Job cuts limit the benefits of purge on lost tax
The UK’s tax-collecting service is praised by MPs for recovering billions of pounds in lost revenue – but it could have been considerably more if it had not shed so many jobs.
The Public Accounts Committee (PAC) report says the £4.32bn saved over the five years of the crackdown by HMRC is a good return on the £387m invested.
But it says the department could have clawed back an extra £1.1bn if it had not cut more than 3,300 staff during the period.
HMRC’s compliance and enforcement programme was intended to bring in an extra £4.56bn in tax revenue by 2010-11 as part of an effort to reduce the so-called “tax gap” between money due and the amount collected.
The measures actually generated £4.32bn, but the MPs said the target figure would have been exceeded comfortably if it was not for the setback caused by the job losses.
The PAC’s report pays tribute to HMRC’s “innovation” in making good use of data to assess risks and patterns of evasion.
But it says it is not convinced that the decision to cut staff numbers involved represented value for money for the taxpayer – the £1.1m shortfall amounted to about £10 in tax lost for every £1 in running costs saved.
The report says: “We are not confident, from what we heard, that there is a regular discussion with policy makers in which the department is sufficiently clear about the marginal rate of return it could achieve from different levels of spending.”
The MPs say HMRC could have been more ambitious, and they welcomed the department’s commitment to reinvesting £917m of its efficiency savings in an attempt to generate a further £7bn a year in tax revenue by 2014-15.
Shock at tax-avoidance advice
The committee says some potential benefits have been postponed or lost altogether because of delays in introducing “key technology”.
It estimates that the failure to implement two systems in time would cost almost £200m in potential lost tax.
It said: “The department must improve the way it integrates new systems with its existing working practices, ensuring the training necessary to support the introduction of new technology is both targeted and timely, and strengthening its procedures for managing ICT (Information and Communications Technology) contractors.”
The MPs also say they were shocked to learn that HMRC advised senior public-sector employees that they could avoid tax by being employed indirectly – a revelation that triggered an announcement of a government crackdown on the “opaque” practice.
Following the announcement on Wednesday by Chief Secretary to the Treasury Danny Alexander of a purge on the use of “off-payroll” salaries which could enable tax avoidance, PAC chairman Margaret Hodge said her committee found it “incredible that [HMRC] could under any circumstances advise that this was acceptable behaviour for a public servant”.
An HMRC spokeswoman said: “PSCs (personal service companies) can be legitimate commercial arrangements, which means we have to consider the details of the arrangement in each individual case.
“However, we are very clear that the use of MSCs (managed service companies) are only for the purposes of tax avoidance and are always unacceptable, which is why Parliament brought in legislation to prevent this tax avoidance.
“Where PSCs are used purely as tax-avoidance vehicles it is always unacceptable and when we have evidence it’s happening we stop it.”