Despite reporting £23.9bn in collected tax revenue related to compliance activities - the highest to date - HMRC made errors in setting its baseline target too low at £1.9bn, allowing it to easily exceed performance targets by £1.9bn in 2011/12 and £2bn in 2012/13, a performance review by the National Audit Office (NAO) reveals
TheNAO, which published the details as part of its review of HMRC’s performance over 2012/13, said that the tax ofice's errors relating to its targets inadvertently led to it overstating the extent of the improvement in its performance when comparing the years up to 2010/11 with the compliance yield it has generated since.
‘It has explained the implications of its error in this year’s annual report and recognised that changes in its measurement methodology prevent direct comparisons of the data over the long term. It has also accepted the principle that there should be external scrutiny before it publishes data on its compliance performance in future, and has invited the National Audit Office to undertake this work,’ the NAO said.
In total, HMRC’s revenue collection for 2012/13 was £506bn, up £30bn (6.3%) from the previous year.
The taxes that contributed most of this increase were income tax and national insurance (NICs), which increased by £16.2bn (6.4%), VAT by £7.2bn (7.1%) and stamp taxes which have significantly increased by £3.4bn (35.8%).
HMRC wrote off debt for reasons such as hardship or value for money, amounting to £5.1bn.
The NAO said that the tax department’s ‘tax debt’ increased to £13.3bn (from £12.2bn last year); but it collected £39.6bn in 2013/14 and focused on clearing debt older than one year, resulting in the balance of this debt falling to £3.7bn (£4.2bn last year).
The UK-Swiss Tax Agreement, which came into force in January 2013, had brought in £1bn by 31 March 2014, compared with the £5bn HMRC had originally forecast it would collect by March 2016, but in line with its updated forecast of £1.7bn.
However NAO Comptroller and Auditor General Amyas Morse qualified his audit opinion on HMRC’s 2013/14 resource accounts because of material levels of error and fraud in the payments of personal tax credits. This is the third consecutive year he has qualified the accounts on these grounds. The 2012/13 error and fraud percentages (the last year available) equate to payments of between £1.8bn and £2.2bn being made to claimants incorrectly because of error or fraud and a further £70m to £320m not being paid to claimants because of error. The overall levels of error and fraud in finalised awards are significant within the context of the £29 billion spent on personal tax credits in 2013-14.
Tax credits debts rose to £5.5 billion at 31 March 2014 (up £0.7bn from a year earlier). HMRC has undertaken a detailed analysis of its success in pursuing debts and believes that only 34% of the balance is likely to be recovered (31% at 31 March 2013). HMRC is making increased use of private sector debt collection agencies to recover tax credits debt and is on target to achieve a return of £90m, though recovery rates to date of 18% are well below the 30% it originally forecast.
Morse described HMRC as being ‘broadly successful’ in meeting its objective of securing additional tax revenue by investing in compliance projects, as measured by its estimates of compliance yield.
However he added further concerns: ‘I am concerned, however, that an error of as much as £1.9bn in HMRC’s baseline calculation led it to report the trend in its performance in a way that inadvertently exaggerated the improvement since 2010-11.
‘I welcome HMRC’s decision to invite the National Audit Office to provide independent assurance on the data it publishes on compliance revenue in future, and the greater clarity and transparency about its performance that HMRC has provided in this year’s annual report,’ he said.
Commenting on the annual results, chair of the Public Accounts Committee (PAC), Margaret Hodge MP, said: ‘HMRC’s commitment to securing more tax revenue for the taxpayer should be commended, but its efforts to date are undermined by poor governance arrangements that have not picked up on this mistake.
‘Put simply: it has not been able to track its performance accurately which is absolutely crucial to long term success. If HMRC can’t get its own numbers right, how can it ask the same of others?’
PAC will have the opportunity to grill HMRC officials about their performance record at a public hearing before the committee on 16 July.