Public Accounts Committee

Oral evidence: HMRC Standard Report 2022-23, HC 76

Thursday 14 December 2023

Ordered by the House of Commons to be published on 14 December 2023.

Watch the meeting 

Members present: Dame Meg Hillier (Chair); Paula Barker; Peter Grant; Ben Lake; Sarah Olney

Gareth Davies, Comptroller and Auditor General, National Audit Office, Darren Stewart, Director, National Audit Office, and Marius Gallaher, Alternate Treasury Officer of Accounts, were in attendance.

Questions 1 - 97

Witnesses

I: Jim Harra, First Permanent Secretary and Chief Executive, HMRC; Justin Holliday, Chief Finance Officer and Tax Assurance Commissioner, HMRC; Angela MacDonald, Second Permanent Secretary, HMRC.

Report by the Comptroller and Auditor General

HMRC Standard Report 2022-23 (HC 1466)

Examination of witnesses

Witnesses: Jim Harra, Justin Holliday and Angela MacDonald.

Chair: Welcome to the Public Accounts Committee on Thursday 14 December 2023. Today we are, once again, examining HMRC’s accounts. The National Audit Office Report on its accounts, which was published in July, found again that HMRC’s customer service standards are below the expected service standards that it set itself in 2022-23 and raised concerns around performance on collecting revenues and managing compliance, something that has been a very big focus of the Committee and I know of HMRC, particularly since the pandemic. We will want to delve into those issues and a number of issues around customer service. We will have some questions at the top as well.

I would like to welcome our witnesses. Of course we have Jim Harra, the permanent secretary and chief executive of HMRC; Justin Holliday, who is the chief finance officer and also a tax assurance commissioner at HMRC; and Angela MacDonald, who is the second permanent secretary. Welcome to you.

I want to thank all those who submitted evidence. We had even more evidence than we normally get on HMRC matters, much of it very useful as we prepared for today’s session. For all those who sent it in, we may not be quoting everything but it has been useful nevertheless.

I would also like to welcome Paula Barker MP, who has just joined the Public Accounts Committee. Ms Barker, would you like to make your declaration of interest?

Paula Barker: Good morning, everyone. My declaration of interest is that I am a member of the Unison, Unite and GMB trade unions. My husband is a senior NHS officer and holds a dual position with a local authority as a director. My son is currently working in the Home Office via an agency contract.

Chair: A very warm welcome to the happy team that is the Public Accounts Committee. Before we go into the main session, Mr Harra, we have some questions about some issues more generally. Mr Peter Grant is going to kick off on IR35.

Q1                Peter Grant: Good morning. Mr Harra, you have been providing regular updates through Treasury minute updates since we took evidence from you in February 2022 on lessons learned from the implementation of IR35. Most recently—in fact, just earlier this month—you said that HMRC had recently identified several sectors where IR35 is causing issues and you are trying to deal with it on a sector-by-sector basis. Can you tell us what sectors you think are having particular problems?

Jim Harra: I do not think that it was so much sectors that we felt we were having particular compliance problems with. We have improved analytics on the use of the tool that we have to enable people to determine employment status. We have been identifying sectoral issues with using that tool and both improving the tool and improving the guidance around it, so that different sectors that have challenges get extra support. We recognise that. We recently moved the tool on to a new platform called Ocelot, which gives us much better data analytics and also gives customers a better experience as well. That is really what we were getting at.

Clearly, when you look at litigation and what is in the public domain, broadcasting is a key area where there have been long-standing disputes between HMRC and taxpayers, mostly predating the reforms that have been introduced in recent years. That is an area where we have been testing through litigation what the employment status rules are and how they apply to people working in that sector. That would be an example.

Q2                Peter Grant: Do you think that the main broadcasters are now confident as to what the rules are?

Jim Harra: We have worked specifically with the broadcasters, and I know that the public broadcaster has itself been before the Committee in the past giving evidence about its practices. We have issued specific guidance to them. Also, as large customers, they have a customer compliance manager who can work with them on any compliance issues they have.

A key change of the requirements that came in in 2017 and 2021 is that it is now them, rather than their worker and the personal service company, who has to determine the status of the worker. That relieves the burden from the workers to do that themselves, but it is important that those engagers understand how the rules work and apply them effectively. We have been working specifically with the broadcasting industry.

Q3                [1]Peter Grant: I have been contacted by a number of individuals who have been involved in some of the litigation that you have mentioned. They are all saying that most of the big broadcasters now will not consider taking somebody on a self-employed basis. They insist on taking them on as an employee, not because they think that that is what the rules say, but because they do not have any confidence in HMRC’s interpretation of those rules. Were you aware of that issue?

Jim Harra: No, I am not aware of that. It is for any engager to decide the basis on which they engage people. Since the reforms were introduced, we have seen a shift of about 100,000 to 150,000 individuals, not just in that specific sector but more generally, who have moved from being paid through personal service companies to going on to payroll. That is a choice that engagers can make.

Through our tool, our guidance and our engagement with customers, we aim to make sure that, whatever model they choose, they are able to make the correct tax decision and therefore apply the correct tax treatment to their worker. They are perfectly at liberty to take someone on who is a self‑employed contractor. Provided they make the right status decision, we do not have a problem with that.

Q4                Peter Grant: The problem is that the BBC and ITV, for example, can see the self-same people that they want to give work to being dragged through the courts time and time again by HMRC. The BBC’s lawyers, ITV’s lawyers and everybody else’s lawyers are saying to them, “Do not take the risk. Do not even look at taking on somebody on a self-employed basis.” Even if their lawyers’ advice says, “What you will be doing is within the law,” they are also saying, “But we do not know whether that is how HMRC would regard it.” That cannot be a satisfactory position to be in.

Jim Harra: Most of the litigation that has been covered in the press predates the recent reforms. It dates to the period when the worker and their personal service company were responsible for applying the tax rules, which is why the litigation is with them. One of the key aspects of the reforms is that that burden is lifted from them and passed to the engager. Some of the behaviours we have seen throughout, over many years, from engagers, have been an attempt to move the risks that are involved here from them on to other people.

The reforms move that back to them and say, “No, you have to take responsibility for this.” If they want to take a risk-averse approach and say, “We are going to take everyone on employment contracts,” that is a choice for them. We are clear that we completely accept that some people will be self-employed. Provided you take the proper steps and make a proper determination, that is not a problem for HMRC.

Q5                Peter Grant: One of the journalists who contacted me has asked to remain anonymous because they are scared that, if I name them here, there will be some repercussions from HMRC. I know that you would immediately say that that is not going to happen, but what does it say about the relationship of trust that is needed between HMRC and the taxpayer if people are actually scared that they are going to be victimised if they speak publicly about their experiences?

Jim Harra: Clearly, we do not victimise anyone. We aim to get people’s tax right. For the vast majority of people, there is absolutely no dispute about their employment status. Whether they are self-employed or employed is a straightforward matter to determine and never gives rise to a dispute with HMRC. Around the edges of the test, there are cases where you have to make a judgment. We have been as transparent as we possibly can in the tool that we have provided and the guidance we published about how we approach these decisions.

People have a right to dispute those decisions if they do not agree with them. There has been litigation. We do not win all of that litigation, but we win a lot of it. I can understand that that is stressful for people and not a situation that they want to get into. We will try to avoid it wherever possible, but we have to have the right to apply the rules. That includes inquiring into people’s tax affairs and entering into a dispute with them if we think that they have got it wrong.

Q6                Peter Grant: You said that sometimes you win and sometimes you lose. In the case of Atholl House Productions you have not won any of your cases yet. You have taken it to court four times now and you have not won any of the cases at all.

Jim Harra: Can I correct you there? The Court of Appeal ruled in favour of HMRC in Atholl House Productions. It then asked the first-tier tribunal to remake the decision. Recently, the first-tier tribunal took a decision in favour of the taxpayer.

Q7                Peter Grant: The first-tier tribunal is intended to be a relatively simple, not too expensive and not too intimidating process to try to deal with fairly simple disputes before they get any further. On the first occasion that Atholl House Productions went to the first-tier tribunal, you were represented by a tax barrister and a large number of senior HMRC staff. When it went back to the tribunal, which only issued its ruling quite recently, you had three senior members of staff and three barristers up there for three days. That does not sound to me like a low-cost and simple way to deal with it. Why are you spending so much money putting such very senior legal people in such numbers into what is supposed to be an accessible and inexpensive way for taxpayers to settle their disputes or have a ruling on their disputes?

Jim Harra: All tax appeals go through the first-tier tribunal initially. As you say, many of them are relatively simple disputes to determine. They go no further than the first-tier tribunal. Often, HMRC is simply represented by one of our own presenting officers. We do not even send one of our in-house lawyers, never mind engage counsel.

Initially, it all goes through the first-tier tribunal, so we make a judgment case by case on what level of representation we need. Some of the employment status cases that have gone to litigation recently are very important because they will help to clarify what the employment status rules are, so it is important that we have the right level of representation to make sure that we get the right decisions.

Q8                Peter Grant: Effectively, although you did not say it in so many words, you are using Atholl House Productions as a test case to set precedents that you can then use in interpretation of other people’s cases.

Jim Harra: The fact that that case went to the Court of Appeal, where the lower court’s decisions were overturned, demonstrates that there were important points at stake in that case. We are now considering where we are with that judgment. If it clarifies employment status rules in any way, we will look again at our guidance and our tool. That is why those cases are important, because a lot of people’s affairs could be affected by decisions in those cases. They are a relatively small number, but it is the case that some of them are very important.

Q9                Sarah Olney: I wanted to pick up on this particular Atholl House Productions case. In this case, the individual taxpayer concerned has incurred hundreds of thousands of pounds in legal costs to defend their position. Do you think that that is fair, particularly when you consider that it is a failure of HMRC’s to provide clear guidance in the first place that has led to the various disputes?

Jim Harra: I do not accept that HMRC has not provided clear guidance. But, obviously, that has changed over time. I know that that particular case relates to a number of years ago, before the recent reforms were introduced, which are partly designed to ease the burden on workers and their personal service companies.

When it comes to costs, ultimately it is a matter for the tribunal and the courts. The general rule is that, in the first-tier tribunal, the costs rest with each party unless the tribunal considers that this was a complex matter where HMRC should bear the costs, or the tribunal concludes that either party has acted unreasonably in bringing the case. Otherwise, generally speaking at first-tier tribunal, costs fall where they are. In the higher courts, the upper tribunal and beyond, costs usually fall on the losing party, but ultimately it is a matter for the tribunals and the courts.

Q10            Sarah Olney: You have just said then that it has implications for quite a wide variety of people working particularly in the broadcasting sector, but related sectors as well. We are now getting to the point, as you heard from Mr Grant, that people are effectively being restricted from working as self-employed contractors in that industry. It is having a very damaging impact on individual careers but also the sector as a whole. Is that something you take into consideration when you are pursuing these tribunals? That is the evidence I am getting, and I have lots of broadcasters who live in my constituency. The lengths that HMRC is going to pursue some of these cases is becoming very damaging.

Jim Harra: There are two parties to any dispute. We always try to resolve disputes by agreement, but it is inevitably the case that some will go to litigation. That is a right of the taxpayer to do that. We have published our policy, called our litigation and settlement strategy, which describes when we will go to litigation. That is where we believe that we do not have an offer to settle from the taxpayer that is in accordance with the law.

In the case of employment status disputes in recent years that have gone to litigation, about 70% of the cases have been ruled in favour of HMRC and 30% have not. We constantly look at the judgments that we are taking there to make sure that we are acting in a way that reflects our published policy. I assure you that we do not underestimate the stress that is involved in dealing with an HMRC inquiry and potentially dealing with litigation. As I say, one effect of the reforms from 2017 and 2021 is that that burden should increasingly be lifted from the workers and placed on the engagers, who I think for many years had practices that were intended to shift that risk away from them on to the worker.

Q11            Chair: Before we move on, this is an issue that I have raised. We are a Committee that does not deal with the policy, though some of us have raised issues around the IR35 policy. It affects a lot of the tech businesses in my constituency, some of whom, it is worth highlighting, are offshoring. They are moving to other parts of the world—Germany is one of the main destinations—because of the complexity of IR35 for contractors in the IT sector. I would also highlight evidence that we have received, particularly evidence 23, which shows some concerns on this issue. Mr Harra, are you planning to do a review of how effective IR35 is? If so, when?

Jim Harra: It is tax policy, so it is primarily a matter for Treasury, although HMRC, in the policy partnership, works very closely on that. Certainly we keep under review how we are administering it and whether people have all the support that they need to make the correct decisions about their tax liability. The Government have recently announced a change to the policy to make it fairer by allowing for set-off of tax that a worker may have paid against the liability that we conclude was due on the engager. We will be taking forward how we do that in technical consultation. Beyond that, it is a matter for Ministers and Government.

Q12            Chair: Given that you have all these expensive tribunals going on, you must be learning something about how this is working. At which point does that trigger you providing advice to Ministers?

Jim Harra: There are more decisions awaited in the pipeline. There are quite important litigation decisions still awaited that, depending on what the courts rule, could have implications for where the line is drawn on employment status. They could confirm HMRC’s view. They could require us to change our view.

Q13            Chair: At the moment, you are waiting more for the law to change the view, and policy would be a matter for Ministers, but you are not advising Ministers directly at this point.

Jim Harra: We reflect in our Check Employment Status tool the law as we understand it. That law is all driven by case law. There is no legislative test here. Every time there is a decision, particularly one taken by the higher courts, it is necessary that we look again at whether, in our guidance, we have reflected the correct legal position.

Q14            Chair: What proportion of your casework relates to IR35?

Jim Harra: I cannot tell you offhand, I am afraid.

Q15            [2]Chair: Would you be able to write to us and tell us that? As Mr Grant has highlighted, it is using up a lot of time of your own teams, lawyers and staff. Do you think that it is proportionate to the money you are getting back?

Jim Harra: I believe so. We had a very serious issue prior to the 2017 and 2021 reforms, which was that the original off‑payroll working rules, as envisaged in 2000, simply were not working. We thought that there were very high levels of non-compliance with them. Our efforts since 2017 have been very much to focus on helping engagers to get that right and on checking that they are doing so.

We have seen that result in about £1.8 billion more in tax between October 2019 and March 2022, which reflects that the levels of non-compliance are going down. As I say, we have seen about 100,000 to 150,000 workers move off having a personal service company and move on to payroll. We are certainly monitoring those effects. As a tax administrator, the reformed way of working the off-payroll working rules gives higher compliance for lower cost in HMRC.

Chair: We hear what you are saying about where some of this needs to be taken to Ministers. I think that that has landed with colleagues. That is our sister Committee’s responsibility primarily, but we will be liaising with them. I would like now to move on Mr Ben Lake MP. I think that you might know what this is about Mr Harra.

Q16            Ben Lake: Good morning, Mr Harra. Can I begin by asking you about a case that you are familiar with? It relates to a constituent of mine who has, for the past year or so received in excess of 10,000 letters from HMRC in relation to the tax affairs of companies that have registered at his property but with whom he has no connection. I am grateful for your most recent update, in which you explained that you have removed his details from the master records and the online VAT checker. I am very pleased to report that, for the past 10 days, there have been no new letters, so it seems to have started to take effect. With that in mind, though, has HMRC been able to come to some sort of a figure as to how many businesses had erroneously registered at his address?

Jim Harra: I am very pleased to hear that there have been no letters—I have everything crossed under the desk that that continues. One learning for us here is that the addresses from that system then fed into other systems. When we corrected the address in one system, that did not always feed through. There are still some cases relating to your constituent that are registered at his address for customs purposes, so we are trying to suppress everything going to him.

Our investigation in this has given light to more information. It confirms what I have previously said to the Committee, which is that we found no evidence of an attempt to defraud HMRC or the Exchequer here. We have identified that there were two addresses with the same postcode, your constituent’s and another. That other address was actually a serviced office, which is a kind of correspondence address for businesses. It appears that the intent was to register to that address.

There were about 11,000 businesses affected, many of which registered to correct address, but some of which registered to your constituent’s instead. This appears to have been an accident on the part of a foreign agent who perhaps did not understand the way the UK’s postal system works. We are satisfied from all our inquiries so far that there was no attempt here to commit a fraud. These are genuine businesses that are correctly registered for VAT and some of whom are also correctly registered for customs purposes, but clearly should not have changed their registration to your constituent’s address.

Most of them, because they are overseas sellers, no longer pay the VAT themselves. Since 2021 that has been paid by the online marketplaces, but a number of them had debts that predated those reforms, when they were directly liable themselves. It was letters from us and from debt collection agencies in relation to those debts that your constituent unfortunately received.

Q17            Ben Lake: Have all of the businesses that had erroneously registered at my constituent’s address rather than the serviced office address that shares the same postcode now registered correctly? Do you have a UK address for all those businesses now?

Jim Harra: We have been in touch to make sure that the correct addresses are registered. As I say, some of our systems still need to catch up. In particular, as I understand it, your constituent’s address is still showing on our customs system for some of those businesses. I am afraid that there is still a risk that he will receive further correspondence, but we are doing everything we can to catch that through.

We did a couple of one-off dumps of our database to do mailshots and that was based on a snapshot of the addresses on our database at that time. Although we then updated the database, the mailshots still went out using the old address list. Some of those had gone to your constituent, but those have all worked through now.

Q18            Ben Lake: Accepting that this is an error on the part of this third-party agent, it is striking that, since we discussed this matter last in the Committee before the summer, there have been other reported instances of a residential address being used erroneously by a high volume of businesses. Indeed, my colleague on the Committee, who is not in her place at the moment, the honourable Member for Meon Valley, has constituents in a not too dissimilar position as mine, in that they are receiving letters from HMRC about businesses registered at their home with whom they have no connection whatsoever. How common is this error?

Jim Harra: I might ask Angela to come in in a moment. While your constituent’s problem appears to have been a bizarre accident, there is a more widespread problem with bogus registrations, where people’s identities get highjacked, if you like. They are used to register businesses— companies—for example with Companies House. That data then feeds through into HMRC’s systems. We may not have engagement with the company until significantly later. Some of those registrations are a first step in an attempt to defraud the Exchequer. Steps are being taken to strengthen that front door to registration, in particular working with Companies House.

Angela MacDonald: You may well be aware that very recently reforms have been offered to change the powers of Companies House. Prior to that point, the registrar had very limited opportunity and very limited rules that would allow them to challenge addresses and change information that was on registers. It was very easy for companies to set up addresses, set up businesses, change addresses and change ownership with very little challenge.

The reforms that Companies House has just put through give it a significantly improved set of activities that allows it to challenge everything that is going on the register. It allows them to remove things from the register, to be able to take information and challenges for citizens who find themselves caught up in the middle of these circumstances.

The reason why that is important for us is that for us, like for many places, Companies House is the start of the audit trail of where information pushes through. Indeed, once you register at Companies House, you will automatically get letters from us, saying, “Thank you for setting yourself up as a new company. Here is how you pay tax.”

Chair: This previous Committee made recommendations about—

Angela MacDonald: That is absolutely right. I was with the chief executive of Companies House only a few weeks ago in Cardiff. We are working incredibly closely now that Companies House has gained Royal Assent to its change. How do we then support it to give life to its new set of law? How do we then flow that through neatly into the way that we then initiate tax? How are we also able to support where we find that people find themselves in the middle of it?

We can, as we have in a number of instances, solve point issues. In reality, there is this ability for companies to set up fraudulent situations, which I recognise is not the situation for your constituent, but more broadly. Now, Government have taken action, and that is going to allow the entire system to be able to protect citizens from this in a way that Companies House and then us have not had the power to do up to now.

Q19            Ben Lake: That is very heartening to hear, in terms of going forward. To conclude the questions of this part, some of the letters received by my constituent, again for these erroneously registered addresses, as you have alluded to, Mr Harra, included demands for payments. One, for example, in October, asked for just shy of £8,000 in customs duty. There was another one then for unpaid VAT of some £1,400. Assuming that many of the other letters also include similar sorts of amounts, this is quite a significant amount of money. How confident are you that, in this particular case, all those moneys will be recouped?

Jim Harra: I cannot be confident in all of those. One of the reasons why the Government introduced the reforms that moved the liability to the online marketplaces was because of the difficulty of collecting VAT from overseas sellers. We know that, since then, for this group of customers, we have checked and VAT is being paid on their sales by the online marketplace as we would have expected. Prior to that, they were liable themselves for their VAT.

While these companies register and make VAT returns, chasing payment if they cannot or will not pay is very challenging because they are not in the UK. The customs liability is slightly different. We have established in relation to a number of customers what we call undervaluation problems. They put a valuation on their customs declaration, if we think that their goods are risky, we will take them to an inland site where we will open the container, check it and check the valuation. We will place liabilities on them if we think that they have undervalued. Often in those cases we actually have control over the goods and will not release them until the debt is paid. Sometimes these people will make an economic choice not to do that, but often they will.

In defence of some of these businesses, they are overseas. They do not always understand their obligations. There is often a long chain of communication from HMRC to them. We do not just regard them all as bad guys. We have found that, as we educate them, they want to comply but they do not understand what they are supposed to do. We have been doing, for example, Mandarin language guidance. We have a liaison officer out in Beijing who works on the ground, trying to improve our communications with them.

Q20            Sarah Olney: Going back on that last point that you made, on this particular incident for Mr Lake’s constituent, do you think that it was a single entity acting as agent for many different companies and that there is a single origin, if you like, for this one particular error?

Jim Harra: Yes, we are confident of that. We have been in touch with them.

Q21            Sarah Olney: Ms MacDonald, I will pick up on what you were saying about the fact that this new change to Companies House is going to have a system-wide impact. Do you think that there is more that HMRC can be doing to validate the addresses they are sending correspondence to?

Angela MacDonald: Many of the systems across Government are linked together. For instance, when we get address changes that come from one place, thinking about things such as DVLA or through into DWP, we will pass information if one of us holds a better address than others. We get a significant number of addresses that come back where we send out post and actually it is marked that that person is no longer at that address. We will go out and seek to track those customers down. We will sometimes use third-party data, such as Experian, places where there is information that we can get, or Royal Mail services.

If a customer tells us that that is the address, if you think about the fact that we have the number of millions of citizens and businesses, we take on face value that that is the address that they need to be at. In reality, there is no single place at which any organisation, HMRC or indeed anybody else, can go and validate that that person definitely is at that address. That is a challenge not only for Government organisations but for businesses more broadly.

Q22            Sarah Olney: Could I come back to the issues associated with online marketplaces? I am hearing from companies that run the online marketplaces, but also from customers who are using them to trade, that the customers’ funds are being held for a long time while the online marketplace establishes, quite rightly, whether the service is being used for fraudulent purposes. Are you confident that the guidance issued by HMRC around VAT for online marketplaces is sufficient to enable a rapid transaction?

Jim Harra: On our control of use of same address for multiple businesses, there are two risks from our point of view that we try to manage. One is that these are entirely bogus businesses that have been set up as the first stage for fraud. We have extra steps that we take to try to manage that.

The other is that these are genuine overseas business but they are trying to bluff the online marketplace to think that they have a UK place of establishment so that the online marketplace rules do not apply to them and VAT is not operated. We have given guidance to the online marketplaces—not just written guidance, but we engage with them on a one-to-one basis—to make sure that they understand the due diligence that we expect them to carry out. They cannot assume that, just because a business is registered at a UK address, that means it is established in the UK.

The responsibilities of online marketplaces here only relate to overseas sellers, so they should not be impacting on UK sellers using those marketplaces. As well as giving them guidance, we have been engaging with them one on one to make sure that they understand what their obligations are and that they are applying them correctly and effectively. Certainly, if I use Mr Lake’s constituent’s case as a test case, when we looked into these businesses that were wrongly registered at his constituent’s address, we found that the online marketplaces were doing the correct thing and accounting for VAT and had not treated those businesses as UK-established.

Q23            Sarah Olney: You are confident that the rules are sufficiently clear that the online marketplaces understand their responsibilities around that.

Jim Harra: They are relatively new, so it is definitely an ongoing process. We believe that they are operating well and being very effective in plugging a compliance risk for us. We will keep working with the online marketplaces and keep listening to feedback about impact on sellers, for example, to make sure they run as smoothly as they possibly can.

Chair: We now move into our main session. As ever, Mr Harra, there are always important issues of the day to raise at the top, but we must cover some of the ground. I want to thank, again, the National Audit Office and the Comptroller and Auditor General for their ongoing work on HMRC, without which we could not do this. I would also like to welcome colleagues from the National Assembly of Namibia, who are here with the Commonwealth Parliamentary Association to see what we are doing today. Thank you very much for your attendance.

Q24            Peter Grant: Mr Harra, I have questioned you previously about the estimates of the tax gap for the year. How confident are you in the 2021‑22 tax gap estimate?

Jim Harra: The tax gap is estimated in accordance with best practice. It is subject to regulation by the statistics regulatory authority, which came and looked at it in, I think, 2019 and commended us for our approach to it. However, we are constantly revising and improving the way that we do it to try to get the most accurate estimate we possibly can. We think that it is a good measure of the tax gap, particularly as a trend over time, because it shows you a consistent picture. It is effective as a time series, more so than as a spot estimate. We feel that it is the best we can do. It has been subject to quite rigorous external scrutiny, but we are always keen to improve it if we can.

Q25            Peter Grant: The NAO Report tells us that the amount you generated from tax compliance work as a percentage of the total theoretical tax liability declined in 2020-21 and 2021-22, but your estimates of the tax gap did not increase over that period. How can that be possible?

Jim Harra: The relationship between compliance yield and the tax gap is not a straightforward arithmetical link. There can be a variety of factors that affect the tax gap: we could be collecting more compliance yield, and yet it could be going up, or we could be collecting less compliance yield, and yet it could be going down. It is an interesting analysis to compare our yield as a percentage of the theoretical tax liabilities. It gives you some insight but does not tell you the whole story.

One issue with our compliance yield is that it is often generated, particularly the cash element of it, from cases that are looking at previous years’ liabilities, so they are not directly related to the same year’s tax liabilities as the year in which the case is settled. That is one reason why there is not a straightforward arithmetical link. I feel that, as tax revenues have been increasing in recent years, partly as a result of policy decisions and partly as a result of inflation, that is one explanation why there is a gap in our yield performance, because it lags and therefore runs to catch up.

Q26            Peter Grant: You did not meet your compliance yield target for 2022-23. Why not?

Jim Harra: Our compliance yield target takes account of the increase in tax revenues. As I described, we get an instant target based on this year’s tax revenues, but our yield is often based on settling cases that relate to prior years. There is always going to be a lag.

The good news is that our performance in recovering compliance yield has recovered from the pandemic. If you remove exceptional cases, it ran last year ahead of the last pre-pandemic years. On a trend basis it is upward, and I expect it to be upward again this year, but it is lagging behind the target, which is produced by a model endorsed by the Office for Budget Responsibility.

We are focusing on our productivity to try to make sure we get as much out of our compliance work as we possibly can. In a situation where taxes are going up year on year, that lag always means that there will be a bit of a lag. I do not expect that we will hit our yield target as calculated by that model this year or next year either, based on current forecasts.

Q27            Chair: Can I ask, then, why you set a target, not a range? We have this discussion quite often.

Jim Harra: I am quite happy to think about that. Targets tend to be a number.

Q28            Chair: You will know what cases are coming through. You have an idea of the variables. Your model does not take into account that a case might crystallise in a particular year.

Jim Harra: Internally, when we are forecasting what we expect our performance to be, we use a range. We have a central forecast and an upper and a lower level of that. In terms of whether you wanted to have a public facing target that did that, the target is set by the OBR’s model. It comes out with a number. We are chasing being as effective as we possibly can.

Q29            Chair: You are saying that you would be happy to publish your internal figures, but the OBR needs a figure because it has to fit that into its model.

Jim Harra: I am putting words in their mouth. I do not know. Certainly their model comes out with a target. When we are forecasting our performance internally, we know that we are forecasting on a range.

Q30            Peter Grant: Mr Holliday, in July this year a response to an earlier report was issued on managing tax compliance following the pandemic. One of the recommendations that the Committee made and HMRC did not accept was that we wanted you to set a rolling target for compliance yield as a percentage of tax revenues. Could you explain why HMRC did not feel that that was a workable solution?

Justin Holliday: It is because of the kinds of factors that Jim is outlining. In the way the regime works, we are trying to do enough work to hold or improve the tax gap, and compliance yield is a proxy for that. The tax gap can only be properly measured two or three years after the event, but we need to be trying to manage something in the year in question. Essentially, we think that making it a percentage like that is a step of sophistication too far. It makes it feel like the kind of simple arithmetic relationship that Jim was trying to explain does not always work does actually work. It is presenting something that does not quite work as if it worked.

Q31            Peter Grant: This year again, we are seeing a lot of people coming into taxpaying brackets for the first time, or people who have always been basic rate taxpayers becoming higher rate because wages are going up and the tax bands are staying still. Are you able to give an indication as to how many people will be paying tax for the first time as a result of these changes? Does that create a compliance burden on HMRC to have more people to check up on?

Jim Harra: You are right. There are more and more people coming into the income tax system all the time. The Office for Budget Responsibility, in its last economic and fiscal forecast, set out its forecast for the numbers. In addition, more customers are going into the higher rates and into the additional rate brackets. In addition, that means—there are other factors as well—going into more complex ends of the tax system. More people are engaging with having to pay tax on dividends and investment income. More people are engaging with having to pay capital gains tax, for example.

In terms of the numbers, the Office for Budget Responsibility has forecast that, compared with 2022-23, by 2028-29 there will about 4 million additional income tax payers. There will be about 3 million more in the higher rate and about 400,000 more in the additional rate. All that creates more of a pressure. I will describe those pressures on compliance in a moment, but the key pressure on HMRC is that more taxpayers, and more taxpayers engaging in the part of the tax system where they have to actively engage with it, means more contact with the tax system and therefore more contact with HMRC.

You have seen that in our telephone calls and our post. Last year, both went up by about 3 million—so about 3 million more phone calls and about 3 million more items of correspondence for us to deal with. That is a key pressure for us operationally, just handling the service that those customers need.

On compliance, if you look at the tax gap and how it is made up, most of it is not made up of employees. Employees earning more does not significantly affect the tax gap, because pay-as-you-earn does that automatically, but overall it puts pressure on that compliance target that I mentioned. The compliance target is directly related to tax revenues and therefore it puts pressure on it.

However, there is still a growth in businesses in the tax system. They have gone up from about 5 million—I am not going to quote the years because I will get it wrong—to about 5.5 million. Some 56% of the tax gap is made up of small businesses, so that is an increasing compliance pressure for us to manage, but the main pressure is on service and the operational contact with those customers.

Q32            Peter Grant: Are you given any additional resource to cope with this extra compliance workload?

Jim Harra: We have regular negotiations with Treasury on the resources that we need. We sometimes get additional resources to deal with pressures, either just external pressures coming from the economy or from policy change. By and large, when it comes to the growth in our contact demand, no, we are not getting more resources to answer more phone calls or deal with more post.

We have had investment to push as much of that contact as possible into digital self-serve to make it easy for these taxpayers to get their tax right and make it as easy as possible for them to be self-sufficient as they do so. Despite the underlying upward pressure on our contact demand, we have to reduce it by 30% by the end of the next financial year compared with the level of 2021-22. That is the challenge that we are focused on.

Peter Grant: I think that we are going to come back and look at the digitisation issues in more detail later on.

Q33            Ben Lake: Can I turn now to the number of prosecutions that HMRC has undertaken in recent years? The NAO Report, in paragraph 1.30, details that HMRC’s criminal investigations resulted in 240 prosecutions in 2022-23. That compares with 691 prosecutions in 2019-20, which is quite a significant reduction in the number of prosecutions. I understand that HMRC informed the NAO that this was as a result of delays in the criminal justice system, but also its strategy to increasingly focus its criminal investigations on the more serious cases. Could you perhaps elaborate on what a serious case would be?

Jim Harra: We have extensive civil powers as well as criminal investigation powers. We can tackle criminality using the criminal justice system but also using the civil system, or both in parallel in the same case. You will have seen in the Bernie Ecclestone case, for example, that, while we prosecuted an offence, at the same time we used our civil powers to pursue the tax liability. We used both in parallel, so that is part of our strategy.

Increasingly, we are selective about when we use our criminal investigation powers and when we seek prosecution. We do not do it routinely even for deliberate error. We would normally use civil powers and civil penalties to put that right. Where we think that criminal investigation and prosecution is the only effective way of dealing with this, either because of the seriousness of the offence or because we need to use criminal powers to get at the evidence, that is what we will do. You will see it increasingly used at the top end of serious crime and crimes with aggravating factors.

Q34            Ben Lake: In terms of a serious case, or your understanding of a serious case, has that changed at all? My understanding from your answer there is that, for those cases that are not as serious, you would look to use the civil powers and prosecution in the civil law, which is quite understandable. I cannot quite understand why there should be such a significant drop in the number of criminal prosecutions, unless our understanding of what a serious case is has changed in that time.

Jim Harra: It is a policy we have been adopting. If you look at our practices in the past, we had volume targets for prosecutions. There has been a change in our approach in recent years, and that is being reflected in what you see in the changes. It is also the case, as you mentioned, that, just at the moment, charging decisions are still affected by the wash-through from the pandemic in the court system.

Also, in recent years we have been given additional powers that we did not have in the past, which mean that we can sometimes deal with cases differently. We increasingly have powers to freeze accounts, to—with the Insolvency Service—get people disqualified as directors and to put liability on to directors of companies, for example. So that might well change the circumstances in which we pursue criminal investigation.

Q35            Ben Lake: I take from your answer as well that some of those new powers may also negate the need to pursue criminal prosecutions. The deterrent effect of a prosecution is something that this Committee has been quite concerned about. Earlier this year, concerns were also expressed that, without a sufficient number of prosecutions, there is a risk that HMRC will not be able to demonstrate a credible deterrent effect from its compliance activities. Have you made any progress in understanding the extent of this deterrent effect of criminal proceedings versus other civil proceedings or indeed these new powers you mentioned?

Jim Harra: We would agree not only that our compliance activity has to be effective on the particular taxpayers but that we need to be able to leverage it so that other people are aware of our presence and what will happen to them if they deliberately do not comply. We recognise that. In particular, some high-profile criminal cases are very heavily covered, for example, in the press. People certainly notice them.

We do, however, take other steps. We have what we call the deliberate defaulters list, which we have recently published the most recent one of. Where a taxpayer settles with us under our civil processes but we regard them as having deliberately defaulted on their tax and it is relatively serious, we will publish details of their case so that it is in the public domain in the same way as if they had gone through the courts. Those cases tend to get quite a bit of coverage at local level, although less so in the national press. That is all an effort to leverage the deterrent effect. It is something that we need to bear in mind.

Q36            Sarah Olney: To pick up where Mr Lake left off, you have been talking about very serious cases and so on and so forth. We have had a substantial body of evidence submitted by members of the public, agents and official bodies. Evidence 0003 refers to how HMRC debt management was chasing a small limited company for an outstanding debt of £89 over the course of four years and nine months. Do you think that there is sometimes a lack of proportionality in the way that HMRC approaches debt management?

Jim Harra: We take a risk-based approach to debt management. We have described to the Committee before the strategy that we are following. Even for small debts, if it is cost-effective, we will pursue them. We may reach a point in our processes where it is not good value for money to proceed any further. We sometimes remit debts. It is not a formal write-off. The taxpayer has not been made insolvent but, from our point of view, there are no further practical steps that we can take that are value for money. Certainly, if you owe us £89, that will stay on your record and we will periodically contact you and try to get you to pay that.

We obviously use our own officers for debt collection. We also use debt collection agencies. We have recently increased our use of them. We make sure that we get a good rate of return on that. The rate of return, for example, on our use of debt collection agencies has recently improved. It was 23:1, and I think that it has gone up to over 30:1 now.

Q37            Sarah Olney: We will come to debt collection agencies shortly. I wanted to move on to the overall level of tax debt. We have seen a huge increase in the overall level of tax debt post the pandemic. We also know from various indicators that there are immense pressures on households and businesses at the current time: inflation, interest rates and various other things. How confident are you that you are going to be able to tackle that level of tax debt, given pressure on household and company finances?

Jim Harra: You are right: we have seen a significant increase in our debt balance compared with pre-pandemic years. That is not a direct hangover from the pandemic. We saw, almost as a policy decision really, the debt balance increase during the pandemic. We have worked through those debts. In the last couple of years, there has been a high level of non‑payment, higher than in the past, mainly by small businesses. It is less of an issue for us on households. That is self-employed people and small companies not paying their income tax, VAT or pay-as-you-earn. Those are the three main heads.

We see evidence that that is a sign of distress. It is not necessarily deliberate non-payment. Those taxpayers are often compliantly filing their returns showing the liability, but then are not paying it, because they are finding that difficult. Over the course of this year, we have managed to clear that debt slightly faster than it is arising. It is arising at record levels—new debt all the time—but we have just got ahead of that. I expect the debt balance that we report at the end of this financial year to be slightly lower than it was at the start of the financial year.

In the autumn statement, we were given the funding for 700 additional debt officers. We will be using that in-house and with debt collection agencies. That gives us an opportunity to further reduce that debt balance. One of the issues with it is that it is well known that, as debt ages, it becomes increasingly difficult to collect. You have to act as promptly as you possibly can. We are more than keeping our head above water. We are making headway on it, but I think that the reduction in the balance this year will be small but there.

Q38            Sarah Olney: Do you expect, in time, the level of tax debt to come back to pre-pandemic levels?

Jim Harra: I cannot forecast what it will be. It is affected by external factors. At the moment, it is being driven by the level of indebtedness in small businesses, which I think the Bank of England has reported on more generally. Currently, we are still seeing the rate of new debt being created running at record levels, which is why we are having to clear it at record levels. At this stage, I am not seeing anything that will indicate that, in short order, we will return to the kind of debt balance that we had four or five years ago.

Q39            Chair: You say “in short order”. Do you have any timeframe for this?

Jim Harra: I hope that the debt balance will be lower next year than it is now, but it is not going to be back to that kind of level.

Q40            Chair: One interesting thing is that there is an overlap in the Venn diagram of the businesses that you are saying are struggling to pay their tax debt and those who received bounce-back loans. Is there any read-across that you are doing? They have a 10-year period to pay them back and interest rates kick in at different times. Are you talking to the Department for Business and Trade at all about that? The point where they crystallise could be a particular crunch point for you too if they owe money to you and owe their bounce back loan back. That is quite a pressure point.

Jim Harra: I am afraid that I am not expert enough to give evidence to the Committee on that, but, yes, our debt management team does that kind of analysis. It looks at all of the pressures on small businesses. It is clear that a couple of years ago there was a high level of liquidity so businesses were able to get access to funds. We gained from that in terms of paying back the tax debts, but things are obviously much tighter for businesses now. To some extent, that is playing out in tax debt as well as other debts.

Q41            Chair: To be clear, in law you have precedence over most other creditors, do you not?

Jim Harra: That is only for pay-as-you-earn and VAT.

Q42            Chair: There could be a point where the banks are owed money back from the bounce back loans, but there is no 100% guarantee by the taxpayer if it is not paid back, and people also owe money to HMRC. You are saying that your people are doing that analysis and liaising with other Departments in Whitehall.

Jim Harra: Yes. When it comes to our ranking as a creditor, Ministers and Parliament took a decision a few years ago that, in the case of pay-as-you-earn and VAT, that is money that the business has collected from its customers and employees and we should have precedence in getting that from them. For other liabilities, such as corporation tax, we just rank in the same way as any other unsecured creditor.

Q43            Sarah Olney: The current tax debt balance is £43.9 billion. Do you have a forecast yet of how much of that you expect to be able to recover?

Jim Harra: We remit or write off an amount every year. Last year, that was about £3.8 billion that we remitted or wrote off. We report that in the tax gap as a loss. It is reflected in the tax gap as non-payment. Those come from either insolvencies or debts that are legally collectable but where we feel that there are no further practical steps we can take and that we would be wasting money if we went any further. That is what we declare.

I expect that to increase, for two reasons. First, the current debt balance is pregnant with debts that are going to end up as losses. As we clear it, particularly with the extra resources we have, we will be collecting more debt, but we will also be bringing out those debts that need to be remitted or written off.

In our accounts, we make a provision against the receivables for how much of that is ultimately collectable. I think the impairment is about 14%.

Justin Holliday: The impairment is £19 billion.

Q44            Sarah Olney: It is £19 billion, and that is 14%.

Justin Holliday: No, it is more than 14%.

Q45            Sarah Olney: You mentioned debt collection agencies earlier. You referred to the ratio that you are able to collect via agencies versus what you had been doing without agencies. Was it 30:1 versus 23:1?

Jim Harra: I will let Angela pick this up. Certainly, the rate of return we were getting from debt collection agencies was about 23:1. We have recently improved the contract from 2022, and it is better now.

Angela MacDonald: It is better. As you can imagine and as we have discussed, there is a wide variety of debts that sit within that debt balance, some of which are quite simple and straightforward and can be driven at volume, and some of which are highly complicated and really quite difficult to pursue.

We have a mixed economy of capabilities. We have a very large set of internal colleagues, and then we also have contracts with a broad variety of debt collection agents. Those debt collection agencies do exactly the same job as our own people. They are not bailiffs. This is desk-based activity: sending letters, making phone calls and following up with businesses to support them to pay.

We have a slightly higher rate of return from the debt collection agencies than from our own internal colleagues, but that is slightly misleading because the reality is that we often put to the debt collection agents a lot of the simpler, higher-volume activity, which we know they can confidently crack through.

Right now, as Mr Harra said, our historical rate of return for debt collection agencies has been £23 for every £1 spent. So far this year that has improved and it is £32 for every £1 spent. It is a very good rate of return.

Q46            Sarah Olney: What has driven that improved productivity?

Angela MacDonald: We changed our contract with our debt collection agents. Government have a set of contracts for these kinds of agents, and we pull off contracts as part of the bigger Government framework.

We have been negotiating with those businesses to help us refine our processes, help them be more effective and learn more about where they can play a stronger role than us. That has helped us to change some of our balances around. It is a continuous learn between us and the debt collection agents to make sure this is as efficient and effective a process as possible.

We have some very long-standing relationships with many of these firms. As you know, after a while, as you get into that, processes become streamlined and you can pull it through. We have a very big network of businesses together, working with our own people.

Q47            Sarah Olney: This is an issue that has come up occasionally in my case work. Does the debt transfer from HMRC to the debt collection agency? At that point, does the taxpayer have no further appeal against HMRC? Is that a misunderstanding on my part?

Angela MacDonald: No, the debt is always an HMRC debt. This is a set of resources. These are people who are acting on our behalf. Those debts are always HMRC debts. The relationship is always with HMRC. In most instances, the debt collection agency is able to address the debt. There will be lots of instances where the process of the debt—not the physical debt—is returned back to HMRC because we have learned some more information, a different conversation needs to happen with the customer and we need to move things around. It is always a HMRC debt. It is never not our debt.

Sarah Olney: Thank you for clarifying that. How accountable are debt collection agencies? Ms Barker, do you want to ask your question?

Q48            Paula Barker: Yes, I would be interested to understand the accountability element. I would also be interested to understand how many private agencies you use.

Angela MacDonald: All of our debt collection agents are regulated by the Financial Conduct Authority. They are part of a broad set of oversight regulations that go through that. As I said, we also use only agents that are part of the Government framework. They have gone through very rigorous commercial processes to get themselves on to the framework, with standards that are identified that they must adhere to as part of that.

We do also agree and oversee the processes that those debt collection agents use. We also vet the letters and the processes that they follow. We will quality-assure the letters and the processes that go out on their behalf. If there are any complaints or issues that customers have, because those businesses are FCA-regulated, there is an opportunity there. In the main, if there are any problems, that customer will come back to us and we will follow it through.

We only operate within a regulated environment and, as I say, because the debt and the accountability remain with us, ultimately, if there are any problems, when the customer comes to HMRC, we solve those.

Q49            Paula Barker: In terms of numbers, how many private agencies do you use?

Angela MacDonald: I am afraid I do not have the number, but I will be happy to write to you.

Q50            Chair: What proportion of your debt collection is through debt collection agencies?

Angela MacDonald: I do not have that in my head either, unless Mr Harra has found the table in the briefing.

Jim Harra: Last year, the debt collection agencies recovered £852 million on our behalf. That was a record level. It is significantly more than previous years. We will write about the numbers in the framework.

Q51            Paula Barker: Are the individuals who you are using via private agencies being paid a higher rate than your in-house staff?

Jim Harra: The remuneration policies are for the debt collection agencies. They are, in effect, contractor companies, so we do not control their remuneration policies. We ensure they are following the same processes and policies that we follow in relation to how they deal with our customers.

Q52            Sarah Olney: Finally on agencies, if taxpayers are being dealt with by a debt collection agency, if they have a complaint about the way that the agency is handling the debt collection, can they come back directly to HMRC? Do they have a dedicated route by which they can do that?

Angela MacDonald: They would come back into main HMRC and simply articulate that they want to have a complaint. There are mechanisms both online and by phone or post, if you want to tell us that you have a complaint about a service that we are delivering. We will pick up and follow it up from there.

Q53            Sarah Olney: They are not going to be told that they need to complain to the agencies.

Angela MacDonald: No.

Q54            Chair: Mr Harra, I want to come back to this issue about the debt that, in particular, small businesses are facing. Are you getting a sense that tax debt is dropping? Where does it fit into the scale of where businesses are paying back debt? Are you doing any analysis of that?

Jim Harra: Again, I am not the right expert. I might write to you with more information after I speak to my debt management colleagues.

As you know, we try to segment customers into their propensity to pay and their ability to pay. We believe that the increase in indebtedness that we are seeing is from customers who understand that they owe this money and would pay it if they had the means to do so but who are juggling their finances.

Psychologically, if you are a self-employed person or the owner of a small business, if you have the choice between paying the taxman and spending money on keeping your business afloat, you are going to keep your business afloat. We completely understand that. Our Time to Pay arrangements are designed to ensure that viable businesses can remain viable as they pay off their tax debt.

We believe the increase in small business indebtedness is just from distressed taxpayers who would like to pay us back.

Chair: Certainly, we all know businesses in our constituencies that are really struggling to keep afloat.

Q55            Peter Grant: Mr Harra, I want to look at the levels of fraud and error in research and development reliefs, which you will know is something the Committee has raised concerns about before. Your previous estimate, for the 2021 financial year, was that fraud and error in R&D reliefs was £336 million. You have now reassessed that and come up with a figure of over £1 billion. How did you get it so badly wrong?

Jim Harra: We used some assumptions. Prior to the most recent estimate, we looked at the outcomes from our compliance cases that were selected on a risk basis, and we then had to make some assumptions about the extent to which that non-compliance played out in the reminder of the population, where the risk levels were different.

In statistical terms, that is a reasonable thing to do. It is reasonable to assume that what you see in a risk-selected sample does not play out in the whole population. When we then did a mandatory random inquiry programme, we discovered that the assumption we had made was incorrect and that the levels of non-compliance in the remainder of the population were significantly higher than we had assumed they would be. That is the key reason why, among SMEs, we have seen that significant increase in our estimate of fraud and error.

Q56            Peter Grant: I appreciate why you did not go back and repeat the exercise for previous financial years, but is it reasonable to assume that the actual level of fraud and error in 2019-20, for example, was significantly higher than your previous estimates?

Jim Harra: Yes, that is reasonable to assume. The same assumptions were made in previous years. We have seen growth in the take-up of R&D. We have seen growth in the industry of R&D specialist agents, who are marketing R&D to customers that might not otherwise have considered that they might benefit from it. I suspect it has been a growing trend in recent years, but nevertheless it is reasonable to assume that our estimate prior to that was too low.

Q57            Peter Grant: Particularly in relation to fraud and error in the part of the scheme that deals with small and medium-sized enterprises, we are talking about a fraud rate of just under 25% in some cases. That is even higher than the levels of fraud we have seen in relation to some of the covid schemes.

First of all, how did we get into a position where a scheme was brought in that was so vulnerable to fraud? Secondly, why did it take so long for anybody to realise just how bad it was?

Jim Harra: First of all, just to clarify, the fraud and error rate we saw in 2021-22 among SMEs was 24.4%. That is most definitely not all fraud. We have looked at the cases in the sample that we think show indicators of fraud, and it is about 10% of cases.

A significant proportion of this is from error in its broadest sense. That ranges from inadvertent mistakes through to pushing the boundaries of what qualifies as R&D or qualifying expenditure within an R&D project and carelessness in compiling the claims. There is a big issue about the quality of the work that some claimants and their agents have done.

Clearly, we have underestimated it in the past. That has played out in the operational attention we have paid to it. You will see that we have significantly ramped up the resources on R&D and the number of cases we inquire into. Nevertheless, since 2021 you can see a range of policy and operational measures that the Government and HMRC have been taking in response to what we saw as a growing risk, even though we had the qualification wrong initially.

Q58            Peter Grant: Your most recent estimate, as I understand it, assumes that you have got back about £250 million from the increased compliance activity that you have just described. Where does that £250 million figure come from?

Jim Harra: At the moment we only have an estimate for 2021-22. We did have to come up with an illustrative figure for the purposes of our accounts in 2022-23. We know that our operations will have had an impact on that. We have estimated that it is £250 million. We have not made any estimate in there for the impact of the policy measures that came in, which also affected that year.

We have been conservative in what we have done there. When we come to measure the level of fraud and error for that year, we believe we will see a more significant drop compared with the 2021-22 figure than that illustrative example. That comes purely from the increase in our operational activity on tackling non-compliance.

Q59            Peter Grant: If you look back from 2019-20 to the present day, realistically we are talking about losing £4 billion to £5 billion. You have indicated that probably about half of that is fraud and half is error. How much of that £4 billion to £5 billion do you expect to be able to recover?

Jim Harra: Certainly, where we find today through our compliance activity that a claimant has been getting it wrong, we expect them to go back and correct the previous years.

As you know, we have the ability to go back into past years depending on the level of culpability in the case. This is why the definitions of fraud and error can be important. If it was inadvertent error, by and large some of those earlier years will pass out of time quite quickly. If there was carelessness or deliberate non-compliance, we have longer to do that.

We are really focused on selecting cases here and now, but, to the extent that people have been claiming year on year, we would certainly expect that to be put right for the past.

Q60            Peter Grant: Is there any evidence that this is partly being driven by dishonest agents, in the same way as some other compliance issues have been in the past?

Jim Harra: About 90% of R&D claims involve an agent or a tax adviser. It is a highly intermediated part of the tax system. In recent years, we have seen the growth of specialist R&D agents. They will go into a business. They will say, “We think we can get you some tax back on what you have been doing, because we will be able to characterise that as R&D.”

They will help the business put together a claim and submit it on their behalf; they may get the company to submit it and stay behind the scenes; or the company may go to its regular tax agent and say, “File this claim for us.” The quality of the work done by some of those agents is extremely poor, in our opinion. When we have come along afterwards to investigate the claim, the business often says, “I do not know anything about this claim. This guy came and put it in for me, but now he has gone.”

We have taken two steps, in particular, that came into force earlier this year. First of all, there must be a named person in the business who takes personal accountability for the quality of the claim. Secondly, they must disclose to us the identity of any adviser that has helped them to compile the claim. We know which advisers are good and which are not.

We are also engaging with the main professional bodies. Not all of these R&D specialist agents are affiliated to a professional body that regulates their conduct, but a good proportion of claims are submitted by members of professional bodies. We are working with them to make sure their members can add more value and to make sure that what we get is compliant.

Q61            Peter Grant: Do you have sufficient powers to go after what are basically criminal agents, as well as the taxpayer?

Jim Harra: We certainly have powers. Our powers apply to anyone who is involved in defrauding the Revenue. It is not just the claimant. There is a range of things we can do to agents whose standards we are unhappy with or who have been engaging in criminal activity. That goes from refusing to deal with them, right through to criminally investigating them and seeking their prosecution.

In the case of R&D claims, one feature is that the claimants sometimes nominate their agent to receive their payment. The agent then deducts the fee and passes the rest on to the taxpayer. That weakens the quality of the engagement between the client and the agent. Therefore, one of the steps we are taking is that we will no longer pay R&D payments to nominees. It will have to be paid to the taxpayer, and they will have to have a proper discussion about the service that is being received and the payment.

Q62            Peter Grant: You may be aware that we have had probably more written submissions for this inquiry than anything we have had in the past. We have had a lot of submissions from professional bodies, such as the Institute of Chartered Accountants in England and Wales, the Chartered Institute of Taxation and others.

One of the issues that a lot of them are raising on behalf of their members is that, in response to the realisation that the rate of fraud and error in R&D relief is so high, they feel you have gone too far the other way. Effectively, completely honest operators, which have never had any problems, are now being pulled into the net. They feel as if they are coming under suspicion.

The Chartered Institute of Taxation is reporting that it is discouraging some firms from investing in R&D, because they would be scared to put in the claim in case they came under suspicion as fraudsters. Do you accept that the volume compliance approach that you have introduced for R&D reliefs is causing these problems?

Jim Harra: I do not accept it, but we definitely do need to listen to the feedback. We have been ramping up our activity here. We have to get it right. I am not saying we cannot do better.

In the case of R&D, we are trying to tread a very careful path. This is a very important incentive, which the Government want to succeed and which we want to succeed. We do not want to discourage anyone who is entitled to it from receiving it. Nevertheless, the level of error and fraud is such that we have to take action.

We have increased our coverage in terms of compliance checks from around 1% of claims to now over 20%. It is unsurprising that people are feeling that. It is also the case that, in the past, we have had limited information on claims, which has meant it has been quite challenging for us to risk-assess them and make sure we are picking up the right cases.

Some of the reforms that have been brought in to give us additional information relating to claims are intended to improve our risk assessment. Hopefully, fewer people who are genuine claimants will get caught up in our compliance activity in the future, as that comes in.

We are also concentrating on those sectors where we do not think there is as much R&D taking place as the claims would suggest. We are contacting businesses in those sectors directly and educating them so that, if they are approached by one of these agents, they think carefully before they engage with them. We are very much trying to target our effort at the taxpayers and the sectors where we do not think R&D relief is due.

Q63            Chair: Mr Grant has highlighted some very good evidence. Rather than playing it all out here, Mr Grant has picked up on some of the points and will pick up a couple more, but it would be worth while for your team to have a look at it. I am sure you are engaging with them anyway.

Jim Harra: I assure you that we do engage with CIOT. We are aware of their views.

Chair: There is the ICAEW as well.

Jim Harra: We are certainly very much open to feedback and looking at how we can improve. We also very much want those bodies to look at how their members can add more value so we can have more confidence that intermediated claims are correct.

Chair: Those professional bodies definitely want to do that.

Q64            Peter Grant: One of the issues can sometimes be determining whether what they are spending their money on is research and development. By its very nature, that is going to be quite specialist. By definition, it is something that has not been done before.

ICAEW is very firmly of the view that HMRC does not have enough expertise to understand the sectors it is assessing. Would you accept that criticism? Do you need to bring in more specialists for particular sectors of the economy, rather than simply relying on people who are experts in tax but may not understand the technology that they are looking at?

Jim Harra: It is undoubtedly the case that in R&D it is quite challenging. It covers a broad range of engineering, including software engineering, building bridges or whatever it may be. You are right. I do not have loads of experts on all of those different fields in HMRC.

However, our checks are mainly directed at whether the claimant understands what they are doing and why they consider it to be R&D that qualifies for the relief. A lot of our volume compliance work, in particular, is cases where we are challenging the taxpayer: “You have put in this claim. Why do you consider that this qualifies? Have you taken all the right steps to satisfy yourself before you put your claim in or before a claim was put in on your behalf?”

There will be cases that get to a different level of dispute, where we have to bring in experts, if there is a dispute about whether something is R&D. We might bring those experts in from other parts of Government or externally. The volume compliance work that we are doing is generally more straightforward than that. It is about checking that the taxpayer has taken proper care to consider the tests.

Q65            Peter Grant: Finally from me, the Committee has previously looked at the wider application of tax reliefs in looking for evidence as to whether they are achieving their stated policy objectives. How will we know whether the revisions to R&D claims encourage more businesses to invest in research and development?

Jim Harra: In the past, we have published analysis that demonstrates the linkage between R&D relief, the carrying out of R&D and the economy. I could certainly point the Committee to that.

However, this is an area of the tax system that has been heavily reformed year after year, and there have been more measures announced recently. It is a moving picture all the time. We have to keep evaluating that as well as, as you said, the impact of our operational efforts to make sure the relief only goes to people who are entitled to it.

Q66            Peter Grant: It took several years. It was the Office for National Statistics that looked into this and discovered that there was no correlation between the amount being claimed in relief and the amount of actual research and development expenditure that was going on. That appears to be at quite a simple level, but it took HMRC a long time to realise there was a problem. How can the Committee take assurance that, when you assess the effectiveness of the scheme this time, you will be basing it on valid assumptions?

Jim Harra: I do not believe that that point about the lack of correlation is correct. I believe we have published this analysis. I will follow up on this, if I may.

Q67            Chair: If you could let us have that, that would be helpful. It was interesting that you were talking about going straight to businesses, stepping over the agents in a way. Are you going to be prosecuting any of the agents involved in these schemes?

Jim Harra: We will certainly consider prosecutions. There was what we consider to be a fraudulent attack on the regime last year.

Chair: You paused applications.

Jim Harra: We paused applications whilst we made sure we put in protections. That was really about bogus claims from bogus companies.

Q68            Chair: We had constituents who were frustrated, but we understand that you have to guard against that.

Jim Harra: If we can establish criminality, we will certainly consider criminal investigation and prosecution. As I said earlier, in the random inquiry sample programme, we only saw indicators of fraud in about 10% of cases. What we are seeing a lot of is boundary pushing.

Q69            Chair: How much of that abuse is coming from agents rather than the companies? Do you have any idea about the percentages?

Jim Harra: I do not have a quantification, but one of the reasons why we brought in the measures we did in August was that we felt that, in some cases, the agents were having a negative effect and the claimants had not had much engagement in the claims that were being put in either on their behalf or they had been asked to file. Agents can play a very positive part in relation to helping people get what they are entitled to, but that is not what some—

Q70            Chair: In this case, the R&D does really have to be with the company, because they are really the only ones who will understand the detail of what they are applying for.

Jim Harra: Yes, they know whether they are carrying out research.

Q71            Sarah Olney: I wanted to ask Ms MacDonald about transition towards universal credit for those who had previously been claiming tax credits. There are still a large number of tax credit claimants who have not been migrated. Are you confident that you will complete the move by March 2025?

Angela MacDonald: Yes. We have about 940,000 child tax credit and working tax credit cases still in payment. As you know, we have been working with DWP for many years on moving cases over. We have to get that 940,000 through. We have a very detailed plan to get us from here to March 2025, on which we continue to work very positively and closely with DWP.

A few months ago, we successfully delivered the remaining parts of automation, which will allow us to move those customers through and give them the transitional protections they need when they need them. After March 2025, there will be a small amount of follow-up work for us to do, but, as we sit here right now, we have a very clear and confident plan between us and DWP, on which we continue to work very closely with them.

Q72            Sarah Olney: Are you confident that you will be able to maintain the focus on error and fraud as you transition?

Angela MacDonald: Yes, absolutely. What is interesting is that, as the nature of the case load has shifted, for those customers whose circumstances change more frequently, those frequent changes have already triggered those customers to move to universal credit. The nature of who is left is much more stable. You are seeing that in the fact that our error and fraud numbers are coming down as the years progress, because those customers are not moving very far.

We are working through how the usual processes that we do to manage error and fraud need to adapt in a circumstance where you may only have a small number of months left before that customer is moving on to universal credit. We are working through how we make sure we maintain the focus, and we are managing this all the way to the end, but we are wise to the fact that our circumstances are moving around and to how we support customers through that.

Q73            Sarah Olney: That is interesting. Thank you. How are you planning to redeploy the resources that previously had been working on administrating tax credits?

Angela MacDonald: The volume of colleagues working on tax credits has been reducing for some time. By the time we finish in March 2025—by the time we get to the end of this—there will be a small number of colleagues left. That will release roughly 1,000 colleagues off that work. As part of the attrition we see every year, we will simply not replace attrition elsewhere. Those colleagues who remain with us will be redeployed and retrained in other areas of work. Again, that is what we have been doing so far as work has been reducing. We have either been absorbing attrition or redeploying and retraining.

Jim Harra: If I can just add to that, much of this work is done in Preston. When we made our location plans in 2015, the assumption was that most of our staff working on tax credits would transfer to DWP with their customers. The universal credit programme has changed that assumption. Those colleagues will now not move to DWP; they will stay in HMRC. We did recently announce that we will now retain estate in Preston and carry on employing people there.

Q74            Chair: I am sure that is welcome news for Preston. Currently, the debt is owed to HMRC. If there is a fraud or an error, that is an issue with HMRC. Does that liability stay with you or does it move over to DWP when people move over?

Angela MacDonald: It depends. So far, about £4 billion of debt has moved between us and DWP, where customers have then gone on to make a universal credit claim. If that customer moves to universal credit, any remaining tax credit debt will move with them. If they do not make a universal credit claim, we will write to that customer and explain to them that, as their tax credit claim has come to an end, this is now any remaining debt. We will maintain that debt and manage that through.

Q75            Chair: Will that be permanent? If someone is at the point of cut-off and does not make a universal credit claim, but does so six months or a year later, does something kick in then so that DWP takes on the debt?

Angela MacDonald: We will always be looking for opportunities, as we are managing those debts on our debt balance, to find routes to—

Chair: Pass them over to DWP.

Angela MacDonald: Should there be a subsequent universal credit claim that would offer Government the opportunity to recover that debt, we will take the opportunity to—

Q76            Chair: Ms MacDonald, you have mandarin language down to a fine art, but we get the point. It will get pursued, but it might stay with you. You might have a residual chunk of debt to deal with.

Angela MacDonald: That is absolutely right. As part of the debt activities that Mr Harra was mentioning earlier, we already have tax credit debts we are pursuing after a tax credit has closed, and those cases will then move through our debt collection processes just as any other debt would. We will follow those through where it is economic for us to collect that debt. Should we get to a point where it is no longer economic to pursue that debt, we will take action, as we would with any other type of debt.

Q77            Chair: You can recover it from payroll for somebody, if they were to get employed.

Angela MacDonald: Yes. We have a number of actions to take, but we always look at those on a case-by-case basis, depending on the circumstances of the debt and the circumstances of the customer. Yes, you are quite right. Our debt colleagues have an array of opportunities to try to ensure we get the money that is due.

Q78            Chair: I just wanted to check one thing with you, Mr Harra. Going back to R&D for a moment, when you do the R&D sampling and you do that random inquiry, are you making a deliberate check for fraud or intent to defraud? Or is it just really random, and you are uncovering it in that random sample?

Jim Harra: The sample is selected randomly so that we have statistical validity. When the caseworkers work the cases, we record what indicators they saw in the case that point to what kind of behaviour it is. In the cases that were settled in the programme, we saw indicators of fraud in about 10% of cases, as I understand.

Q79            Chair: You use those to help you model questioning for staff who are trying—

Jim Harra: It is very important to us that we understand not only the extent of fraud and error but the behaviours that are driving it.

Q80            Chair: It sounds like it is still work in progress, because R&D relief is still bedding in, really.

Jim Harra: Yes. There are constant changes to R&D. Over the years, it has become a much more generous scheme. There have been changes made to the rates in the last couple of years. There have been changes made as recently as the autumn statement on the threshold for resource-intensive small businesses. We need to watch how all of those wash through and how the customers and the agents respond.

Q81            Chair: The changes mean you effectively have a review of what you are doing, but will you also be doing a wider review of how it works? We have talked a lot about tax reliefs over the years in this Committee. Very often they are unveiled and announced, but not enough evaluation has been done. Are you evaluating how this is working from your end? The Treasury and the Department for Business and Trade will have to evaluate the impact, but will you be evaluating how it is to administer?

Jim Harra: From the point of view of fraud and error, there have been lots of measures taken since 2021 that we believe will tend to drive down the level of fraud and error. There are also other measures that have been taken that make the scheme more generous in some aspects. That changes the incentives, including the incentives for non-compliance. We will be tracking that.

Chair: We will look forward to asking you questions about that in future.

Q82            Ben Lake: Ms MacDonald, could I briefly take you back to tax credits and the migration of tax credit claimants over to universal credit? You mentioned that you are in close contact with the Department for Work and Pensions on this process. Have you been made aware of concerns by certain self-employed and small business owners about this migration? I am thinking specifically about farmers. I raise this because the nature of their business means that they often get paid once a year in one single payment. There have been concerns that this will be to their detriment when it comes to universal credit. Is this something that has been raised with you? Has the Department for Work and Pensions asked for your advice on how to deal with it?

Angela MacDonald: I will confess that I am not aware of whether we have had any conversations with DWP. The eligibility rules for universal credit are quite different from tax credits. Those have been reviewed and, in some instances, changed over the many years that we have been working on this transition. The difference between tax credits and universal credit, and how universal credit treats different customer groups, is a question for DWP.

Q83            Ben Lake: If I can now bring you on to customer service, paragraph 8 of the NAO Report deals with the performance of HMRC against the service standards for the past year. You might recall that this time last year the Committee heard some concerns about the levels of customer service at HMRC. It would appear from the report that, against many, if not all, of the key measures, performance has not improved this past year and in some cases has deteriorated. How do you account for that?

Angela MacDonald: I would start by offering that by far the majority of citizens engage with their taxes digitally without the need to do anything or take any action. We have also driven significant improvements and extended our digital services over time. For instance, 99% of people doing their VAT mandated are successfully doing that digitally through Making Tax Digital. The majority of our customers get safe, secure and good-quality digital services to manage their taxes.

Of course, it is true that there are customers who need to write to us and who also wish to phone. As Mr Harra mentioned earlier, there has been an upward pressure in the volumes in both of those areas. The increases in post and phone traffic has been more than 10%, which is reflected in the increased volume of customers who are needing to be serviced.

When it comes to the management of post, we are delivering the best post service we have in four years. We are driving about 74% in 15 days for our returns at the minute—that is the data right now—which is fairly consistent with last year’s performance. I completely take that that is not quite at our service standard of 80%, but we continue to drive forward our improvements there. Through that, we are also seeking to reform how people give us what is often the provision of data, as we are working through.

The harder area is telephony. Again, there is an upwards trajectory on phone volumes. The challenging reality is that more than half of that phone traffic is capable of being serviced for the customer through an online service. We do not have the resources to be able to service all of that demand. Therefore, we are increasingly encouraging, supporting and insisting that, where there is an available high-quality digital service, those customers use that.

That is so important because there are customers whose affairs are very complicated, who are digitally excluded or who are vulnerable. We are currently not able to provide a good-quality telephony service for those customers because we are busy answering phone calls from a whole load of people who could go online digitally.

Yes, it is true to say that we are not delivering against our ambitions on the delivery of quality and timely phone traffic at the moment, but the answer to that is the action that we are driving, which is about increasing the array of and support for digital.

To be clear, by “digital” I do not simply mean gov.uk. I mean things like webinars, YouTube, chatbots or webchat. Our webchat is backed by people, not bots. We need an array of digital. That is where we really need to focus our and our customers’ attention.

Q84            Ben Lake: That sounds very promising. With that in mind, do you have an anticipated timeline or a point by which you will be hitting some of these service standards?

Angela MacDonald: We have a target to achieve a 30% reduction in our analogue traffic by the end of next year. It is our view, all other things being equal, that, if we are able to deliver that reduction in incoming demand, we should have the resources necessary to allow us to deliver the service to our standard.

Q85            Ben Lake: I appreciate that my colleague Peter Grant will want to probe you further on digitalisation, but am I right to understand that, provided you are able to achieve that 30% mark, you hope that that will release capacity to ensure that telephony and dealing with correspondence will hit the service standards?

Angela MacDonald: That is our planning assumption at the moment.

Q86            Ben Lake: Finally, paragraph 1.43 in the NAO Report says: “In June 2023, the Adjudicator’s Office reported concerns with HMRC’s complaints procedures, with significant backlogs…and increasing numbers of customers receiving no or little meaningful response from HMRC for long periods of time.” What steps, if any, are you taking to address this concern?

Angela MacDonald: It is true to say that the adjudicator is seeing upward pressure on complaints. We are seeing upward pressure on complaints, which is mainly down to timeliness. That is the upward pressure. As you know, we have a new adjudicator, who attended our leadership session only last week. We work closely with the adjudicator in order to drive that forward.

It is challenging when resources are limited. We have to allocate resources to delivering frontline services and handling complaints. While I am handling your complaint about how long it is taking, I am not doing a piece of work to prevent that issue from happening.

We are increasing our resources to complaint management but, to be fair, the answer is not to put more people on managing complaints. The answer is to be able to deliver more timely services at the beginning. I will not repeat what I have already said, but we have an opportunity to deliver improvements for customers through that.

Q87            Chair: We looked a lot at the digital programme, which we will go into in a minute. I just wanted to add that some of the evidence we have had is from frustrated agents. They are the people who will be able to understand the digital portals and the other routes through, but they are struggling to get through when they have a more complex question to ask.

Do you segment the customers who call? If 50% of people could go through a digital process—Mr Grant will pick up on some of this—why is it that they are still phoning in?

Angela MacDonald: I have stood before many stakeholder forums and shared the data that more than half of this is capable of being done digitally, only to be met with incredulity from a number of agents who would say that that is not their experience. It is not, because many agents are dealing with the more complicated end of customers.

It is true to say that we do not have the array of digital services available for agents that we do for the main citizen. In order to improve the level of service to agents, who are increasingly dealing with the complicated end, we need the broader set of citizens to move online. If I were to give you an example, we had 3 million calls last year, representing 500 people, who wanted to know what their NINO was, reset their online password or know what their tax code was. All of that is available online.

We are trying to work with the representative bodies, with agents more broadly, but, if we can drive a broader narrative about the safety, security and value of digital services with citizens in the round, the shift we are focusing on—

Chair: You will have more resource.

Angela MacDonald: We will then have more capacity. It is really important for those with complex affairs, who are often, as you say, represented by agents. I would point out some other things, though. For instance, we recently took the decision to close our VAT registration—

Chair: We have had a lot of evidence about that. That has probably driven quite a lot of the volume.

Angela MacDonald: That is true, but what is interesting is that more than three quarters of the phone calls to that were people ringing to ask where their VAT registration was. When the phone calls are chasing calls, we spend resources on answering those calls, which is taking those vital resources away from doing the doing.

Since we have removed that phone line, our service quality on VAT registration has seen a significant improvement because we have been able to reallocate all of those resources from those low-value calls into actually doing the work. That is the thing the agents are really after: they want the VAT registrations to be sorted.

Q88            Peter Grant: In the figures you quoted, you said you wanted to reduce the volume of contact by phone and post by 30%. Just to be clear, that is the total number of letters and phone calls that you receive.

Angela MacDonald: Yes.

Q89            Peter Grant: If we use 2021-22 as a baseline, by 2022-23 you had gone from 100% of the baseline to 110% of the baseline. You are now looking at a target reduction in 18 months of over 36% rather than 30%, are you not? You are no longer at 100%; you are up to 110%. Is it at all realistic to turn that around and move from an increase of 10% a year to a reduction of 36% in less than two years?

Angela MacDonald: It is possible if we are prepared to take interventionist action. For instance, when I look at my international peers, many of whom have built good-quality and highly competent digital services, my experience is that, if you leave all of those channels available for customers, people have long habits. There may be a lack of awareness of digital services, or they simply prefer to speak to somebody on the phone. Therefore, it can be very hard to achieve channel shift.

That is why we have taken actions to encourage, strongly encourage and insist that people use these digital services. We need to draw our customers’ attention to those services. A lot of people do not know about them. People do not know about the high-quality and broad array of digital services that HMRC has for citizens in the main.

We have to find the methods and mechanisms to point customers to those services and to help reassure and encourage customers to use them. When we look at our data, it tells us that there is enough of this opportunity in that system that those numbers are possible but, in order to achieve that, it is necessary to offer digital solutions to customers as a priority rather than simply enabling them to use whatever channel they would prefer to use.

Q90            Peter Grant: That is a persuasive argument that you can get the scale of reduction that you need eventually, but have you taken any of those steps yet? You are 15 or 16 months away from when you want to hit the target. The last figures that we have indicate that things are going backwards rather than forwards. You are talking about trying to find ways of doing this and that. Should you not now be at the stage where you know what you have to do and you are starting to do it?

Angela MacDonald: We absolutely have done that. I have an incredibly extensive list, which I probably do not have time to share, of the array of digital changes we have made. We are constantly making significant improvements, for instance, in our HMRC app. There are new services being delivered.

Let me give you a current example. If we look at what we are doing on the self-assessment helpline—this was started at the beginning of this week—if you ring us about one of the large number of services where we know there is a reliable digital service, you will tell us, via natural language through the IVR, what it is that you want us to do. We will then send you a text with a link directly to the area that points to the answers to the question you have. At that point, we will end the call.

We are already driving that. If you get to that point and gov.uk is unable to help you, from there the digital assistant will be able to help you or webchat will be able to help you. In order to be able to do the best we possibly can through the SA peak, for instance, we are already driving those changes to flag these services to citizens—as I say, many of them may not even know that these services are there—which will allow and enable them to instantly get the service they need.

Jim Harra: I will just give you an example of that. There is evidence this year of a turnaround. For example, on self-assessment we are already seeing a reduced level of telephone contact and an increasing transfer of those calls into digital services.

I will just give you the example of child benefit. We introduced a new online service for customers in May this year. In the period May to October, we have already seen a 53% reduction in phone calls on child benefit claims. That is nearly 100,000 fewer calls.

Q91            Chair: That is new applicants for child benefit.

Jim Harra: Yes. You can now put your claim in online; you can check your entitlement and your payment online; you can change your bank account details online; and you can notify us online if your child is staying in full-time, non-advanced education. We saw this reduction in the first few months it went live, because there was a pent-up demand from customers for that service. We have to do that over and over again.

The main area we are focusing on now, after we have introduced those changes to child benefit, is pay-as-you-earn. We get a very high volume of phone calls from people querying their tax code. We think there are simplifications and improvements we can make to the information we provide to customers, which should remove a lot of those, particularly when people start new employment.

Q92            Peter Grant: Could you write to us with the full list of the interventions that you have spoken about? You gave us a couple of good examples there. Rather than ask you to go through them all one at a time, it would be helpful if you could write to us.

Finally from me, Ms MacDonald, you mentioned the fact that quite often when agents phone, they are phoning about things that cannot easily be done online. Part of what you are trying to do is free up phone time for them. Are you able to guarantee that there will always be a phone-in service for tax agents?

Angela MacDonald: Yes. Wherever there is not a digital service that the agent can use to self-serve, we will always offer agents and citizens a phone service. It is the same for agents as it is for direct taxpayers. Where there is a digital service, it is not an unreasonable expectation that agents will use it.

You have asked us before about whether we would value extra investment in this space. When we are looking at overall value for money for taxpayers as the funders of HMRC in this instance, it is reasonable that any user of HMRC is using the most cost-effective channel. If a digital service is available, it is reasonable for all of us to expect those digital services to be used.

Q93            Chair: There is an incentive for us: we can save taxpayers’ money by going digital.

Angela MacDonald: Yes, I think so.

Q94            Chair: Thank you very much, Mc MacDonald. Mr Grant suggested that you write to us with digital changes. It would be helpful to have a really clear timeframe about when they are coming through. That would be useful.

Angela MacDonald: We have extensive information about the things we have already done, but we also have other plans. I will give you the next 12 months rather than the longer-term plan. You will have an opportunity to ask us about this again.

Chair: Yes, indeed. You will be here.

Angela MacDonald: We will. If I give you a 12-month input, that gives us a bit of a backwards and forwards.

Chair: That would be very helpful. Thank you.

Q95            Sarah Olney: I just wanted to pick up on something that Mr Harra said earlier about additional taxpayers. You mentioned that there are going to be 4 million extra taxpayers as a result of frozen thresholds and 3 million taxpayers moving into the higher rate, who were previously basic rate taxpayers.

It feels to me like this is potentially a very large extra workload for customer service staff at HMRC. You have just been describing your heroic efforts to get people to use digital services rather than telephony. Particularly for people who are paying tax for the first time, their first recourse, when they have questions, is to try to get somebody on the phone. If you do see this increase, how might you manage that challenge?

Angela MacDonald: You are quite right that some of the particular pain points in the experience for people when they pay tax for the first time is the very first sign-on for a job. Many of them can find themselves on an emergency tax code. If you are at the lower end of pay, that can be really material, especially if it lasts for a few months.

We have been working through the solutions and services that we place into the HMRC app and the support we need to provide for employers, which are a vital part of this set-up. One of the things we are working on is the fact that there is no one big thing you can do to solve the overall situation on demand. It is a whole load of individual circumstances and pain points.

We are working on this particular one on first-time jobs with our HMRC app right now. We are working to find solutions for this. We are working with a particular employer to allow that very first payslip to contain a correct tax code as opposed to emergency tax.

Our aim is to try to solve the problem in the first place, but we also want to utilise the interaction that the employer has to help explain this. We have been working with a number of employers, including some public sector ones. How do we put tax information on their own intranet sites so there is information available in the place that taxpayers might often go, as opposed to feeling like they need to come to us.

It is a broad variety. What do we see coming through in our information? Where does that originate? We are often at the end of the chain, not where the original question or challenge was. How can we support the process or the originator to make sure we and the customer can get it right first time? We are working our way through a long list of opportunities, a number of which have started and delivered, and more of which are yet to come.

Q96            Sarah Olney: In terms of additional resource, you must be looking at those 4 million extra taxpayers and thinking that that is going to require additional staff, whether that is on the frontline or in processing returns.

Angela MacDonald: Bear in mind, as Mr Harra said earlier, that a number of those are people moving between the thresholds in the pay-as-you-earn system, in which case the pay-as-you-earn system will take care of itself and those taxpayers will flow through.

We have forward forecasts for some of the other areas where you may need to report to us in a different way, such as capital gains tax or dividends tax. We keep those numbers under review. They are part of our forward planning for numbers and part of the conversations we have with Treasury about upward pressure versus downward opportunity.

Some of the time, the question is about whether we should ask for investment in more digital solutions or more solutions to help us, as opposed to more people to answer the phones. For example, we were given £136 million by Treasury to help us to invest in the HMRC app and the single customer account, precisely to allow us to improve the array of services we offer to try to help our customers to self-serve increasingly. It is about finding the correct answer and the best way, in a value-for-money fashion, to support those customers with increasing tax needs.

Q97            Sarah Olney: All these new customers you are about to be getting are a great opportunity to introduce them to—

Angela MacDonald: Yes, digital habits.

Jim Harra: I want to assure you that, while we can see the opportunities to manage this demand on us in a more cost-effective way by reducing phones and post and by increasing digital, we do not underestimate that that is going to be a big challenge for us to deliver.

As Mr Grant said, in effect we have to swim against the tide to achieve what we need to achieve, because the underlying pressure is upward and we have to remove all that and then go down.

We have constant dialogue with our Ministers and with Treasury about our capacity to do all of that. We know the opportunity is there. We know what needs to be done. How fast can we run on that? What other things do we have to do at the same time? We have constant conversations with them. The increase in the taxpayer population that you have described is over a number of years beyond our current planning horizon.

We will be constantly feeding back what investment we think we need, what investment we think we can ingest and how much we think we can drive from it. It is about us changing our functionality and constantly improving our services but, as Angela said, it is also about us pushing our customers to change the ways they interact with us. We have to make sure we can make both of those things happen at a tolerable pace.

Chair: Thank you very much indeed to our witnesses for their time. This session was slightly delayed, just because of the timings of recesses and so on. We normally see you earlier in the year. Thank you.

We will be producing a report on this in 2024. In the meantime, I hope you get some break over the Christmas and new year period, though I am sure your phone lines are open all the time for customers.

Angela MacDonald: Yes, always.

Chair: I am sure the same applies to the digital routes you have been heavily promoting today. We could have gone through a lot of individual cases; every individual failure in customer services has a really big human impact. You acknowledged that just now in your answer, Ms MacDonald. Thank you for that. Thank you for what you do. We will keep pressing you to do even better. Thank you very much indeed.