Extra-statutory Concession A19

David Gauke Excerpts

Tuesday 4th December 2012 Westminster Hall

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

It is a great pleasure to serve under your chairmanship again, Mr Streeter, and I congratulate my hon. Friend the Member for Amber Valley (Nigel Mills) on securing the debate. Once again, he is bringing to the attention of the House his knowledge and expertise of the tax system and representing his constituents so well on a number of matters. He does so today with regard to the extra-statutory concession A19, and the debate has been helpful. I am grateful for the opportunity to respond, and I hope to be able to address his questions.

Before doing so, it is worth recognising that HMRC has made considerable progress in modernising the PAYE system and bringing the legacy issues for PAYE customers up to date. The national insurance and PAYE computer system—NPS—became operational in early 2010, enabling HRMC to bring all taxpayer records on to a single national database held under unique references. For the first time, HMRC has been able to bring together all sources of income for a customer under one reference. Although I know that there were considerable problems with the implementation of NPS, now that it is fully automated, it is a very cost-effective process that enables HMRC to reconcile nearly 60 million PAYE tax records very quickly.

In October 2010, HMRC’s late chief executive, Dame Lesley Strathie, made a commitment to the Public Accounts Committee, in response to an NAO recommendation, that HMRC would bring PAYE up to date for taxpayers by the end of 2012-13. It is on track to deliver on that commitment and it has already settled 17.9 million unreconciled customer records. As a consequence of those improvements, in the last two years, the number of unexpected tax repayments and demands issued by HMRC has been higher than usual, and in turn, that has led to an unprecedented number of customers contacting HMRC for help and advice. HMRC recognises that on occasions its customer service has fallen short of the standards that it wants to provide. HMRC has taken steps to improve its customer service over the past year—for example, by investing in its contact centres—and it is making customer information more accessible and easier to understand. It recognises, however, that there is more to do, and it is building on this year’s improvements to give all taxpayers the services that they rightly expect.

A significant proportion of the complaints that HMRC has received relate to HMRC’s implementation of ESC A19, and HMRC consulted on the operation of the concession over the summer. It has listened to the views of taxpayers and to comments in the media. Its current operational process was developed in response to the exceptional circumstances of 2010, when steps needed to be taken to ensure that the 166,000 requests that it received could be dealt with quickly. To respond to a question raised by my hon. Friend, from September 2010 to 31 March 2012, HMRC received 166,000 claims to the value of £185 million, and 41,766 of those requests were successful, at an estimated value of £53.7 million.

HMRC looked to deal with those matters as quickly as possible, creating a dedicated team and a streamlined process that included a more relaxed approach to the reasonable belief test during 2010 and 2011. It also raised the collection threshold to £300, and as I said in my statement to the House in January 2011, HMRC would not reconcile the tax affairs of 250,000 pensioners for whom we believe a request under the concession would have been successful. HMRC recognises that there is much more that it needs to do to improve its implementation of the concession for the future. There is work in progress to deliver process improvements and better guidance for officers dealing with requests, and particularly to improve the service for those customers who will always need help understanding and managing their tax affairs. That work is specifically aimed at reducing the number of customer requests that become formal complaints.

At this point, it may be helpful if I try to respond to some of my hon. Friend’s specific questions. He asked whether HMRC had published all the internal guidance on ESC A19. HMRC has published all guidance except where it considers that publication of the decision-making process that it uses to determine the reasonable belief test would prejudice its application. If HMRC published certain items, all cases would be phrased in a particular way to meet it. That would not be helpful, but that is the only reason why guidance would not be published.

HMRC has not changed its policy on ESC A19. HMRC has been looking to improve its consistency of decision making in these cases. Taxpayers have an appeal route to the Revenue adjudicator if they cannot agree the position directly with HMRC. Perhaps it is worth saying a word or two about that appeal route, which was raised by my hon. Friend. If a claim is refused, the taxpayer can request a second review. The taxpayer can make a formal complaint to HMRC. The taxpayer can then request a review of the formal complaint decision. The taxpayer can ask the adjudicator or ultimately even the parliamentary ombudsman to conduct a review. It is correct to say that there is no statutory right of appeal to the tribunal. That point has been tested with the tribunal, and that was the conclusion reached in that case.

Of course, HMRC has a responsibility to collect the tax correctly as prescribed by Parliament. ESC A19 is a concession that applies where HMRC has not acted in a timely or accurate way, but clearly there is not complete flexibility for HMRC to agree not to collect the tax that is due.

My hon. Friend asked whether, in some cases, the matter should be taken to the employer or pension provider first, rather than going to the taxpayer. HMRC has a process that allows it to approach both the employer and the taxpayer at the same time. In the majority of cases, a review under ESC A19 can be conducted quite quickly to establish the nature of the error. HMRC is happy to discuss individual cases with taxpayers if the taxpayer feels that it is their employer who has made the mistake.

[Nigel Mills]

Is it not the case that under, I think, PAYE regulation 72, the Revenue should go to the employer first? I think that it can then issue a notice to say that it can go after the taxpayer. In theory, the taxpayer should be sent a copy of that notice. I am not entirely sure that that is the process that is followed very often, but I think that it is the one set out in the regulations.

[Mr Gauke]

If I may, I shall come back to that specific point, because I want to deal with another issue raised by my hon. Friend, which was whether the P14 forms could be used for information and why that does not happen. I just point out that due to the volumes received each year—approximately 60 million—P14 forms are processed over several months. That is an automated process. There is currently no scope within the process that would enable HMRC to identify and amend a tax code for the current year on receipt of the previous year’s P14.

My hon. Friend asked about the ESC A19 consultation. The outcome of that consultation has yet to be decided. Obviously, he will be keen to know what it is. When that has been concluded, I will ensure that he is fully aware of it.

It is right to say that HMRC has delivered a real change in the operation of PAYE and brought its legacy issues up to date. That means that 85% of PAYE customers will have paid the right tax during the year. The remaining 15% will be due a refund or owe tax for a variety of reasons other than HMRC error. Furthermore, the vast majority of customers will be notified of their tax position well before the end of the tax year.

ESC A19 is designed to apply routinely when HMRC has failed to act on information received and also fails to notify the customer of their arrears for a full 12 months after the end of the tax year. This year, HMRC has received significantly fewer requests, and most of those were received immediately following the issue of the tax calculation. The vast majority were not eligible for the concession because there had been notification of the arrears within the 12-month deadline. The occasions on which taxpayers will need to make a request under ESC A19 in the future are significantly diminished. HMRC does not envisage the problems and complaints that arose from its implementation of the concession in the exceptional circumstances of the past two years arising to the same extent in the future.

However, my hon. Friend raises an important point about the difficulty that some taxpayers have when they simply have a tax code. That can make it difficult for them to assess exactly what the right amount of tax to be paid is and, if they are paying the wrong amount, what can be done about it. My hon. Friend will be pleased about the progress that we are making with tax statements. We are making much more information available to taxpayers, so that they can see what tax has been paid. The way I see that developing is that ultimately it should provide a much clearer route—much greater clarity to taxpayers—to ensure that the correct amount of tax has been collected.

Let me return to regulation 72, which my hon. Friend raised a moment or so ago. He is correct about the process. The NPS is fully automated and cost-effective and deals with 1.5 million underpayment cases per annum without recourse to this process—without going into regulation 72. These cases do not arise only because of employer error. Regulation 72 is really an anti-avoidance measure to prevent collusion between employer and employee. I hope that that provides some clarity to my hon. Friend.

It is important to distinguish between HMRC’s obligation to apologise and provide redress for customers who experience poor service and its collection and management discretions in effect to withdraw tax rightly due from the Consolidated Fund. HMRC has a statutory obligation to collect the right amount of tax from each taxpayer and to be fair to all taxpayers in that respect.

ESC A19 was intended to remedy the hardship and injustice of unexpected demands caused by the then Inland Revenue’s error and delay. Although HMRC’s tax commissioners can forgo tax in cases of financial hardship, its discretions to forgo tax that is rightly due are limited and are certainly restricted to the strict application of the conditions of the concession.

Compensation payments to remedy the cost and distress of poor service are ex gratia and are applied using the guidelines in the “Managing Public Money” rulebook. Those must not allow recipients to gain financial advantage as a result of poor customer service. It would be acting outside the parameters of the authority delegated to HMRC to provide redress that clearly linked someone’s tax liability with the amount of their compensation. To be fair, HMRC does have to operate a difficult balance.

We must recognise that the complaints and problems that we have heard about today, although serious and distressing for the individuals involved, have arisen in exceptional circumstances. HMRC has recognised and apologised for poor service and is taking steps to put things right for the future, particularly for pensioners and other vulnerable customers. It is working closely with professional organisations and charities to understand customer needs and improve services.

The need for customers to turn to ESC A19 for redress in response to an unexpected tax demand is diminishing. I would like to reassure my hon. Friend that HMRC will compensate customers for poor service, using its authority within “Managing Public Money” rules, and use its collection and management discretions to forgo tax where that is appropriate and necessary and where it has the power to do so.

Question put and agreed to.