MPs have criticised HMRC’s response to the Covid-19 crisis, claiming some groups of taxpayers have been unfairly excluded from support packages, while the department’s strategy for property and IT systems has been shown to be wanting
A report by the public accounts committee (PAC) acknowledged the ‘hard work and dedication of HMRC staff in rising to the challenge under difficult circumstances’, with more than £80bn provided since March 2020 in support to business and individuals during the pandemic.
However, the committee said quirks in the tax system have left whole groups of taxpayers without the financial support offered to others –even though lockdowns and tier restrictions mean some cannot work at all – while some large companies that have taken taxpayer support have continued to pay out dividends and high executive salaries.
Those who lost out include some self-employed taxpayers who may have moved onto payrolls because of HMRC’s IR35 rules, but were not employed at the relevant time, and so were not eligible for the Self-Employment Income Support Scheme.
Similarly, some other freelancers, with verifiable employment and tax records visible to HMRC, may also have been excluded from the coronavirus job retention scheme (CJRS). In some sectors, such as the creative industries, it is common for freelancers to work on a series of short-term employment contracts with gaps in between, but the support scheme was not sufficiently flexible to recognise this.
The report recommends that within the next six weeks HMRC should publish an explanation for the reasons why it cannot help those freelancers and other groups that have been excluded from receiving any support and what would be required to determine eligibility for financial support for that group of taxpayers; and consider the support it can provide for those taxpayers that have, due to the IR35 rules, moved onto payrolls and missed out on support from the Covid schemes, for example, by reviewing whether it can use an average of wages in the past three years to determine grants.
The report also maintains that lack of certainty about the Covid-19 support schemes has undermined businesses’ ability to plan effectively, and said HMRC needed to improve communications. As an example, the department could not provide clarity on whether the job retention bonus scheme had been delayed or scrapped.
In addition, MPs said the Covid crisis highlighted long standing problems with HMRC’s real estate strategy, which was described as ‘woefully out of date’. The report criticised the use of non-breakable long-term property leases, locking government into holding larger properties for longer than needed, saying this risked leaving the department with unwanted office space given the changes in working practice accelerated by the pandemic restrictions.
MPs also said HMRC has spent too much of its IT budget on patching up legacy systems rather than modernising them. Of the additional costs incurred by HMRC as a consequence of the pandemic, the largest element, as of 11 September 2020, was the cost of IT at £53.2m (80%).
HMRC told the committee it has made some progress in its ambitious digital transformation but is looking for opportunities to reduce the risks facing its IT systems so that they are kept up to date and safe from cyber-attacks and catastrophic losses.
PAC said the department accepts it should redress the balance between spending too much on legacy systems and not enough on investing for the future. Since the committee took evidence, HMRC secured £268m in the November 2020 Spending Review to fix its outdated IT, to ensure its core systems are secure and support better administration.
PAC said it remains to be seen whether this is sufficient to urgently address the long-standing issues the department has identified, and asked HMRC to write to the committee by the end of March, setting out what it is doing, and has planned, to refocus IT investment on modernisation for the future, while retaining resilience, so it can move on from the need to simply keep patching up legacy systems.
Finally, PAC also criticised HMRC over failures to provide reliable and timely financial estimates, saying it is falling behind where it needs to be on understanding the impact of Covid-19.
For example, it is some way off being in a position to better assess the actual level of error and fraud from the employment support schemes, with planning estimates ranging from 5% to 10% on the CJRS; and it has no estimates of error and fraud from the Eat Out To Help Out scheme, despite the scheme having ended in August.
Meg Hillier, PAC chair, said: ‘As public spending balloons to unprecedented levels in response to the pandemic, out-of-date tax systems are one of the barriers to getting help to a significant number of struggling taxpayers who should be entitled to support.
‘And the system is going to struggle, and in many cases fail, to capture or deal with those wrongly claiming it.
‘HMRC needs to redress the balance in its spending and use of tech, and get ahead on the basic financial and economic metrics that we need to adapt and respond to this pandemic in real time. ‘There is also a huge question about how our customs and revenue technology at the borders is coping, and will cope in the months and years to come. There isn’t really any breathing space – HMRC’s out of date systems need to catch up fast.’