Background

98. In March 2004, the Government announced that it intended to bring together the functions of HM Customs & Excise and the Inland Revenue. HM Revenue & Customs (HMRC) came into existence on 18 April 2005. The Department serves approximately 29.5 million taxpayers, an estimated two million employers and one million companies, as well as 70 million accounts in the national insurance system. When established in 2005, HMRC employed 95,000 full time equivalent staff across around 600 offices and in 2005-06 collected almost £400 billion in receipts. The Department is responsible for collecting the bulk of tax revenue as well as paying tax credits, policing the national minimum wage, collecting student loan repayments and strengthening the UK's frontiers. During its first year, the Department's IT systems issued 16.5 million income tax self assessment statements, 1.4 million corporation tax notices to file, six million personal pension statements to employers and processed 9.7 million annual tax codings reviews.[242]

Capability Review

99. The Capability Review of HMRC carried out under the Cabinet Office auspices and published in December 2007, noted that staff within HMRC had the ambition to improve, but the senior leadership needed to do more to "energise the department with this vision and to clarify what it means for staff".[243] The Review further noted that the senior leadership has not been successful in "injecting pace, confidence and dynamism throughout the Department". [244] The Review stated that at senior level, "the SCS survey also shows a need for improvement. 17% of staff held the view that senior management is effective at leadership and 22% (compared to the 34 per cent Civil Service benchmark) report confidence in the management of the Department. 41 per cent (compared to the 56 per cent Civil Service benchmark) say the SCS inspire staff with a positive vision." [245]

100. The HMRC Capability Review showed that eight out of ten areas assessed required development, four urgently. The weakest area was leadership. The Exchequer Secretary highlighted the positive aspects of the Capability Review, stating "Government had earned a strong reputation with stakeholders for the strength of its analysis and forecasting, for the intelligence of the staff and the experience and astute nature of the staff who work there, their intellectual capacity".[246]

101. We are concerned that eight out of ten areas assessed under the Capability Review of HMRC require development. We expect HMRC to resolve these issues and we will scrutinise HMRC's progress in the autumn.

HMRC's efficiency programme

102. The spending allocations for the Chancellor's departments for the period from 2004-05 to 2007-08 were announced in the 2004 Spending Review. The total budget of the HMRC was to rise, from £4,582 million in 2005-06 to £4,891 million in 2007-08. Within the 2004 Spending Review, HMRC was set a monetary saving target of £507 million to be achieved by 31 March 2008.

103. In December 2007, HMRC published its Autumn Performance Report (APR) which set out progress made towards PSA and efficiency targets. HMRC reported that "we are on track to deliver our 2004 Spending Review Efficiency targets … we expect to exceed our financial savings target of £507 million from 31 March 2008".[247] It also reported that it had met the departmental target of eliminating 12,500 full time equivalent posts by March 2008, eight months ahead of schedule. As at 30 September 2007 the department had already exceeded its reduction target, having cut 13,940 staff. In response to the Committee's Report on the efficiency programme, the Government reported that HMRC has counted its efficiency savings in gross terms in accordance with the basis on which targets were set in SR04. [248]

104. HMRC commonly uses two forms of reporting: the "In Year" basis, as required by the OGC's reporting structure, and the "Full Year" basis, which is used by HMRC, and which takes into account the full year worth of each staff reduction. This means that for those staff members who are made redundant during the year, the full year basis includes the full annual salary costs, rather than the part-year costs which would be saved at the end of the year in which the contract was terminated. Table 5 sets out information provided by HMRC on its monetary savings on both bases as at 30 September 2007

Source: HMRC Autumn Performance Report, p. 28

The 2007 APR notes that, of the In Year savings, £388 million are classified as "final", while £51 million of the savings are classified as "interim". The majority of these monetary savings have been achieved through the headcount reduction programme.

105. In addition to its monetary savings target under the 2004 efficiency programme, HMRC also achieved 3,325 reallocations and was therefore on target to meet its commitments under the Gershon programme. The department explained that its reason for exceeding the headcount reduction target was to prepare for the monetary savings targets set under the 2007 Comprehensive Spending Review.[249]

106. According to the Government response to our Report on the Efficiency Programme, of the £311 million (in-year) savings at 31 March 2007, 62% related to headcount reductions.[250] This compares to the original plan for headcount reductions to account for 75% of the monetary savings.[251] HMRC also has a target of £32.4 million in monetary savings to be achieved from the closure and consolidation of the HMRC estates. As at 30 September 2007, the department had closed, part-vacated or sub-let 145 properties since the merger, yielding £22.8 million saved in running costs. The remainder of the department's monetary savings have come from better procurement practices.

107. Mr Hartnett, acting Executive Chairman of HMRC, told the Sub-Committee that HMRC was exceeding the headcount target "at 31 October 2007 ... we had a gross reduction of nearly 17,500; redeployment of 3,300 and something; and a net position of 14,122".[252] He defended HMRC's approach to the efficiency target stating that HMRC had re-engineered business processes to ensure that the headcount reduction enabled "a constant improvement in the quality of our performance". [253] Mr Mike Eland, Director-General, Law Enforcement and Compliance, HMRC, explained that HMRC used a variety of methods to monitor the quality of its performance "we have time measures, accuracy measures and things like that that we can use; we also do satisfaction surveys; and increasingly we are trying to use focus groups".[254]

Pay and bonuses

108. During 2006-07, the total revenue accruing to HMRC was £436.9 billion, an increase of £31.7 billion (+7.8 %) on the previous year. This was mainly attributed to an increase in Income Tax and NICs receipts and to a lesser extent VAT, Corporation Tax and Stamp Duty. However, higher bonus-related payments and reduced contracting out from the State Second Pension scheme were also believed to have boosted receipts.[255] We were told that 2006-07 was the first year that bonus payments were made under the new integrated HMRC performance pay arrangements. The Exchequer Secretary told the Sub-Committee that the increase was due to "a pay assimilation exercise. It cost around about £60 million and occurred as a result of the merger of Inland Revenue and Her Majesty's Customs and Excise. That pay assimilation exercise removed the different pay and grading structures".[256] The new arrangements were aimed at rewarding individual performance, through bonus payments, thereby driving up performance within the department. HMRC's bonus pot for staff below SCS is currently 0.8% of performance management bonuses paid.

These figures show that in 2006-07 the average bonus payment made to SCS staff was £7,727, a 60% increase on the 2005-06 bonus payments. By comparison, "Other" HMRC staff had an average bonus of £453 in 2006-07.

109. The number of HMRC permanent staff has decreased by 4.8% due to headcount reductions; however, the cost of those staff, as detailed in HMRC Resource Accounts, has increased by 1.1%. We were concerned by the rise in "Other Staff" (a term which would include fixed-term contractors and consultants): While the number of permanent staff has been decreasing, the number of other staff has increased by 9% between 2005-06 and 2006-07. We further note that spending on "Other staff" has increased by approximately £17.1 million which is a surprising 25% increase on 2005-06. Mr Hartnett explained that staff bonuses were not detailed explicitly in HMRC resource accounts as "the bonuses would be shown in overall remuneration and in the remuneration for individuals who are named in the accounts and in the general line in the accounts for remuneration". The Financial Secretary explained that "2006-07 ..was the first year of paying bonuses under HMRC, the increase in the bonus pot was planned growth,… it was achieved by allocating funding to non-consolidated pay rather than to consolidated pay increases. It was a quite deliberate pay strategy adopted by the new organisation, aimed at increasing the proportion of pay which was non-consolidated and, therefore, directed towards performance and aimed to improve performance across the organisation".[257]

110. The Financial Secretary defended the fact that so many HMRC staff qualified for a bonus in a period of maladministration and data losses, stating that HMRC had "some absolutely superb staff working for it. Quite clearly there are areas where their performance needs to improve, but you could not say that across the whole piece performance was failing, and they have some staff who are very deserving indeed of the bonuses that they have been paid".[258] We recommend that in all future departmental accounts the payments of bonuses be listed alongside other remuneration. Whilst we accept that a rise in staff bonuses can be party attributed to pay assimilation that occurred as a result of the merger of Inland Revenue and Her Majesty's Customs and Excise, we ask the Government to explain why, in a year of poor performance and ongoing headcount reductions, Senior Civil Service grade staff have received on average a 60% increase in their bonus payments.

HMRC core objectives

111. HMRC agreed its current set of Public Service Agreements (PSAs) with HM Treasury as part of the 2004 Spending review. The PSAs set out what HMRC is expected to achieve in return for Government funding. The current PSAs cover the period 2005-06 to 2007-08. For the next Spending Review period (2008-09 to 2010-11), HMRC has developed a set of Departmental Strategic Objectives, which we consider later in this chapter.[259]

112. HMRC currently has three objectives, which are underpinned by ten PSA targets. Table 8 summarises the performance against these PSA reported in HMRC's Spring Departmental Report:

Objective I: Tax collection

PSA 1 - VAT LOSSES

113. The PSA 1 is to reduce the scale of VAT losses to no more than 11% of the theoretical liability by 2007-08. The difference between the VAT collected and the total theoretical VAT that could be collected, is commonly known as the VAT gap. The Autumn Performance Report and Departmental Annual Report 2007 stated that there had been Slippage on achieving this target. HMRC's assessment for 2006-07 showed a decrease in the VAT gap of 0.3%, from 14.5% of the theoretical liability in 2005-06 to 14.2% in 2006-07; in absolute terms, the VAT gap decreased from £13.4 billion to £12.8 billion[260]). The target for 2007-08 is 11%, which indicates that HMRC still has a considerable way to go to achieve its PSA target; in financial terms, there needs to be a £2.9 billion (or 22%) reduction in the tax gap for the target to be reached. According to the Autumn Performance Report 2007 "estimates released in the 2007 Pre-Budget Report showed that attempted Missing Trader Intra-Community Fraud [MTIC] fraud fell by around £1.5 billion in 2006-07"; this is a reduction of approximately 30%. The PBR also claimed that "these reduced estimates demonstrate the success of the Government's strategy for tackling MTIC fraud".[261] The considerable reduction in Missing Trader Intra-Community Fraud has not had a marked effect on the VAT loss figures. We recommend that the Government, in its response to this Report, explain how it has evaluated its 'success' in tackling MTIC fraud. We further recommended that the Government explain in that response why there has been slippage on the reduction of VAT losses and how it intends to improve its performance in this area.

PSA 2 -CIGARETTES, SPRITS AND OILS: ILLICIT MARKET SHARES

114. PSA 2 challenges HMRC to reduce the illicit market share for cigarettes to 13%; to reduce the illicit market share for spirits, by at least half; and to hold the illicit market share for oils in England, Scotland and Wales to no more than 2%. The Autumn Performance Report 2007 and Departmental Annual Report 2007 stated that HMRC was on course to meet this target. For cigarettes and spirits, the 2007 Departmental Annual Report did not provide specific percentages for the illicit market share, but instead produced a wide range of potential results which could have indicated anything from incipient abject failure to outstanding success. In contrast, the 2007 Autumn Performance Report 2007 has actual figures which enable a better assessment of HMRC's progress against the target indicators.

115. It appears that the "on course" assessment is justified on the basis of the figures provided. For cigarettes, the 2005-06 result—which is the latest assessment—is 13% and is therefore directly on target. For spirits, the 2005-06 results are 5% representing a 2% improvement on the 2002-03 baseline of 7%, but there is still a further 2% reduction required to meet the target of 3%. For oils, the 2005 assessment is 2% and is therefore directly on target. The 2007 Departmental Annual Report notes that there has been good progress on curbing cigarette smuggling both at the frontier and inland, particularly through working with Trading Standards bodies on counterfeit tobacco. However it warns that organised crime continues to target this area and the incentive to smuggle remains high. It also states that "intelligence indicates that organised criminal groups are focusing their attention on alcohol".[262]

PSA 3—REDUCING TAX AND NATIONAL INSURANCE UNDERPAYMENT

116. The third PSA focuses on the reduction of underpayment of direct tax and National Insurance contributions due by at least £3.5 billion a year. The Departmental Annual Report 2007 stated that the target was now "On course". However, the Autumn Performance Report 2007 suggested that progress towards this target had slipped, The commentary in the 2007 Autumn Performance Report on this PSA target states that HMRC is "broadly on track" which seems to contradict its own "Slippage" headline assessment of performance. The commentary also discusses three projects aimed at further reducing underpayment of these taxes. In the Departmental Annual Report, a £2.9 billion reduction was forecast for 2006-07, but the "actual" figure for the Autumn Performance Report 2007 is £2.25 billion. Moreover, a footnote (Footnote 4, p. 23) states that "this figure is provisional ahead of implementation of legislative measures", implying that the £2.25 billion figure is itself a forecast and dependent on the success of proposed legislation.

PSA 4: SELF-ASSESSMENT TAX RETURNS

117. PSA 4 requires HMRC to increase the percentage of Self Assessment returns filed on time to at least 93%. Both the Autumn Performance Report 2007 and Departmental Annual Report recorded this target slipping in 2007. The figure in the Autumn Performance Report 2007 has dropped from 89.2% in 2006-07 to 86% in September 2007. This latest figure represents a decrease of 4.6 percentage points from the original baseline figure for 2005-06 (90.6%). Thus, from the reporting date HMRC had only 6 months to reverse this worsening trend, and the filing date for Self Assessment was the end of January. The commentary on the PSA targets grudgingly admits that the target will not be reached but claims that this is part of a conscious decision to obtain the greatest value for money:

In recent years, significant resource has been put into raising the Self Assessment (SA) filing rate … Raising SA performance further, by even a small margin, is unlikely to enable the target to be reached and will require the movement of resource from other activities which are of greater value and which provide better returns on investment. We have therefore focused more on value for money/cash to bank by moving to an explicit strategy of recognising value and risk, rather than seeking to simply improve still further the overall SA filing rate. This … will mean that the current PSA target 4 will not be reached.[263]

118. On the issue of filing self assessment online, Mr Hartnett told the Sub-Committee that "We have recently surveyed … our customers, on the on-line service we provide for self assessment, and 71 per cent were very satisfied, or better, with what we were doing". However, this was before the online self assessment system crashed at 9am on the 31st January deadline date, forcing HMRC to extend the deadline by another 24 hours.[264] We recommend that the Government, in its response to this Report, explain why the Self-Assessment filing rate has decreased if "significant resource" has been put into it, and clarify what other activities the Self-Assessment resource has been focused on. We further recommend that the Government explain what effect the online system crash in late January 2008 will have on HMRC's assessment of performance against this PSA target in the 2008 Departmental Annual Report.

OVERALL ISSUES FOR TAX COLLECTION PSA TARGETS

119. Section 1 of the Autumn Performance Report 2007 gives details of how HMRC has been working towards a better understanding of tax receipts, as part of its intelligence-led approach to compliance and tax collection. The Autumn Performance Report 2007 also details how new systems and process allow for an improved assessment of the scale of losses for large companies and the extent of avoidance, while HMRC has developed a sophisticated understanding of the impact of its own compliance activities. This contrasts with the fact that three of the four "tax collection" PSAs are assessed as suffering slippage; particularly as there must be considerable doubt on whether two of the four targets (PSA 1 and PSA 4) can be achieved by the end of 2007-08. We are concerned that the current VAT gap, the direct tax and National Insurance underpayments, and the deterioration in the Self-Assessment filing performance may be linked to the headcount reduction under the efficiency programme. We expect the Government response to this Report to provide further evidence of the Government's position if the Government continues to maintain that this is not the case. We also recommend that the Government response explain how the Government will ensure that any further efficiency savings are not made at the cost of further deterioration in HMRC's performance.

Objective II: the customer experience

120. All of the PSA targets grouped under this objective were assessed as suffering "slippage" in the 2007 Departmental Annual Report and continue to be assessed as such in the Autumn Performance Report 2007. For each of the three PSA targets in this section, the "slippage" assessment is due to lagging performance on one of the two or three indicators for that PSA, whilst the others would be assessed as "on course" or ahead of target. As such, the analysis below deals with each of the "slippage" indicators, rather than looking at the specifics of each PSA target.

121. For PSA5, the "slippage" assessment relates to the indicator of an 80% response rate of individuals and businesses who said that they achieved success at the first point of contact. The commentary notes that the November 2006 figure of 74.1% is only 2.4% higher than the baseline, and that the 2005 result showed a drop to 71.2%—below the original baseline. As such, it admits that the target represents "a very significant challenge". The other indicator for PSA5, which has exceeded its target, appears to be based on information from HMRC, rather than feedback from the customer, and it is therefore potentially less objective. Mr Harnett told the Sub-Committee that "HMRC had sought independent evaluation of its contact centres, and had been reassured that 90 per cent of taxpayers using contact centres were satisfied or better with the service we are providing".[265] We remain concerned that HMRC's headcount reductions, office closures and consequent move towards contact centres have proved a source of frustration to customers. We recommend that the Government, in its response to this Report, provide further information on the reasons for the slippage on PSA 5, and ask HMRC to publish the evaluation that it commissioned detailing the level of customer satisfaction with the new contact centres.

122. For PSA6, the indicator showing slippage is "to increase to 85% the proportion of individuals who find their Self-Assessment statements of account, PAYE coding notices and Tax Credit Award Notices easy to understand".[266] This indicator has actually decreased since the baseline year of 2004—from 77.6% to 76.7%. The Autumn Performance Report notes that all planned changes to the forms have already been implemented and the further changes were not possible in the time remaining, so meeting the target will be "very challenging".[267] We note that HMRC plans to take no further action to improve performance under PSA 6 and therefore suggest that the description is changed from "very challenging" to "impossible", because it is clear that HMRC will fail to achieve the target.

123. The indicator suffering slippage for PSA7 is that of achieving 50% of VAT returns filed online. The baseline in March 2004 was 0.2% and this has risen to an average of 12% for August-October 2007. The commentary states that the target is now expected to be met in 2010, in line with the revised timetable announced in Budget 2007. We recommend that the Government, in its response to this Report, explain why the target for 50% of VAT returns to be filed online has been postponed until 2010. Furthermore, the last three years have seen an increase to only 12% of VAT returns filed online, therefore we expect HMRC's plans to ensure that the 50% target is reached by this later date.

VAT REGISTRATION

124. Eight Key Indicators make up the HMRC's three targets under Objective II: Improve customer experiences, support business and reduce the compliance burden. Key Indicator 4 states that HMRC must demonstrate a measurable improvement in new and growing businesses' ability to deal correctly with their tax affairs. This includes increasing the proportion of applications for VAT registration that are complete and accurate to at least 50% by 2007-08.[268] This Indicator combines a target to improve accurate completion of VAT registration forms with filing on time targets for Income Tax Self-Assessment and Pay As You Earn (PAYE), as a measure of the impact of targeted support and education for those joining the tax regimes and those taking on their first employees. [269]

125. HMRC stated in its Autumn Performance Report that "significant improvements in the ability of businesses to provide complete and accurate VAT registration applications have resulted from a review of the criteria for complete VAT registration applications and a revised registration application form and guidance introduced in December 2006".[270] However, HMRC reported that it had taken "necessary steps to tackle VAT fraud, various additional process and IT problems" [271] and that these steps coupled with an increase in VAT registration applications had contributed to a backlog in registering new businesses during in the first half of 2007-08. Mr Hartnett told the Sub-Committee that "a huge number of new companies were registered in January, February and March this year in advance of the managed service company provisions which came in the budget … with some firms of advisers registering as many as 15,000 companies in very short order".[272]

126. In its Spring Departmental Report HMRC reported slippage on the target for the processing of VAT receipts.[273] In June 2007, the then Financial Secretary to the Treasury told the Sub-Committee that "On each and every one of those 12 measures [of service quality] … HMRC has been able to demonstrate … that there has been no deterioration in service".[274] The Financial Secretary did not accept that the headcount reductions had contributed to the slippage.[275] However, during November 2007, the media reported that new businesses were experiencing significant delays as HMRC processed their VAT registration forms.[276] The Exchequer Secretary stated that, between February and July 2007, fewer than 20 per cent of applications were processed within HMRC's target of 14 working days.[277]

127. In July 2007, HMRC implemented an action plan to address this backlog of applications; the plan included putting extra staff in place to deal with registrations and improving IT systems.[278] Mr Hartnett was confident that HMRC would "achieve its target of processing target 70 per cent of VAT registrations within 14 days" by 31 January 2008.[279] He said that "Business has told us how important it is for us to get VAT registration firmly back on track, and we are determined to do that". [280]

128. There have been considerable problems with delays in VAT registration for small businesses. We have repeatedly been assured that the headcount reductions and efficiency programme as a whole would not cause a decline in the quality of HMRC's services. We ask the Government to explain why there has been a deterioration of service in relation to VAT registrations and what measures it will take to bring HMRC back on course.

Objective III: Frontier protection

129. The key PSA target relating to HMRC's frontier protection objective is that of PSA 8: "By 2007-08 to improve our capability to intervene at the frontier." This target has changed in its assessment, going from "Slippage" in the 2007 Departmental Annual Report to an "On course" rating in the Autumn Performance Report 2007. This is the only area of the PSA target where the performance indicators have changed for seizures of Cocaine, Heroin, and Products of Animal Origin.[281]

130. The figures for number of seizures and kilograms seized were greater in the 2007 Departmental Annual Report than previously, but these figures represented a full year's statistics, whereas the Autumn Performance Report 2007 only had results for the preceding six months. However, an analysis of the half-year figures shows that for nearly all indicators (i.e. seizures and amounts seized for each of the three categories), the department has not reached the halfway point for the targets for 2007-08. A comparison with the 2006 Autumn Performance Report shows that in 2006 HMRC was in a better position than in 2007 and still failed to achieve the target for 2006-07. Hence, it appears that the assessment of PSA8 as "On course" is not justified by the half-yearly position or based on historical experience. We recommend that the Government, in its response to this Report, explain why HMRC's 2007 Departmental Annual Report assesses PSA8 as "On course" when the Department has not reached the halfway point to achieve the March 2008 target and does not appear to have improved upon the 2006-07 Autumn Performance Report results when the same target was viewed as suffering from "Slippage".

Tax credit administration

OVERVIEW

131. In June 2006 we published a comprehensive Report on the administration of tax credits arising from a Sub-Committee inquiry. We supported the principle of tax credits and were encouraged that they were providing financial assistance to so many people, particularly families with children. Tax credits succeeded both in achieving a significantly higher rate of take-up than was the case under previous regimes and in creating incentives for people to seek work. We concluded that it was crucial that HMRC continued to push ahead with the fundamental shift in its departmental culture that was already, of necessity, underway. The difficulties associated with administering the tax credits regime have detracted from the regime's successes and have had real impacts on the lives of some claimants.[282]

132. In 2007, HMRC reported that 6 million families and 10 million children continued to benefit from tax credits. The Tax Credit Office (TCO) now routinely delivers a decision to most claimants within 4 weeks of an overpayment being disputed. TCO has managed to halve the number of complaints on hand at any one time and most claimants will now get a reply in less than 6 weeks. In addition, 2006-07 TCO's accuracy figure is around 97% against a target of 95%.[283]

133. HMRC Contact Centres undertook a change programme in 2006-07. During the period Contact Centres handled 23 million tax credit calls, a 1.3 million increase from 2005-06. HMRC reported that it answered over 99% of callers on the day they phoned in 2006-07 compared to 98.1% in 2005-06. In 2006-07, the number of callers who received an engaged or busy tone was reduced by almost 60% compared with 2005-06.

134. The Adjudicator's office investigate and help to resolve complaints from individuals and businesses that remain unhappy about the way that their affairs have been handled by a number of government departments including HM Revenue & Customs. Adjudicator's Annual Report 2007 noted that the most significant development was a further large increase in tax credits complaints. As a result, 80% of all complaints handled by the office in 2006-07 concerned tax credits. And the office in total settled 1419 investigations against 926 last year.[284] Dame Barbara Mills told us that "a programme of work was underway within HMRC that should, over time, deliver significant improvements". However the Adjudicator's Office reported a "very large, increase in the number of tax credits complaints coming to us."[285]

135. We are concerned that five years after the introduction of tax credits, the number of complaints referred to the Adjudicator's office has significantly increased. We expect HMRC to make significant improvements to their administration of tax credits as a matter of urgency.

CODE OF PRACTICE 26

136. The majority of tax credits complaints that are referred to the Adjudicator's office following the HMRC's refusal to write off an overpayment. HMRC's published guidance setting out the circumstances in which it will write off overpayments of tax credits is in Code of Practice 26—"What happens if we have paid you too much tax credit?". Overpayments can arise because of errors by the claimant, errors by HMRC or a combination of both.[286]

137. There are two principal ways in which claimant error can arise: firstly, the claimant may have completed the claim form incorrectly or failed to inform the Tax Credit Office (TCO) of changes of household circumstances; secondly, HMRC may fail to add or correct new information in its system when it has been provided by the claimant or there may be a HMRC computer system error. The difference between these causes of overpayments is important. If they arise because of claimant error, the overpayments cannot be written off under Code of Practice 26, unless the hardship provisions apply. If they arise because of HMRC error, they can be written off if the claimant could have "reasonably believed" their award was correct. The Adjudicator's Annual Report notes however that in many cases establishing "reasonable belief" is a high hurdle to get over. The tax credits system places a responsibility on claimants to report changes in circumstances and check the personal details shown on their award notices. The reasonable belief test in Code of Practice 26 reflects this. This approach in turn, however, places an onus on HMRC to ensure its communications are of a sufficiently high standard to ensure claimants know what they need.[287]

138. Ms Walker told the Sub-Committee that HMRC had issued a new version of the Code of Practice in April 2006 which sought to redefine the term "reasonable belief". The guidance clarified the fact that HMRC did not expect claimants to be able to check the whole of the calculation of their payment but they were expected to check that HMRC had properly recorded things such as "how many children you have, what your income is, that kind of thing—and that you would check that what goes into the bank account matches what we have told you is going to go into the bank account". Ms Walker was clear that the new Code of Practice went further than the previous guidance stating "these are the things we are expecting you to check … If you have checked those and they are correct and we have still made a mistake, we will not refuse to write it off".[288]

139. We welcome HMRC decision to revise code of practice 26 following our concerns raised in our Report in the administration of tax credits. We expect HMRC to continue to work closely with the Adjudicator to ensure that all tax credit guidance is clear and fair.

TAX CREDIT PAYMENT

140. HMRC paid a net £18.7 billion in tax credits during 2006-07. The Comptroller and Auditor General estimated that year end adjustments to awards meant that HMRC had overpaid £1.7 billion and underpaid £549 million in 2005-06. During the scheme's first three years, HMRC calculated that these adjustments, and other small changes to entitlement after the finalisation of awards, have resulted in a debt of £6.0 billion. HMRC also identified £600 million from in year adjustments to 2006-07 awards and is expected to identify further overpayments for 2006-07 once awards are finalised. By the end of March 2007 the Department had collected £2.0 billion of this debt and written off £0.7 billion. £3.9 billion of overpayments remain to be collected by the Department. It has provided for £1.6 billion in respect of doubtful debts.[289]

141. In June 2007, the Department completed its testing of 2004-05 awards, based on 4,500 random enquiries. As a result of this, the Department estimates that claimant error and fraud resulted in between £1.04 billion to £1.30 billion (7.3 to 9.1 per cent of the final value of awards) being paid to claimants to which they were not entitled. The levels in 2003-04 were £1.06 billion to £1.28 billion (8.8 to 10.6 per cent). It also estimates that claimant error resulted in between £200 million to £350 million (1.4 to 2.4 per cent) not being paid to claimants to which they were entitled. The levels in 2003-04 were £190 million to £280 million (1.6 to 2.3 per cent).

142. The Comptroller and Auditor General noted that it was important that the Department's work provided an accurate view of levels of error and fraud. In 2006-07 the Department carried out 137,930 checks on claims it assessed as higher risk. It has identified incorrect payments made of £151 million and prevented incorrect payments of £291 million (£250 million and £447 million in 2005-06). The reduction on 2005-06 is primarily due to fewer attacks by organised fraudsters, following the closure of the tax credit internet site in December 2005. He reported that HMRC was is developing a framework for validating the identity of individuals and will only re-open the tax credit internet system once this work is complete, which is unlikely to be before July 2008.[290]

Expansion of call centres

143. HMRC reported that an expansion of Contact Centres was required to maintain service levels against the increasing gap between caller volumes and contact centre capacity for handling tax credit queries and to provide the improved service.[291] The Chief Secretary agreed that £30,000,000 should be allocated to the expansion of call centre capacity. This expansion was approved in the CSR07 settlement letter dated 22nd March 2006 which included the agreement that £30million would be made available to HMRC for this expansion. The timescale for expansion was very short. A major peak in demand in between July and September required additional capacity to be in place by July 2006. A new site was fitted out at Liverpool and two existing sites were expanded.[292]

HMRC's Departmental Strategic Objectives

144. Table 9 shows how HMRC's Departmental Strategic Objectives for the period from 2008-09 to 2010-11 compare with its objectives for the preceding years.

243   Cabinet Office, Capability Review of HM Revenue and Customs, December 2007, pp 20-22 Back

244   Ibid. Back

245   Ibid. Back

246   Q 537 Back

247   HM Revenue & Customs, Autumn Performance Report 2007, pp 26-27  Back

248   Treasury Committee, First Special Report of 2007-08, The efficiency programme in the Chancellor's department: Government Response to the Committee's Eighth Report of Session 2006-07, HC 62, p 14 Back

249   HC (2007-08) 62, para 14 Back

250   Ibid. Back

251   HM Revenue & Customs, Efficiency Technical Note 2005, Annex A-1 Back

252   Q 471 Back

253   Q 469 Back

254   Q 470 Back

255   HM Revenue & Customs Departmental Annual Report 2006-07, p 74 Back

256   Q 518 Back

257   Q 518 Back

258   Q 519 Back

259   See paragraph 144. Back

260   HM Revenue and Customs , Measuring Indirect Tax Losses 2007, para 2.6. This document was published alongside the 2007 Pre-Budget Report. Back

261   Pre-Budget Report and Comprehensive Spending Review 2007, para 5.105, 92, p 92 Back

262   HM Revenue & Customs, Autumn Performance Report 2007, p 16 Back

263   HM Revenue & Customs, Departmental Report 2007: Integrating and growing stronger, May 2007, p 27 Back

264   See February 2008: The Daily Telegraph, The Financial Times , The Guardian and The Times Back

265   Q 514 Back

266   HM Revenue & Customs Autumn Performance Report, December 2007, p 18 Back

267   Ibid.  Back

268   HM Revenue & Customs, Departmental Report 2007: Integrating and growing stronger, May 2007, p 46 Back

269   Ibid. Back

270   HM Revenue & Customs Autumn Performance Report, December 2007, p 18 Back

271   HM Revenue & Customs, Departmental Report 2007: Integrating and growing stronger, May 2007, p 46 Back

272   Q 496 Back

273   HM Revenue & Customs, Departmental Report 2007: Integrating and growing stronger, May 2007, p 18 Back

274   HC (2006-07) 569-ii, Qq 357, 379 Back

275   Ibid. Back

276   For example: The Observer, '"Efficiency drive" leaves the Revenue floundering', 28 October 2007; Independent on Sunday, 'Companies angry over VAT chaos', 4 November 2007. Back

277   HC Deb, 23 October 2007, Col 256W Back

278   HM Revenue & Customs Autumn Performance Report, December 2007, page 18 Back

279   Q 491-492 Back

280   Ibid. Back

281   HM Revenue & Customs, Departmental Report, 2007, p 47 Back

282   HC 811-I Back

283   HM Revenue & Customs, Departmental Report, December 2007, p 25 Back

284   The Adjudicator's Office, Annual Report 2007, p 15 Back

285   Ibid., Foreword  Back

286   Ibid., p 15 Back

287   HM Revenue & Customs, Departmental Report 2007: Integrating and growing stronger, May 2007, para 2.3 Back

288   Qq 440, 443-444 Back

289   Comptroller and Auditor General's report on HM Revenue & Customs 2006-07 Accounts, para 6, 9-11 Back

290   Comptroller and Auditor General's report on HM Revenue & Customs 2006-07 Accounts, paras 6, 9-11 Back

291   Ev 94-95, p 3 Back

292   HM Revenue & Customs, 2006-07 Spring Supplementary Estimate Memorandum, p 5 Back