HMRC – Not enough staff and too much uncollected tax

The Public Accounts Committee of the House of Commons (‘the PAC’) has published its 87th report (HC Session 2010-12) on HMRC’s Compliance and Enforcement Programme.

The findings make uncomfortable reading for HMRC. In the PAC’s view, although HMRC had ‘achieved a substantial increase in tax revenue of an additional £4.32 billion over the last 5 years‘ which was welcome, ‘HMRC could have collected a further £1.1 billion had it not cut its staff numbers by more than 3,300 over the life cycle of the Programme‘.

The Programme

The PAC was commenting on HMRC’s Programme designed to reduce ‘tax gap’ (the difference between taxes due and the amount actually collected). According to HMRC’s own estimate, the tax gap stands at £35 billion. Over the last 5 years, HMRC has beefed up its compliance programme which is designed to target perceived areas of risk with the intention of delivering an extra £4.56 billion in tax revenue by 2010/11 (the Programme brought in £4.32 billion over that period instead). However, during this period HMRC continued to shed staff.

HMRC believes that the changes it now intends to introduce will generate a further £8.87 billion by 2014/15.

The PAC is underwhelmed

Margaret Hodge, Chairwoman of the PAC, was clearly not impressed. She said:

‘Within the context of this welcome improvement we believe that the Department’s targets for the Programme could have been more ambitious. We are not convinced that the decision to reduce staff numbers working in this area in the past represented value for money for the taxpayer. The department has estimated that, in shedding more than 3,300 staff, it lost £1.1 billion in potential tax revenue: about £10 in tax lost for every £1 in running costs saved. We are not confident, from what we heard, that there is a regular discussion with the policy makers in which the department is sufficiently clear about the marginal rate of return it could achieve from different levels of spending. We therefore welcome the increase in spending by £917 million in the 2010 spending reviews.’

Compliance – should HMRC spend to save?

In my view the PAC is absolutely right to express the concerns that it has. Nor do we think that HMRC’s commitment to reinvesting £917 million of its ‘efficiency savings’ (a euphemism for having cut resources in the past) will necessarily solve the problem. As a former member of HMRC’s Solicitor’s Office, I maintain regular contact with former colleagues and from discussions that I have had, I am in no doubt that the Department is under resourced and that the morale of its staff has dropped sharply as a result. If the government wishes to close the tax gap then a great deal more needs to be done to re-motivate staff and a major part of such an exercise is the recruitment of more people to join the existing ranks of those specialists who are in the front line of the compliance programme and who will be essential if HMRC are to meet its tough compliance targets. Nor should investing in good quality staff be seen as a drain on the Exchequer at a time when the UK’s finances are in a poor state. On the contrary, as the PAC noted, tax revenue has been lost through staff cuts. This state of affairs should not be allowed to continue. It is a false economy to cut HMRC’s staffing levels.