraud would lead to less tax being collected until 2023-24 as staff were moved from other areas of compliance work. [3]Spending Review 2020, HM Treasury, 15 December 2020, https://www.gov.uk/government/publications/spending-review-2020-documents/spending-review-2020.



The 2022 Spring Statement sets out additional compliance resources for HMRC and suggests that the £161m investment will bring in an additional £3bn. HMRC is expecting an additional £18 in tax revenues for every £1 spent.

It was announced in December last year that the DWP is set to receive £510m for additional compliance work to tackle fraud and error, with the expectation that this will “deliver savings” of £3.15bn by 2026-27.[4]See Funding to fight Covid related tax and benefits fraud, TaxWatch, 29 December 2021, http://13.40.187.124/covid_fraud_spending_dwp_vs_hmrc/ The amount of fraud in the benefits system is far smaller than that in the tax system, and the predicted return on investment is £6 for every £1 spent – 1/3 of the ROI for tax compliance. The question the government needs to answer is: why is more being spent on benefits compliance, which results in a lower return on investment?

New R&D team to tackle abuse of reliefs

In the run-up to the Spring Statement there were a number of rumours that the Chancellor was about to overhaul the way in which R&D reliefs worked.[5]Sunak plans overhaul of ‘generous’ R&D tax credits, Financial Times, 02 March 2022, https://www.ft.com/content/c948c5c5-06cb-4770-a789-e8146df49014 In his Mais lecture of February 2022, Sunak stated that that “in spite of spending huge and rapidly growing sums, clearly it [R&D] is not working as well as it should.”

However, when it came to the statement, very little new was actually announced. There was talk of legislation on overseas R&D expenditure and the inclusion of cloud computing costs, but for the most part the message was that we should wait until Autumn for further developments. The Chancellor said, “the government will consider what more can be done to tackle the abuse of R&D tax reliefs, particularly in the SME scheme, ahead of Budget 2022.” This is not the first time we have been told to wait and see. The Autumn Budget 2021 referred to combating the abuse of R&D tax reliefs “later in the Autumn”. It appears the can has been kicked further down the road.

In November 2021, a treasury report on R&D Tax Reliefs referred to “the creation of a new cross-cutting team focussed on abuse.” [6]R&D Tax Reliefs, HM Treasury, 30 November 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1037348/RD_Tax_Reliefs.pdf The Spring Statement also mentioned this “new cross-cutting HMRC team”, but failed to give any further detail. TaxWatch approached HMRC for more information, and we were told that the aim was for the team to be set up by 2023. An HMRC spokesperson said:

“We are committed to tackling error and fraud within R&D Tax reliefs. We are creating a 50-strong team, working right across HMRC, to further support the ongoing work in this area.

“This new team and the other measures announced in the Autumn are designed to tackle abuse and boundary pushing while limiting the impact on compliant businesses.”

It’s likely that these 50 will be moved from elsewhere within HMRC, rather than being new staff altogether. Details should become clearer throughout the year, and there is a realistic possibility that this new team will somehow involve the fraud investigation team.

The creation of this new team is a step in the right direction. If the team functions well and is able to target the right cases for inquiry, we may start to see HMRC begin to make serious progress against the egregious abuse within the R&D system. Watch this space.

References[+]

References
↑1 The tax fraud gap – 2021 edition, TaxWatch, 16 September 2021, http://13.40.187.124/tax_fraud_gap_2021/
↑2 HMRC’s record on covid support and tax fraud under the microscope, TaxWatch, 14 February 2022, http://13.40.187.124/hmrc_record_covid_support_fraud/
↑3 Spending Review 2020, HM Treasury, 15 December 2020, https://www.gov.uk/government/publications/spending-review-2020-documents/spending-review-2020
↑4 See Funding to fight Covid related tax and benefits fraud, TaxWatch, 29 December 2021, http://13.40.187.124/covid_fraud_spending_dwp_vs_hmrc/
↑5 Sunak plans overhaul of ‘generous’ R&D tax credits, Financial Times, 02 March 2022, https://www.ft.com/content/c948c5c5-06cb-4770-a789-e8146df49014
↑6 R&D Tax Reliefs, HM Treasury, 30 November 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1037348/RD_Tax_Reliefs.pdf


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