HM Revenue and Customs

Ian Swales Excerpts

Wednesday 2nd March 2011 Commons Chamber

[Ian Swales (Redcar) (LD)]

I speak as a member of the Public Accounts Committee, which has held a number of hearings with Her Majesty’s Revenue and Customs over the past few months. HMRC collects about £440 billion, but its estimate of the tax gap—the amount it thinks it could collect compared with what it actually collects—is £42 billion. Others, notably public sector trade unions, have produced even more ambitious estimates of that gap, putting it as high as £120 billion, although a lot of those numbers are more controversial. To put those figures in context, the entire cost of running HMRC is less than £4 billion.

As we have heard, huge systems changes and headcount reductions have taken place in recent years, and they have led to poor morale. As my hon. Friend the Member for Chichester (Mr Tyrie) said, HMRC came a lamentable 96th out of 96 on staff morale in the previous civil service staff survey. It also came 95th, 95th and 94th on “Leadership and Management of Change”, “Understanding My Work” and “Learning and Development” respectively. Those are shocking statistics.

I recently visited an HMRC office close to me to meet groups of staff, and their comments confirmed the survey’s findings. Despite being generally low paid and having their job security and pensions under threat, they did not even mention those issues. They talked not only about pride in the service, and their experience and professionalism, but about their frustration at the chaos they could see all around them and, above all, about the “process as seen” mentality. It means that they have mindlessly to process data they know to be wrong. Examples of that can be as simple as not being able to use data from a P60 where they have been omitted from a tax return, which leads to erroneous tax bills or refunds. In the private sector the mantra “Get it right first time” has been around for at least 30 years.

In the same staff survey, damning verdicts were given under almost every heading, as we have heard. Only 13% of staff gave a positive response to the statement, “I feel HMRC as a whole is managed well”, and only 12% agreed with the statement, “Overall I have confidence in the decisions made by HMRC’s senior managers”. Despite those shocking results, the results on other headings still showed that the staff have the appetite and drive to do a good job, so they remain a very good resource for sorting the situation out. It appears that rock-bottom morale and a lack of faith in the management is blighting the department, but that the majority of staff are still interested, engaged and proud of their work.

As has been well reported in the media and in this place, the changes in HMRC have led to chaotic services being provided to clients, and the huge burden of work has led to a higher level of write-offs. For example, just increasing the threshold for claims from £50 to £300 for the past two years has led to the loss of £160 million in revenue. Moreover, each year local caseworkers refer some 4,000 cases of suspected serious evasion to specialised teams for investigation, but the centralised referral system has not been used consistently across the department, despite being mandatory. In 2008-09 just 20% of referrals were taken up by investigation teams, with the rest being returned to the originating officer to pursue.

The department does not analyse the reasons for rejection, which would help to judge the quality of referrals, nor does it know the result of returning those cases to the originating officer. Not only does that lead to caseworkers becoming disillusioned by the low rate at which referrals are taken up, but it has a serious knock-on effect on the tax gap. The average time taken to complete dealing with a case of serious fraud in 2009-10 was 25 months, whereas the internal target is 18 months. Some 75% of cases exceeded that target, and a substantial number took more than three years to deal with. Of course some cases are more complex than others and will take a lot longer to investigate, but it is clear that the department needs to improve the speed and efficiency of investigations in future, to increase the number of cases and bring in more revenue. Inefficiency is clearly causing revenue to be lost.

New structures, such as the penalty regime in force for tax returns relating to the past two years, have been blighted by recurring top-down problems. The new regime was designed to set tougher penalty rates for deliberate errors. It is obviously good practice that such penalties should be recovered promptly, but the department does not routinely monitor whether they have been collected. An analysis revealed that it could not trace payments for 27% of the outstanding tax due on completed civil investigations of fraud. Of the £58 million that could be traced, only 84% had actually been collected. The Treasury is therefore losing tax not only through evasion and legal avoidance but through systematic inefficiency in HMRC. This lends credence to the statistic mentioned earlier that only 13% of staff feel they are managed well. Given that the total cost of HMRC is less than 1% of what it collects, it should not be treated like a normal spending department—judged partly, at the moment, by its ability to slash costs.

[Mr David Ruffley (Bury St Edmunds) (Con)]

Given his experience on the Public Accounts Committee, what is my hon. Friend’s view of HMRC’s claim that it made £1.1 billion-worth of pure efficiency savings between 2005 and 2009-10 without any negative impact on performance? Is that a credible claim?

[Ian Swales]

I can express a personal opinion, which relates to what I was just saying: we should not judge efficiency savings at HMRC without reference to the tax that is collected. We cannot judge it simply according to headcount reductions and those sorts of changes.

[Mr Liddell-Grainger]

Is my hon. Friend aware that 194 million national insurance accounts are not rectifiable even though they are scanned twice a year? HMRC does not even know how much money is in those accounts. Does he think that that is equally a problem, in that the morale has gone because people do not understand what is going on within the system?

[Ian Swales]

Judging by the evidence that the PAC received, there seems to be a lack of control over the trail of cases. All the changes have resulted in less focus on individual companies and taxpayers. I certainly recognise that sort of story.

There should be a constant watch in HMRC on the business case for investment in it. I welcomed the announcement of £900 million in extra funds to address avoidance, but I remind the House that it is targeted at collecting £7 billion, although the tax gap is £42 billion even according to HMRC’s estimates. How have we arrived at the figure of £900 million, and how do we know it is the right amount? As a taxpayer, I would be happy to invest any extra money that could be proved to produce a positive return.

The department has recognised that it has lacked detailed information on the costs and returns of different types of enforcement activity. At present it does not know the costs of, or returns on, civil investigations, or the point at which further investment in a particular type of activity would produce diminishing returns. It is therefore very difficult for it to decide how best to deploy its resources. Its management and senior officials need to show strong leadership and pay close attention to the morale of staff if those problems are to be overcome. The headcount at HMRC should not be reduced further until efficient new systems and ways of working are properly established. The department urgently needs to manage its resources effectively to optimise the tax take. The current system is obviously not working effectively for people either inside or outside HMRC. At a time such as this, when everyone across the country is having to tighten their belt, it is unacceptable that HMRC is failing to collect such a large amount of money through inefficiency and mismanagement. I urge the department and the Government to put this right.

--- Later in debate ---

[John McDonnell (Hayes and Harlington) (Lab)]

I congratulate the hon. Member for Witham (Priti Patel) on her creativity in using an estimates debate to get so many constituency cases addressed. Following her critique of HMRC, I say to her that the buck stops here in Parliament.

I am not a member of the honourable fellowship of the Public Accounts Committee or the Treasury Committee. I was a member of a Select Committee back in 1997, I believe, when the Labour Whips, in a fleeting moment of jocularity, put me on the Deregulation Committee. I sought to change it to the Reregulation Committee, and we parted company soon after. I believe that my hon. Friend the Member for Leeds East (Mr Mudie) was in the Whips Office at that time, but I do not bear grudges.

I attended the debate on the legislation that founded HMRC. The House was relatively empty, and I believe that I was one of the few Members who tabled amendments on Report. At that time, a number of us were concerned about whether the merger was appropriate. We were also concerned about a trend that started immediately when the merger happened, when 3,000 job cuts were announced. Soon after that, 12,000 more were announced. I do not know of any organisation—public or private—that could have survived the treatment that HMRC received in recent years, including recent months.

When the merger happened, there were 104,000 staff. Since then, there have been 30,000 job cuts. We are now down to 75,000 staff. The £2 billion cuts as part of the comprehensive spending review amount to another 11,500 job cuts. I appreciate that the Government have put back £917 million to tackle tax evasion and avoidance, but cutting £2 billion and putting £900 million back seems like a ricochet policy rather than a planned approach to reform, as many Members have suggested.

I want to follow on from the points that the hon. Member for Chichester (Mr Tyrie) made. I chair the parliamentary PCS trade union group, an informal group of Members of all political parties. It enables us to meet the trade unionists who represent HMRC staff—the tax inspectors. Reference has been made to the briefings that have been given in recent months. That has educated us about the role that the staff play and what they have had to endure. It is not just the job cuts; 200 local tax offices have also been cut. We have now been told that there is a radical reduction in the opening hours of the walk-in tax inquiry centres. The point was made that, in some parts of the country, there are no local tax offices and vast gaps. The worst example is Wick in Scotland, where there is nothing in the vicinity and nowhere to transfer the redundant staff to ensure that they are retained in the service.

My hon. Friend the Member for Luton North (Kelvin Hopkins) made the point that for every tax official appointed, £685,000 is gained in tax income that is generated.

[Ian Swales]

Does the hon. Gentleman agree that a walk-in centre that is open only a couple of days a week and staffed by somebody who knows nothing about tax, and whose main role is to note details or direct people to telephones, is not a good walk-in centre?

[John McDonnell]

Yes. In recent years and from the time of the initial legislation, there has been almost a Dutch auction between Front Benchers competing to see who could cut more jobs from HMRC. We tried to point that out. My hon. Friend the Member for Leeds East gave a good example of how not to do a tax return. Some people need a face-to-face discussion about their tax affairs and that cannot be done through a call-centre mentality.

Some Members have pointed out that the evidence on call centres is fairly appalling. The pressure on call centres has mounted. Let me give some statistics for the record. Calls were up 20% from 2009-10 to 2010-11. Call attempts were up 100% from 2009-2010 to 2010-11. Engaged and busy tones played were up from seven to 35 minutes. One can see why that tune—“Greensleeves” or whatever it is—pushes some people right over the edge if they have to listen to it for 35 minutes. The current contact directorate performance prediction for 2010-11 is that only 40% to 50% of call attempts will be answered.