Public Accounts Committee
Oral evidence: The cost of the tax system, HC 645
Thursday 6 March 2025
Ordered by the House of Commons to be published on 6 March 2025.
Members present: Sir Geoffrey Clifton-Brown (Chair); Mr Clive Betts; Nesil Caliskan; Rachel Gilmour; Lloyd Hatton; Chris Kane; Rebecca Paul; Oliver Ryan.
Andy Morrison, Director, National Audit Office, Edward Pinney, HM Treasury, and Gareth Davies, Comptroller and Auditor General, National Audit Office, were in attendance.
Questions 1 – 80
Witnesses
I: Sir Jim Harra KCB, First Permanent Secretary, HM Revenue & Customs; Justin Holliday, Chief Finance Officer and Tax Assurance Commissioner, HM Revenue & Customs; Lucy Pink, Director, HMRC Strategies, HM Revenue & Customs.
Report by the Comptroller and Auditor General
The administrative cost of the tax system (HC 675)
Witnesses: Sir Jim Harra, Justin Holliday and Lucy Pink.
Chair: Welcome to the Public Accounts Committee on Thursday 6 March 2025. In 2023-24, the UK tax system raised £829 billion, which pays for our public services. The process of collecting this tax came at a price tag of £4.3 billion. This cost is increasing, partly as a result of the rising complexity in different tax regimes and taxpayer numbers, but there are other factors too. HMRC’s stated aim is to run the tax system in the simplest, most customer-focused and most efficient way. However, our Committee’s recent survey of HMRC’s customer service revealed that delivering effective customer service continued to be a challenge for HMRC.
We have also recently examined the issue of tax evasion in the retail sector, with the Committee finding that the true cost of tax evasion is likely to be vastly underestimated by HMRC, thanks to the loopholes in the current system.
Today, we will be continuing our scrutiny of HMRC by examining the main administrative costs in the UK tax system. We will be assessing the main cost pressures affecting the tax system and challenging HMRC on whether it is controlling costs and delivering on its stated aim to run the tax system in the simplest, customer-focused and most efficient way.
Today, to help us with all of that, we have Sir Jim Harra, who was appointed as HMRC’s first permanent secretary and chief executive in 2019. Jim, this is your last appearance before the Committee, so can we thank you very much? You have made fairly regular appearances before this Committee. You have always dealt with our sometimes intrusive inquiries in a very polite and considerate way, so we do thank you very much for all that you have done for this Committee, and wish you well in your endeavours in the future.
Sir Jim Harra: Thank you.
Chair: We have Justin Holliday, who is the chief finance officer and tax assurance commissioner, and has been chief finance officer since June 2015. Finally, we have Lucy Pink, director of HMRC strategy. She joined HMRC in 2017 and has been director of strategy since April 2022.
We also welcome again Edward Pinney from the Treasury Officer of Accounts team. Welcome, Edward.
Without any further ado, we are going to launch, if we may, straight into our correspondence, Mr Harra. Lloyd is going to help us with that, please.
Q1 Lloyd Hatton: I have a couple of questions, so I will keep them as brief as I can, if that is all right. It would be good if we could keep the answers succinct, just so that we can get through them all and then move on to the wider session.
Thank you for the correspondence. It was a useful starting point as to where HMRC is when it comes to the tax gap and high net worth individuals. My first question, just reading through your correspondence, is that, given the limited nature of the current estimate for the offshore tax gap, which was described in the letter as a subset of the overall tax gap, and the fact that this estimate is likely dwarfed by reports of one individual’s likely tax bill, is HMRC capable of knowing the full extent of taxes owed and which could be held offshore? As an organisation, how do you propose to widen the scope of the offshore tax gap statistics in the future?
Sir Jim Harra: We are well familiar with the risks from offshore evasion and avoidance structures, and how to counteract them, but it is extremely difficult to measure it. We have made our first experimental statistics, which look at one element of the individual’s income tax gap, but, of course, there are many other elements to the offshore gap, which are very difficult to measure to a standard that meets national statistics.
We are familiar with the risks. We have a wealthy compliance unit, for example, which is specifically focused on wealthy people for whom offshore risks are a key element.
Q2 Lloyd Hatton: Also in the correspondence, you highlight that investigating offshore tax evasion poses significant challenges—and you have made that point again today—due to the complexity of structures that are used by these wealthy individuals. In the letter, you made a specific point about tackling the accountants and the lawyers who set up these complex offshore structures. Could you go into a bit of detail about how you plan to take action on that specific point, and what the strategy might be to go after those accountants and lawyers? As you said in the correspondence, they are the key to enabling these structures to operate so freely.
Sir Jim Harra: Taxpayers remain responsible for their tax affairs, including the people who they appoint to act as their advisers. However, it is increasingly our aim to improve standards in the tax advisory market and to tackle the minority of advisers who do harm. We have been given increasing powers to do so, and the Government are committed to looking at what more we need. We have to have a two-pronged approach—tackling taxpayers and their attitudes to tax compliance, and the people who might tempt them from the straight and narrow.
We also work very closely with our international partners. The UK is a member of what we call the J5, which is a group of five jurisdictions across the world that share intelligence and assist each other, where we need to find out information that is outside our own jurisdictions.
Q3 Lloyd Hatton: We also know—and this was touched upon in our letter and the correspondence that you provided us—that some nefarious and wealthy individuals use a web of trusts, often offshore, to avoid sanctions and tax. Could you go into a bit more detail about how you plan to tackle the specific challenges posed by the use of trust structures to evade tax?
Sir Jim Harra: Trusts can be used for a lot of legitimate purposes, but they can also be attempted to be used to avoid tax. There is longstanding anti-avoidance legislation—the transfer of assets abroad legislation, which is one of the oldest pieces of anti-avoidance legislation on the statute books, and the settlements legislation, which restricts the ability of people to do that.
The Government did commit in the autumn Budget to review the effectiveness of those rules, to ensure that they are effective in enabling HMRC to tackle avoidance and that they give sufficient certainty to taxpayers about how to stay on the right side of the line. I expect that there will be a consultation on that shortly.
Q4 Lloyd Hatton: I have two quick last questions. You have mentioned this already today, but in the correspondence that you shared with us, you did mention that there is a range of powers that HMRC has to tackle tax avoidance and evasion. Could you provide a bit more detail on how frequently these powers are used by HMRC? If you are able to provide some figures, that would be great. If not, could you follow up with the Committee?
Sir Jim Harra: Wealthy taxpayers are the segment that we focus on as having the greatest risks of using offshore avoidance and evasion, because they have the ability to move assets offshore. They have complex affairs and the ability to get advice. We have a specific unit that focuses on managing their compliance. We have about 251 of those taxpayers under criminal investigation, 101 of whom have received charges and are awaiting trial.
Also in the last five years, a further 300 have settled out of court with our fraud investigation service for tax interest and penalties under one of our codes of practice, which involves the taxpayer acknowledging their offence and taking steps to improve their compliance for the future.
Q5 Lloyd Hatton: It would be useful to know if there are any targets in the future in terms of how often these powers are used and how many criminal investigations you hope to bring. If there are any more details on targets or strategies that you are able to provide to the Committee in a written form, that would be very helpful.
Sir Jim Harra: I am sure that we will in due course, because we are committed to increasing our coverage of this segment, as well as our use of criminal investigations.
Q6 Lloyd Hatton: In the correspondence, you mentioned the use of data taken from the register of overseas entities to identify and investigate where tax might be owed by a wealthy individual, yet we know that individuals often hide their ownership of a property on this register by holding it via a trust, often offshore as well. Given the trust loophole that exists in the register of overseas entities, can you reassure us that this is an effective approach for ensuring that all tax is collected?
Sir Jim Harra: We have made big strides in recent years in terms of gaining transparency internationally and sharing information, but, of course, it is incomplete. Once you cover one area, people who are determined to evade will move their assets into an area where there is no sharing of data, so it is a constant work, particularly through the OECD. Access to beneficial ownership information is really important as well, as opposed to nominee ownership. We have made big improvements in access by HMRC and other law enforcement agencies to trust information, for example, but we are continuing to work on that.
Cryptoassets is really the next area where we have reached international agreement, where we will gain greater transparency for tax jurisdictions about the assets that are being held in that way, but it will be a never-ending process.
Q7 Lloyd Hatton: For your replacement as the chief executive, it would be really important to see that loophole closed to enable the HMRC to do its job effectively.
Sir Jim Harra: It is important that HMRC continues to exercise influence as a tax authority internationally, through bodies such as the OECD, because that is the way that you can make progress.
Q8 Chair: Thank you very much, Lloyd Hatton, and thank you, Sir Jim, for all those answers. Of course, for those who look at these matters, we will be conducting an inquiry into tax collection from wealthy individuals within the next few months, so we can pursue these matters then. Thank you very much for those answers, which were very helpful indeed.
I have one further question at the top of the session, which I do not know whether you have been warned about. It goes back to our old chestnut of online marketplaces, which have raised concerns with us that too many overseas companies are evading VAT by presenting themselves as UK‑based. This is something that we have reported on recently. Some online marketplaces have argued that collecting VAT from all online traders using their sites would help close off this risk. Would this be administratively workable within the current VAT rules?
Sir Jim Harra: It would be a matter for Ministers, and it is something that we would keep under review. The general practice is that UK businesses manage their own tax compliance. In the meantime, we continue to work with the marketplaces to make sure that they operate good-quality processes for identifying businesses that are not established in the UK, but may purport to be.
Generally, we are finding that the online marketplaces are rising to that challenge and, with our support, are doing a good job on it. Again, it is relatively early days in their obligations, and we are working very closely with one or two of them to improve what they do. I can understand why they would wish to be absolved of that responsibility, but, at the moment, that is the responsibility that is placed on them, and our job is to make sure that they comply with it.
Q9 Chair: Having pushed so hard for a change, we would not want to see the extra £1.5 billion collected by the online marketplaces jeopardised.
Sir Jim Harra: I agree, and that boundary between UK-established and non-established is certainly a high-risk area in that part of the tax system, and one that we need to make sure is policed effectively.
Q10 Chair: Have you considered whether such a system would be more cost‑effective overall if it imposed additional costs on HMRC?
Sir Jim Harra: There are no plans to introduce a system of making online marketplaces responsible for everyone’s VAT. That is something that the Government would keep under review. Successive Governments have made changes to these online marketplaces rules since 2016, and they have made big inroads into non-compliance, both with VAT and with customs duty, but it is something that we would keep under review.
Q11 Oliver Ryan: Good morning, Sir Jim. What progress have you made on your key strategic measure to reduce the cost of running the tax system, especially within the context of the increase in staff costs that you have seen? You have had something like a 15% increase in your costs since 2019-20.
Sir Jim Harra: I will let Justin come in in a moment to describe the efficiencies that we have made during the current spending review. First of all, the top metric for the cost of running the tax system has stayed fairly constant in recent years. It costs us about 51p to collect every £100, and that has stayed stable, really, for a number of years.
There is an underlying upward pressure on us in that the number of taxpayers in the system is increasing all the time, as is the amount of revenue that we collect. That affects the number of staff that we need to deal with customer queries and to manage compliance and keep the tax gap low. That is really what has been the driver of the increased staffing in recent years.
The National Audit Office report looks at the base year 2019-20, which was the last year of the 2015 spending review. As the report acknowledges, there were two structural funding gaps in that year. One is that, during the SR15 period, the number of staff in our compliance function was declining, and that was not something that was sustainable if we were going to continue reducing the tax gap.
The other was that we had been making savings in our IT function by, effectively, building up technical debt in that function, which would all have to be paid off at some time with modernising the systems. In the 2020-21 spending review, we got funding to address those two aspects, which is why you saw the increase.
The 16% increase in our costs is, broadly speaking, the same as the increase in the revenues that we collect and also the growth in the number of customers in the tax system, so it reflects those things. During the 2020-21 spending review, we did undertake to deliver efficiencies, and Justin can explain what we have done.
Justin Holliday: In the period that the NAO Report covers, we made efficiencies of about £500 million. If we had not made those efficiencies, we would be spending £500 million more than that.
In the last spending review period, which is the year that we are currently in and the previous two years, we were targeted with making savings of £500 million. The Committee will recall that this was the period of quite a lot of economic shocks and inflation. Through that period, we were asked to try to absorb some of those inflation costs and those shocks, and we will have made, by the end of this financial year, efficiencies of about £700 million, which are in three broad buckets of cost areas.
The first is in general process improvement. The second is in the utilisation of our estate and moving, broadly, from a rather expensive PFI arrangement to more normal property arrangements. Thirdly, notwithstanding what Jim was saying about the fact that we have an underlying technical debt, we have also been moving to improve the efficiency within our IT function.
Those are the broad areas of saving and, as I said, if we had not made those savings, rather than our costs roughly keeping pace with the level of revenues, our costs would have increased at a significantly faster rate than revenues.
Q12 Oliver Ryan: What is concerning is that £4.3 billion is quite a lot of money. As much as you say that costs have increased but revenue has also increased, there is another section in the NAO Report that talks about the efficiency of the staff who you have taken on. I know that other people will cover this in questions later, but I am cautious that your income per capita has fallen. Your efficiency, if you like, is decreasing, despite the fact that you are increasing the amount of staff who you have taken on.
Anybody looking at those figures, certainly in my constituency, would think that £4.3 billion is a lot of money. Granted, you do bring in £829 billion later, and there is a cost to the tax system, but it feels to me that the whole system is not acting efficiently enough. There are probably more savings to be made in areas such as digitisation, AI, and making sure that people can do their own tax arrangements efficiently.
Some research that I conducted outside of this looked at tax systems in places such as Estonia, Denmark, Finland, Canada and Australia, which look to be more efficient for the consumer. I know that you have a strategy in place to do some of that by 2030, but it just feels to me like that is a bit too far down the track and not moving quickly enough, although I appreciate you saying that you have made some efficiencies in the past few years.
The question is probably more for Sir Jim. You did some international comparison work in 2016, just to benchmark yourselves against not so much competitors but similar markets and comparators in the OECD. We have not done that since then. Do you have an intention to do that in the future? It would be healthy for us to know, in terms of international comparators, how efficient our tax system is.
Sir Jim Harra: You are right. In 2016, McKinsey carried out a benchmarking exercise across 21 tax administrations. HMRC came out fifth, so we were well up in the top quartile on most things. Since then, while there has been no repeat of that formal benchmarking exercise, we do benchmark ourselves and self-assess, through the OECD in particular, with other jurisdictions. We learn from them, and they learn from us.
In terms of the productivity of staff, there is, first of all, clearly a big area where there are further cost savings to be made, and that is in customer contact. While we have reduced customer contact in recent years through digitisation, despite the growth in customer numbers, we still reckon that, for about two-thirds of the customer contact that we get on our helplines, for example, customers should be able to self-serve and do that digitally, or it should be automated. There is lots of scope for us to continue improving our digital services and their take-up and to reduce that contact.
The other area, which is where HMRC is different from many other Departments, is in compliance. What the NAO Report shows is that yield per staff unit in our compliance group reduced slightly during the period and then started rising again.
A key reason for that was that, in 2021-22, we recruited about 4,000 new compliance staff. Their costs go in straightaway, but they do not produce yield straightaway. We assume a zero yield from them in year one, and it is really four years before we treat them as fully productive. Not only are those staff members not producing yield during that period, but we also have to move existing staff away from frontline work to mentor and support them. When you bring in big slugs of new compliance resource, you will expect to see a dip and then a recovery.
What is different about HMRC, which affects the way that we are given our budget, is that, generally speaking, if you add money to HMRC’s budget, you will get back more than that costs. Therefore, for example, in the autumn Budget, it was announced that we will be getting 5,000 additional compliance officers over this Parliament. That will increase our cost base, but will bring in far more revenues than it costs.
Every time you add compliance resource, the marginal rate of return of that additional resource will probably be lower than the average rate of return of the existing resource. That is just something that we need to get more sophisticated at measuring and presenting, but it does mean that focusing on cost savings in HMRC can sometimes be a false economy. What you really want to do is optimise the return.
Q13 Chair: Sir Jim, the acid test of what you have just said to Mr Ryan is whether, if you have a higher cost base, the tax gap will be not just maintained but reduced as a result of, presumably, more skilled staff who you are recruiting.
Sir Jim Harra: That will absolutely be the aim. With the additional 5,000 compliance officers who were announced in the autumn Budget, we expect to increase tax revenues by about £6.5 billion a year by 2029-30 compared with the base. That is a very significant return on that investment, and you would expect that to be reflected in suppression of the tax gap.
Q14 Chair: That figure of £6.5 billion was given in the Budget. Is that achievable?
Sir Jim Harra: That is certified by the Office for Budget Responsibility as a central estimate. We will try to do better than that. Most of the £6.5 billion a year is from the return from the staff who we are being given in debt management and compliance. Some of it is from policy changes to close loopholes and make it more difficult to avoid and evade tax. All of those are costed and certified by the Office for Budget Responsibility, and we will monitor them. If we can do more with the resources that we have been given, or with more resources, we will do so.
Oliver Ryan: Sir Jim, are you moving to another job or retiring?
Chair: He is retiring.
Q15 Oliver Ryan: You do not look old enough. There we go. Is somebody talking to you, before you retire, about your views on the simplification of the tax system or how we might be able to look at it from a different direction or from a consumer perspective? Are they trying to exit interview you before you go? Frankly, if you can be as candid as you can be, do you see some areas in our tax system that, through your time in this job, you feel need to be ironed out if you want proper efficiencies?
Sir Jim Harra: First of all, in terms of the handover, rather unusually in the civil service, my departure was announced about six months in advance, so that the job could be advertised and filled. My successor has been named and, although he still has his own day job to do, we have been doing a handover and making sure that he understands my views, although he will have his own. I do not run HMRC single-handedly. I have an executive team who know what they are doing.
The tax system is very complex. That drives opportunities for error, evasion and avoidance. It also drives cost because, the more complex it is, the less certain taxpayers are about what they need to do, and the more likely they are to contact us. However, a lot of that complexity is down to policy objectives that Government want to achieve, and fairness that they want to achieve in the tax system. HMRC’s job is to make sure that we give the best possible advice to Ministers so that the right trade-offs are made between those.
Q16 Chris Kane: Good morning, Sir Jim. Happy retirement to you, when it comes. I am the MP for Stirling and Strathallan, so I am a Scottish MP. I am conscious that, when we talk about the tax system, we have our own tax rates in Scotland. I know that this is subject to different reports from the NAO, but it is helpful to talk about it in the round in sessions such as this. I wonder if you could talk for a few minutes about the differences in running the Scottish tax system and the challenges associated with this, which are running concurrently with your efforts to create efficiencies in the overall system. How does administering the Scottish side of things interact with that?
Sir Jim Harra: HMRC administers Scottish income tax as well as UK income tax. As you say, we account to the Scottish Government for that, and we are audited and subject to Scottish Parliament scrutiny of that. We administer that income tax system at a UK level, so we do not have a separate compliance regime for Scotland, although we do, of course, look at any specific risks that might arise from differences in tax rules in different jurisdictions.
There are two issues with Scottish income tax that could pose compliance risks. One is that the higher rate of tax in Scotland creates a greater incentive on people to evade or avoid, potentially. The other is that there is a residence rule, which people may not comply with or may try to game. Those are two risks that we are alive to. Our view at the moment is that the differential is probably not sufficiently significant to pose a very material risk that requires its own management, but it is something that we monitor very carefully.
Chris Kane: So just to clarify that, it is broadly the same. You are not seeing anything that causes you concern.
Sir Jim Harra: The way that we administer the tax system is the same. The compliance risks that we see are ones that we generally see right across the UK. There are a couple of factors in Scottish income tax that could drive different compliance behaviours. Therefore, that is a risk that we have to control and monitor, but at the moment we do not think that it is sufficiently great to be manifesting in taxpayer behaviour.
Q17 Chris Kane: In terms of getting the efficiencies in the system and embracing new technologies, is it the case that the differences in terms of being held to account by the two Parliaments are not causing any issues? Is it the case that you are getting the same efficiencies and that there is no differential between them?
Sir Jim Harra: We have to spend a bit more money on IT and accounting, for example, to make sure that we can account for the two pots of tax separately. There is a bit of cost in that, which the Scottish Government pay us for, but it is not particularly material in the great scheme of things.
You could argue that the additional rate band in Scotland makes its tax system a bit more complex than the UK’s, which might generate a bit more customer contact. Again, it is really at the margins. I do not think we can see any impact of that.
Chris Kane: Thank you, Chair. It is important that this Committee gets inside of that.
Chair: No, absolutely.
Chris Kane: It is bringing things together, so thank you for that.
Q18 Mr Betts: Sir Jim, good morning. Clearly, your base costs are the number of people who pay tax or are in the tax system. Back in November, you told the Committee that one of the challenges that you had was the number of people now paying tax as the tax threshold was frozen. Back in 2022, the tax impact and information notes, which assess the impacts of tax policy changes, said that it did not think there was going to be any impact from the freezing of the tax thresholds. Why was that assessment made then, which clearly is not accurate now?
Sir Jim Harra: I do not have that tax impact and information note to hand. The freezing of tax thresholds means that more people come into the tax system, so there are more people for us to deal with. It also means that more people go into higher rates, and our experience is that people’s tax affairs become more complex as they go into higher rates. Therefore, we see greater levels of contact.
There are some changes, which are not necessarily policy changes, that have affected this. For example, there is a combination of freezing thresholds for the tax-free allowance for bank and building society interest, combined with the increase in interest rates recently, which has meant that this year, for example, we have seen a significantly greater number of people whose pay-as-you-earn code we have had to adjust for their bank and building society interest. That has certainly driven more customer contact than we have previously seen.
Mr Betts: I will come back to the first point. The tax impact and information notes are published. They are official. They are the Government’s assessment of what impact tax changes will have. It said that the threshold was not a problem and was not going to have any impact. If you are saying at this point that you do not have that information to hand, it would be very helpful if a note could come to the Committee. We are very reliant, when changes are made, on proper assessments being done of their impact.
Q19 Chair: Perhaps I could help the Committee. If I could take you, Mr Harra, to paragraph 2.4, on page 27, that sets out very clearly what Mr Betts is saying.
Sir Jim Harra: “The TIINs indicate a gradual increase of HMRC’s running costs over time”. I will certainly have a look at that TIIN and write to the Committee. It is our experience that we are seeing a significant increase in the number of customers, which has an upward pressure on our costs.
Q20 Mr Betts: That would be what most people would instinctively imagine would happen when you freeze tax thresholds, so a note about that would be helpful.
You have just explained, Sir Jim, that, as people move up the tax bracket, that can get more complicated as well and produce more questions and more interaction for you. The other side of it, which many of us would feel is going to have a big impact going forward, are people at the bottom end, who have never paid tax before, being brought in. Many of those are perhaps pensioners as we go forward. I just wonder whether the waiting times on your call systems are going to get longer, because pensioners may be the very ones who phone you rather than sending you messages by email or whatever.
Sir Jim Harra: I can certainly pick that up, but Lucy has something to say.
Lucy Pink: Just on the previous point about the tax information and impact note, when we calculate the main costs on HMRC in those notes, we often focus on big technology change. We do publish them, and the point is that, if there is feedback or lessons to learn, we have an opportunity to update them, so that is something that we could take away as well.
Q21 Chair: I do not want to put words into my deputy’s mouth, but I think what he is saying is that it is so counterintuitive that you have all these extra taxpayers, including lots who have never been in the tax system at all and therefore are not as familiar with it as those who have been. It is counterintuitive to produce that TIIN. We were rather surprised to read that.
Sir Jim Harra: We will look at that, but I suspect that, in this case, one other thing that happened was that, after the freeze was announced, there were changes in the economy—inflation, for example—which drove up wages and, therefore, probably brought more people into the system than might have been anticipated initially. We will check that.
Picking up your point about pensioners, you are right. Increasing numbers of state pensioners are coming into the tax system as a result of the combination of the freezing of the thresholds and the triple lock. For many of them, if they have a secondary source of income, such as an occupational pension or a job, we can adjust their pay-as-you-earn code to do that. We still get a fair bit of contact from customers querying why their code has been adjusted for their state pension when that happens for the first time.
What we have seen, however, is that there is a significant number of people who do not have either any or sufficient secondary income for us to do that, and we have to issue them with an assessment, which is basically a bill for them to pay. Therefore, we are seeing a much larger number of those assessments issued than was the case in the past. Currently, about 26% of them generate contact from the customer, either querying why they have had the bill or asking, for example, to pay it in instalments. That is one of the big drivers of the pressure on our services in the last few months.
Q22 Mr Betts: You are now putting resources into your telephone service. We have had discussions about that in the past. It is really strained and not able to respond currently to the demand. If this demand goes up, as you have just described, particularly from pensioners, are you going to have extra resources to cope with it?
Sir Jim Harra: We were given some extra funding earlier this year for the current year, which is also built into our budgets for next year, which we have been able to use to increase the number of advisers on our helplines. That enabled us to improve our service levels over the course of this summer, to the point where we were hitting our service standards in quarter 3.
We are currently redeploying more resources, particularly on to what we call our pay-as-you-earn helpline, which deals with those types of queries that you mentioned. Now that we have passed the self-assessment peak, we want to put more resources into making sure that we deal with those calls. There are about 1,600 more advisers on our helplines as a result of that additional funding.
Q23 Mr Betts: Given that the tax thresholds are going to be frozen going forward, which is Government policy, have you done an assessment of the cost to yourselves of that policy going forward for future years?
Sir Jim Harra: We have a forecast from the OBR of the additional number of taxpayers—2023-24 and 2024-25 are the main years where there will be growth, although we will continue to see that in subsequent years. We are now getting better insights into how customers will behave in response to that, because, although we can see growth in the number of taxpayers, the question is, “How will they behave? Will they telephone us when they get a simple assessment or a coding notice?”, for example.
We had to make some forecasts of that, but we have now had a run where we can get good data that enables us to understand how they are behaving and get better forecasts for the future. We do that, and we now have an opportunity to improve our operational forecasting.
Q24 Mr Betts: So you are aware of this potential problem and, going forward, we should not be hearing, in two years’ time, “The service has got worse because all these people are now in the tax system, and we had not really anticipated that they were going to be there”.
Sir Jim Harra: We are certainly aware of it. My director general for customer service, Myrtle Lloyd, who has appeared before the Committee before, lives and breathes it every day, I can assure you.
Q25 Lloyd Hatton: Reading over the NAO Report, I was struck by the figure for the administrative burden on businesses of £15.4 billion a year, and the fact that this is likely an underestimate and a very conservative figure. I also find quite stark a figure that was produced via a PQ that I did quite recently, which is that HMRC’s large business directorate has a total of 2,422 full-time equivalent staff working with large businesses on their taxes.
Do you assess that the administrative burden shouldered by large versus small businesses perhaps is not entirely equal? Could you just go into a bit more detail about why it is that large businesses, which often already have more compliance resources, get that additional taxpayer-funded support through the large business directorate?
Sir Jim Harra: I will pick up the point about large businesses, and I might then ask Lucy to come in on admin burdens more generally. I suspect that, if you had large businesses in front of you, they may say that they do not welcome all that additional resource being deployed on them, because it is in my customer compliance group, and its job is to make sure that they are complying with their obligations and paying their taxes. It reflects the level of risk that we think large businesses pose to tax revenues, because they are big taxpayers and also because they tend to have the capabilities to organise their affairs in ways that they attempt to minimise their tax. Therefore, we need to be on them.
We have a compliance strategy for large businesses, which effectively means that we man-mark them. We put a customer compliance manager on them who understands the risks that they pose and their attitudes to tax compliance, and makes sure that the CCM can bring to bear on their large business client the right resources from within HMRC to tackle that. It is not about giving them a better service; it is about managing the risks that they pose to us.
Lucy Pink: Just on admin burdens in general, it is our objective to minimise them where we can. One of the ways we want to do this is through tax simplification. This and previous Governments have made commitments to. Our Minister, the Exchequer Secretary, at the autumn Budget, said that that is one of the main ways that he wants to achieve his objectives. We made some announcements at the autumn Budget on this, and the Minister is currently consulting with stakeholders. We hope, throughout the spring, to make some further announcements on simplification, because we think that is the main way to help reduce burdens on business.
Q26 Lloyd Hatton: Just taking a slight step back from that and looking again at that figure of £15.4 billion a year in terms of the administrative burden on businesses, I have a really simple question. Why is the cost to business of complying with our tax system that high?
Sir Jim Harra: First of all, it is an inevitable feature of doing business, I am afraid, that you have to comply with your tax obligations, and you will have to deploy some cost to do that. Our aim is to make that cost as low as we possibly can, commensurate with making sure that businesses comply.
In the case of small businesses, our aim really is to build tax compliance into the way that they run their business, so that it just happens as they run their business. We have largely done that in the case of pay-as-you-earn and, increasingly, VAT. You run your payroll, and your payroll system will do your pay-as-you-earn compliance, by and large. Increasingly, thanks to making tax digital for VAT, you run your business accounting records, which will take care of VAT compliance for you. The aim of making tax digital for income tax is to build tax compliance into the record-keeping that businesses do, rather than have it as a cost that they have to do on top.
The Government have also announced a consultation on e-invoicing, which has the opportunity to help businesses and tax compliance, and is a way of building tax compliance into the way that businesses run their business.
One significant element of the admin costs that are attributed to the tax system is the cost of invoicing. The only legal obligation on a business to issue an invoice is the VAT system, whereas, in practice, even if you did not have the VAT system, we know that lots of businesses would issue invoices anyway. That is a cost that is attributed to the tax system but, I would argue, would be incurred anyway. E-invoicing is looking at ways of integrating that much more in the way that they run the system.
Accounting and business software offers us real opportunities to reduce the burden on businesses in terms of the time that business owners have to take to manage tax compliance, because it just becomes part and parcel of what they do every day.
Q27 Lloyd Hatton: Moving the conversation on slightly from businesses to individual taxpayers, this report picks up the fact that, as it stands, HMRC does not maintain a model that estimates the cost impact of tax changes on individuals. Why is it that HMRC gives so much less attention to the cost to individuals of administering their tax compared to businesses?
Lucy Pink: We do not agree that it gives less attention. The way that we look at the impact on individuals is not just about cost, but the wider experience of individuals. If you think about the customer experience, our understanding of individuals is that it is the time taken, but also the worry, the ease and the understanding. We try to look into that through our research. In our TIINs, we talk about some of those elements. They are often in qualitative rather than quantitative ways, but we also have measures of ongoing engagement and experience with our service.
Q28 Lloyd Hatton: You currently calculate that the cost of customer time is £18.66 per hour. That is three years out of date now, so can we expect that to be to be refreshed to reflect how much time it might cost an individual to administer their own tax?
Lucy Pink: That is an internal calculator that sometimes helps us give a bit of an understanding.
Q29 Lloyd Hatton: If it is three years out of date, you can appreciate why an individual might think that the HMRC perhaps has a slightly distorted understanding of how much time people spend administering their tax.
Lucy Pink: As recommended by the NAO, we are going to look into the feasibility of what we can do to try to give up-to-date cumulative assessments regarding individuals. When we publish our tax information and impact notes, we try to give qualitative assessments. As I say, we do have an up-to-date understanding of wider individuals’ experience, and that is where we focus our attention. Our feedback from individuals is that that is where they want to make us look in terms of where their pain points are with the overall administrative system in general.
Q30 Lloyd Hatton: If I could press a bit further there, we have touched on this previously when you have come before this Committee. In total, taxpayers spent 719 years on hold to HMRC in the past year, so you can understand why, if an individual watching this today sees that the internal figure that you use is three years out of date, they might say, “This is why HMRC has a slightly distorted understanding of how much time, money and energy is wasted by an individual on administering their tax”.
It also will slightly frustrate people to know that much wealthier individuals have a slightly different relationship with HMRC. HMRC often reaches out to wealthy individuals before they even file their taxes. If you have an income of over £200,000 and assets of at least £2 million, they may speak to you before you file your tax return, whereas less wealthy individuals do not get that relationship with HMRC.
I know that there are good reasons why you take a more proactive approach with wealthier individuals, and we have discussed them today, but you can see why, for the public at large, it is deeply frustrating if you have currently more than 1,000 people working in HMRC with those wealthy individuals. The last figures say that 1,014 people are working with that wealth team at HMRC, and yet you have many millions of individual taxpayers who find it really difficult to get anything out of HMRC.
We have touched upon that before. It would be really helpful for the Committee to understand when you are going to update that figure around how you calculate the costs of customers’ time, but also just an understanding of how you are going to improve your relationship with non-wealthy individuals who, equally, have to use HMRC every single month and every year.
Sir Jim Harra: First of all, if I just pick up on the admin costs for individuals, we are committed to looking at the feasibility of coming up with a measure for that, and that is a recommendation that we have received. Particularly for unrepresented taxpayers, the financial cost is the time, worry and burden on them. We have metrics such as Net Easy and customer satisfaction that capture that, but we are committed to looking at the feasibility of coming up with a financial figure.
On the wealthy and giving people a better service, first of all, as you recognise, Mr Hatton, our wealthy unit is in our customer compliance group, and it is there because of the risks that wealthy people pose to tax compliance and the need to manage those.
Q31 Lloyd Hatton: I completely accept that, but you can understand why the public find it very frustrating. Would it be more accurate to have a different calculation for extremely wealthy individuals versus the majority of the country when it comes to how much time is spent on administering their tax, particularly considering that those wealthy individuals will often have an accountant or a tax expert who they can pay to do this? It will be more costly for people who are not in a position to be able to pay an accountant or a tax expert, because they are having to do it all by themselves. They do not have someone calling them up from HMRC, and they do not have an accountant who can take this burden away from them.
Sir Jim Harra: I agree that a key difference in these groups is the represented versus the unrepresented. Represented taxpayers pay someone to manage their tax compliance for them, and there is a financial cost to them that we can measure. Unrepresented taxpayers do not bear that financial cost, but they can bear other personal costs of administering the tax system, and getting a grip of that is important and is probably less of a financial figure.
Q32 Nesil Caliskan: Sir Jim, if you have to take a day off work to be on hold to HMRC, that is a financial burden as an individual. Equally, if you are a micro or small business that is having to pick up the phone yourself as opposed to using an accountant to do that for you, that is a financial cost too, but I think that you would acknowledge that.
Sir Jim Harra: I agree. Certainly, small and micro business costs are included in our admin burden costs. For the unrepresented taxpayer, the key things are to make it as simple as possible for them to look after their tax affairs, to automate that wherever possible, and to make sure that our communications are clear so that they feel certain about their tax affairs and, if they do need to deal with the tax system, that we have good digital services and good helplines.
Q33 Lloyd Hatton: Building on what Nesil was saying, the NAO Report makes very clear that there is declining trust in HMRC among both businesses and individuals. Why we have touched upon this today is because this is probably one of the causes of that declining trust.
If I may, I have one final, separate point to this. I would be really interested, Sir Jim, in what you see as the challenges around tax simplification. As we have already touched upon, the previous Government abolished the Office of Tax Simplification last year, since when we have heard a bit more about this from Treasury. Could you just tell us a bit more about what you see as the impact of abolishing the Office of Tax Simplification? Finally, how are we going to better evaluate how we make the tax system simpler, more cost-effective and more efficient in the future?
Sir Jim Harra: Following the removal of the Office of Tax Simplification, there is now a direct responsibility on HMRC and Treasury policy advisers to include simplification in their advice to Ministers and to track that. It is part of our policymaking process that they must do that.
A big challenge in simplification is that it is often very difficult to simplify the tax policy itself, because the complexity is there for a whole variety of good reasons, such as trying to achieve good policy objectives and maintaining fairness. HMRC’s job is to mask as much of that complexity as we possibly can for the taxpayer, and to make it as simple as possible for the taxpayer to understand their tax affairs and what they need to do, and enable them to take whatever action they need to take.
Our aim for the vast majority of unrepresented individuals is that tax is automatic for them if at all possible, but, if not, that they know what they need to do and have a simple route to do that. That is administrative simplification as opposed to policy simplification. There, our digital strategy of improving our app and our online accounts, so that people can see more clearly what their tax position is and understand what to do, is key.
Q34 Lloyd Hatton: Without the Office of Tax Simplification, is HMRC able to measure this and report progress? It is really important for this Committee to be able to see whether it is working.
Sir Jim Harra: Yes, I believe so, and Ministers have committed to reporting back in the spring on their plans for this. It is something that is built into the priorities that the Government have given HMRC for the life of this Parliament.
Q35 Chair: Sir Jim, on this whole issue of trust that Lloyd Hatton has referred to, your charter promises to provide services at a minimal cost to the taxpayer. If you turn to page 35 and paragraph 2.20, “Using £20 an hour”—and I do not know how many of your staff are paid £20 an hour—“to value customer time, we estimate that waiting times imposed costs of around £142 million on taxpayers”.
On this whole business of trust, surely you have to really try to help taxpayers reduce their compliance costs. This is, surely, absolutely critical. Producing a figure of £18 an hour, which is out of date and even unrealistic—as I say, I do not know how many of your staff are paid £18 an hour—just does not foster an idea of trust.
Sir Jim Harra: First of all, as Lucy said, that is an internal figure that we use, so it is not something that we publish.
Chair: It is in the public domain now.
Sir Jim Harra: It certainly is, and it is out of date. We have undertaken to look at the feasibility of coming up with better measures of admin burdens.
Going back to trust in the tax system, we have seen a decline in trust globally with Governments and with public bodies, and HMRC is subject to that in the same way as everyone else. In addition, I absolutely agree with you that we know the factors that drive trust in HMRC, one of which is competence in the services that we provide. We know that we have not been providing services up to the standards that we aspire to in recent years, and that must be a key driver for it, so it is something that we have focused on.
As these two know, I have banged on about trust the whole time I have been chief executive. It has to be at the centre of everything that we do, because the UK’s tax system depends on people voluntarily complying and having confidence in HMRC, so that, when they receive something from us, they trust that it is right and do not need to contact us or query it. It has to be central to what we do, and that covers both the quality of the processes and communications that we give people, as well as the quality of the service when they have to deal with us.
Chair: Thank you very much for that candid answer. That was very helpful indeed.
Q36 Nesil Caliskan: Can I thank Sir Jim and his colleagues for joining the Committee today? I would like to go back to talking about the overall cost increase for HMRC, with a specific focus on staffing. I know, Sir Jim, you have already touched on some of that, but if I could just go back and probe a bit more, the overall cost has increased by 15%. From the report, working on tax administration specifically increased by 9% from 2020 to 2024, which is an increase of about £100 million on staffing.
As an aside, given the conversation that we have just had around customer service, my residents, as well as others, will find that figure of £100 million surprising and will question how that helps them gain better customer service. I know that you have touched on this a little, but what are the main factors that have increased your staffing costs? Is it accurate to say that you have spent most of that money on higher salaries for your most senior staff?
Sir Jim Harra: The main driver of increased staff costs in the last few years—and it will be the case in the next few years as well—is the increased number of compliance staff who we are deploying on reducing the tax gap. It is the case that our jobs in compliance tend to be more highly graded than the jobs in our customer service group. As that group reduces in size and the compliance group grows in size, you will see not just an overall increase in staffing costs because of more staff, but an increase in the grading of staff and, therefore, the salaries that they get. That is a reflection of the level of training that you need to be a compliance officer, and the competitive market that we are in for tax professionals.
As the NAO has said in successive reports, we give a very good rate of return on that, but it does require us to pay a higher salary level for compliance staff. As we change the balance of our workforce from customer service to compliance, you will see that shift in the grading mix and the seniority of staff.
Q37 Nesil Caliskan: I will ask you about grading mix in a moment compared to other Government Departments. In terms of compliance and the more senior members of staff dealing with more complicated cases, as you put it, is there a focus on the upstream or the downstream? I am trying to get a sense on behalf of the Committee as to whether those more complicated cases are dealt with before or after the tax deadline.
Sir Jim Harra: Our overall compliance strategy is what we call “prevent, promote, respond”. It is a hierarchy. We want to prevent non-compliance, ideally. We want to promote good compliance where we are reliant on the customer. While we will respond to non-compliance, that is the most costly way of doing it. We really want to increase upstream activity and reduce downstream activity, if we can.
We can see evidence that that strategy is bearing fruit. The proportion of our upstream compliance yield increased last year to about a third, whether from fixing loopholes so that people cannot evade or avoid, or from identifying risky claims and intervening to prevent them from being paid. We can see that we are implementing the strategy and it is having an effect.
Q38 Nesil Caliskan: You have spent an additional £100 million on staffing. Is that what those staff members are doing? Are they dealing with the upstream compliance or are they dealing with downstream compliance?
Sir Jim Harra: It is a mix. In particular, lots of new compliance officers will necessarily be deployed on downstream respond activity, but it is mixed. We do not have the level of analysis of our costs between upstream and downstream that we need. We need to improve on that in the next couple of years. In terms of measuring the outcomes of our compliance work, more and more of those outcomes are coming from upstream activity.
Q39 Nesil Caliskan: I wanted to ask about that because productivity has been a challenge. You have provided an answer in part around the delay of seeing the returns on the investment in compliance officers. I think that is how you referred to the work. Understanding whether you are getting value for money on the additional spend on staff is crucial. To do that, I would have thought that understanding where you spend that additional resource, whether it is upstream or downstream, really matters. You have spent £100 million on additional staff. That is a lot of money. Compared to other Government Departments, the higher spend on higher salaries will be questioned.
Sir Jim Harra: There is absolutely no doubt about the value for money that we give. Indeed, the National Audit Office, in this report and in previous reports, has concluded that.
Q40 Nesil Caliskan: No, the point I am trying to make is, if you spent that money upstream as opposed to downstream, there is no question about value for money. The amount of money that is spent by HMRC is always less than the amount of return; therefore, there is always value for money. Would you be able to get even more if that £100 million were spent upstream rather than downstream?
Sir Jim Harra: We believe that intervening upstream is more cost‑effective and also gives a better experience for the taxpayer. That is why it is our strategy to manage compliance increasingly upstream. I do not believe you will be able to reach a position where you have 100% upstream. You will always have respond work because you will always have to address evasion and avoidance after it has happened. Yes, we want to use upstream activities as much as we possibly can because we think that is the most effective way of managing compliance. We can see evidence that we are implementing that strategy and it is having an effect.
Q41 Nesil Caliskan: I would just like to ask about grade mix. The increase in seniority in HMRC’s workforce exceeded the increase in, for instance, the DWP’s workforce and the civil service as a whole. HMRC’s staff mix is 54% in the senior grades. That is much higher than, for instance, DWP’s, which is at 20%, and more than the civil service as a whole, which is 45%. It is about a 10% difference between the whole of the civil service and HMRC. Why does HMRC have more senior members of staff compared to other Government Departments?
Sir Jim Harra: The main reason for that is because of the growth of our compliance group. The compliance work that we have to undertake means that we have to pay higher salaries to attract the staff that we need who have the training this work requires. That is the key reason, really.
Q42 Nesil Caliskan: Given that staffing costs have gone up and productivity has gone down, how can you reassure the Committee that you are delivering value for money when your important comparators, i.e. other Government Departments, are spending less on senior staff?
Sir Jim Harra: I am not sure how relevant those comparators are because we are all doing very different jobs. The grading that we require in our compliance group reflects the challenges we have in recruiting, training and retaining the staff that we need to do that work.
When it comes to productivity, as I have mentioned, when we recruit large numbers of new staff we do see a temporary dip in productivity because they are necessarily not as productive as experienced staff. Indeed, in year one we regard them as having zero productivity, but their costs are in our cost line. We have to measure the productivity of compliance staff over time. We need to look at whether we can adjust for the costs and productivity of those trainees because I am conscious that over the next five years we will be bringing roughly 1,000 new trainees into our compliance group every year. They are going to depress the productivity in the short term but bear the results that the OBR has signed off on in the longer term.
I am confident that we are managing our grading according to what we need to recruit and retain the right staff and that we give a very good return on that, but we have to manage our productivity; we have to get it back up to the levels that our experienced staff have had before.
Nesil Caliskan: You do not feel that the organisation is too top-heavy.
Sir Jim Harra: No. If I thought it was too top-heavy, I would change that. It is the case that, as we continue to shift the balance of our workforce from customer support, which we are increasingly digitising, to compliance and digital jobs, you will continue to see that change in the grading mix and therefore the cost mix of the organisation. That is a deliberate thing.
Chair: Are you happy, Nesil? “Are you complete with your questions?” would be a better question.
Q43 Nesil Caliskan: I note all the responses. The only thing I would say is, at a time when resources are scarce and the public is looking for more value for money, Government as a whole need to be doing more with less. I come from a local government background where, for a long time, senior officers have had to do more with less. It is hard for people to not question why HMRC has more senior members of staff compared to other Departments. That is notwithstanding the very detailed responses that you have given us.
Sir Jim Harra: I completely acknowledge that. In terms of transparency, HMRC has a trick to turn. We have to demonstrate that we are doing more with less, hence the efficiencies that Justin mentioned, but we are also being tasked to do more with more because the Government are giving us more resources to bring in more revenues. We have to be able to set out our performance in a way that demonstrates that we are both doing more with less and doing more with more, if that makes sense.
Chair: We will be coming back to Justin Holliday doing more with less through technology—that is really important—but we are going to take a short break now.
Sitting suspended.
On resuming—
Q44 Chair: Welcome back to the Committee. Sir Jim, why is it taking longer and costing more to remediate your legacy IT systems?
Sir Jim Harra: Chair, as I mentioned, during the spending review 2015 period, one of the ways the Department dealt with its budgetary constraints was that it allowed its legacy estate to get more out of date. That has to be remediated afterwards. We have a very large and complex legacy IT estate, so there is constant work to keep it up to date, whether that be by replacing out-of-date platforms with more modern ones through our transformation programmes or by updating the existing platforms and keeping them secure, resilient and reliable.
We have made significant progress. We have an internal dashboard that tracks how up to date our systems are and how that improves over time, but some of them have certainly proved more complex than others to remediate and we underestimated the costs for some. As a result of that, I am today not in a position where I have a tolerable level of risk in my IT estate and we need to continue investing in it.
Q45 Chair: That is a very interesting answer because we have a hearing coming up on cyber-security. Clearly, out-of-date systems are more likely to suffer cyber-attacks. You hold very sensitive data. You will be getting advice on that from the appropriate experts, but is there a case for speeding up and renewing some of the extensive legacy estate in your IT equipment?
Sir Jim Harra: Yes. There are three key risks that we run from our legacy estate. The first is whether it is as secure as modern systems can be. A lot of our work to leave our data centres and go into the cloud, for example, was to gain access to those higher levels of security. The other is the reliability and resilience of the service. When a system goes over, how easily can you get a part or find someone who understands it to get it back up? The third is the cost of change. If Government announce that they want to make a change in a policy area where we have an old legacy system, they tend to be much slower and more expensive to change. That is reflected in our advice to Ministers.
The extent to which you invest in modernising all of that depends on your level of risk appetite around resilience and what you think will be on the agenda for policy change. As accounting officer, I would certainly like to carry less risk than I currently carry. That is why we have been investing quite heavily and I would recommend that we continue to do so.
Q46 Chair: Do you understand now what more needs to be done, what it will cost and when you expect that remediation to be complete?
Sir Jim Harra: I will possibly pass over to Justin on the programme.
Justin Holliday: We have a good understanding of what needs to be done. When we will finish is frankly a bit uncertain because we are in the middle of spending review conversations. We have a budget for the year that we are about to go into; we do not have a budget for the three years after that. When we have that settlement in June, we will be able to give you a much better explanation of where we think we will be at the end of the next four years.
Q47 Chair: Back to Sir Jim’s point about what happens when a tax change is made, presumably somebody in your organisation does an impact assessment before the tax change is announced so that the Treasury has good visibility of what resources you are going to need to update your system to be able to cope with that.
Sir Jim Harra: Yes. As part of the policymaking process, HMRC advises on how quickly we think we can make a change and what that change will cost. That can be slightly counterintuitive. If you are a Minister, you might see a policy change that looks relatively simple to you in policy terms but actually is quite costly and time-consuming for us to make. For others, Ministers might worry that it is going to be complex, but we can say, “No, we can do that quite quickly”. It really depends on what investment we have made in the past.
Justin Holliday: If I may, it is also a good illustration of where things might end up taking longer than initially planned. If there is a strong policy imperative to do something and the only viable option in the time we have is to do it in the legacy system, that will mean the legacy system lasts for longer because you are putting the effort into the old system rather than building a new system.
Q48 Chair: I am just looking to see whether we are going to cover it because this is something that is creeping up on all Departments. Unless your systems are up to date, it is going to make it much more difficult to adopt new AI systems, is it not?
Justin Holliday: Yes. The critical thing with AI is making sure you really have a handle on where your data is and that you are managing your data well. When you have more disparate legacy systems, that is definitely a harder thing to do.
Q49 Chair: Of course, AI can be a positive and a negative. It can help you sift data and discover trends, but equally it can help those who wish to carry out evasion and fraud to work out ways to do things and how to avoid tax. It is really important that you are looking at adopting the most modern methods of AI, is it not?
Justin Holliday: I think it is. When you look at AI or IT security in general, using the language of an arms race is not an unhelpful way of thinking about it. It is a fact of life that bad actors tend to be a bit more agile and a bit more flexible than good actors. You see that right across big organisations, public sector and private sector.
Q50 Chair: The one thing I would like to get out of this section of questioning is that you definitely have a plan and you know where you want to go to modernise your systems.
Justin Holliday: We definitely have a plan. We do not yet quite know how long it is going to take because of those funding conversations.
Chair: But you have a plan.
Justin Holliday: Yes.
Q51 Nesil Caliskan: I want to ask a little more about the overall cost of the digital systems and why the higher spend has not lowered the overall cost of collecting taxes.
Justin Holliday: In the period we are talking about, there are two things going on. The first one is something that Jim was alluding to, which is that we were starting from quite a low base in terms of the state of our environment and our IT estate. In some cases, as we have worked through it, we have found that there has been more to do, frankly, than we thought there was at the beginning.
The second thing in this period is about dual running. We are building new things, but you have to keep the old things running while you build the new ones. In this period, we also have a significant amount of keeping the old world alive while starting to build the new world.
Q52 Nesil Caliskan: About £785 million is spent on what the report refers to as the digital business group. That has increased by 18%. It is £122 million additional cost. I just want to get a sense of this. Is that cost on digital infrastructure spend or is some of that money spent on consultants, for example?
Justin Holliday: It is the cost of our technology function. The way that the NAO Report uses the word “digital” is essentially as a synonym for “technology”.
Nesil Caliskan: Is it on technology? That is what I am asking for reassurance on.
Justin Holliday: Yes, it is.
Q53 Nesil Caliskan: It is not that 20% of the overall cost is spent on consultants giving you advice on how to deliver a digital service, for example. I ask this because there have been lots of examples in the past— perhaps not at HMRC but throughout public sector—where, when you dig deeper, you see that it is not all spent on infrastructure but on consultants who might have a specialism in the area.
Justin Holliday: The nature of technology spend is that there is spend on hardware, if I can put it like that, but a lot of the spend is on people doing things with the hardware and the software and making it work. When you dig into the cost, there is a surprising amount of people cost in your technology cost.
Nesil Caliskan: Sure, but I am looking for reassurance that the people spend is on knowledge and delivering digital infrastructure and not on strategies and ideas.
Sir Jim Harra: We have a mixed model for how we deliver technology. We have suppliers that we use; we have in-house permanent staff in our CDIO unit; and we also use contractors, as I would call them, rather than consultants. They are digital coders, but we may bring them in from outside for a temporary period on a project rather than use permanent staff. We are transparent about our consultancy spend. We do have some, but it is really quite small. Most of our external spend would be on what I would call IT contractors.
Q54 Nesil Caliskan: My final question is a broader one. What are your views on the potential for digital systems now and in the future to address cost pressures?
Sir Jim Harra: We believe that in 2023-24 about 69% of all customer interactions with us were digital. That ranges from people filing their self-assessment return online to going onto our app and checking their pay-as-you-earn code. We have gained a lot from the digital investment we have made so far, but there is a lot more to do, both on increasing the take-up of existing digital services, and enhancing and expanding them.
In particular, we have seen very significant growth in our mobile app in the last two years. In the first 10 months of this year, we saw over 100 million uses of that by over 5 million individual users. That is a 54% increase or something on the same period last year. There is lots of potential to remove avoidable contact from the tax system and to take HMRC out as an intermediary between the customer and the tax system and let them do things for themselves.
In the past, a lot of our digital services were about allowing people to transact with us. This is, “I need to file a return” or, “I need to make a payment”. Increasingly, we are using digital services to manage the relationship with the customer. That is more like, “I need to find something out” or, “I need to ask a question”. Increasingly, we are using digital services to deal with that demand as well. There is clearly scope to go further, if you just look at the level of what we regard as avoidable contact that we get from customers to our customer service.
Q55 Nesil Caliskan: That is a really interesting answer. Just to slightly go back to my earlier questions around the £100 million spent on staff, a lot of the additional cost around compliance was spent on higher-paid staff. Compare that to the response you have just given, Sir Jim, around contact with the organisation, which is also a cost to the organisation. There seems to be a disconnect. If we are encouraging more people to use the digital services, which is the right thing to do, that is not a complicated case that requires higher-paid members of staff to deal with it, is it?
Sir Jim Harra: Yes, you are right. That is why you see the change in the profile of our workforce. As we introduce digital services that replace contact, the jobs that are removed from the organisation are lower-paid and lower-graded customer service jobs. We keep being given additional funding to do more compliance work and reduce the tax gap. Those are higher-graded and higher-paid jobs. That is why you see that shift.
Q56 Nesil Caliskan: In your view, the additional spend on digital infrastructure, for example, will allow the organisation to reduce the number of lower-paid staff to allow people to have contact via a digital service.
Sir Jim Harra: It does that together with a number of other things. First of all, our research tells us our customers increasingly expect to deal with us digitally because it is how they live their lives. We see higher levels of satisfaction with our digital services, for example. It both fits with what our customers want and it takes out avoidable cost from the organisation.
We tend to cash in those savings to the Treasury. We hand those savings back and then we have a separate conversation with Treasury about how much compliance work it wants to fund. We do not automatically do the switch.
I was going to mention digital support for compliance work. We have talked a lot about how we are increasing our compliance staffing, but we also want to invest in improving both our case management systems, because that will improve productivity, and our risk analysis and data analytics tools, which help us to target the cases in which we want to intervene. That will improve the productivity of our compliance work and improve the experience of customers because fewer compliant customers will get caught up in our compliance checks.
Q57 Nesil Caliskan: I have a final question on risk, which you mentioned earlier. I just want to understand this a bit better. When you talk about the risk that exists in the organisation in terms of digital capacity and capability, is that cyber-risk or is there a risk to the business, so to speak, in terms of not being able to collect taxes?
Sir Jim Harra: It is much broader than cyber-risk. It goes to the resilience and reliability of systems. If they are on old infrastructure, they are more likely to break down. It can then be more difficult to repair them and get them back up and running again. It goes right across the reliability, resilience and security of our systems, all of which poses a risk to tax collection that we need to keep within a tolerable level.
Q58 Nesil Caliskan: There have been comparable incidents in local authorities over the past few years, have there not? Cyber-attacks have meant that whole council tax systems have been wiped out and local authorities have been unable to collect council tax for years in some cases. I guess I am looking for some reassurance. I am sure there will always be a level of cyber-attack risk, but is HMRC making an ongoing assessment of that so that the risk is minimised as much as possible, given the gaps in the digital infrastructure?
Sir Jim Harra: That is correct. As a Department, we are under constant cyber-attack, frankly. We are very effective at managing that, but nevertheless we are carrying risk of the type that you have mentioned. That is a significant focus of my executive team and our board, who are really on top of us in terms of that risk.
We have a good assessment of it. When I became chief executive, one of my first acts was to bring in Deloitte to do a thorough assessment of the cyber-risk we carry. With Deloitte and Gartner, we have produced a dashboard that we use at the executive level and in our digital team to look at how we are improving that over time. We have got that down to a real level of granularity. Our board has an expectation that over time we will see that reducing. They have an impatience at the rate at which we are achieving that, which, as we have said and the report acknowledges, is not as fast as we would like.
Nesil Caliskan: There are mitigations for each of those risks, I am assuming, and this is regularly monitored.
Sir Jim Harra: Yes. We want to protect our systems from successful cyber-attack, but we also rely on a lot of monitoring of our systems to understand what is happening to them. That is not just our digital systems. Fraudsters will try to enter via our helplines or our web chat. They will try every way in. Monitoring that is really important.
Q59 Chair: Nesil Caliskan has just spawned one more question from me before I bring in Oliver Ryan. There is another lot of actors in what you have to deal with: other Government Departments. I do not mind who answers this question, but to what extent do you take advice from the Government Digital Service so that your systems are compatible with, say, Treasury or DWP and you can talk to each other and improve your efficiency in that way?
Sir Jim Harra: We work very closely with GDS and the National Cyber Security Centre. They are the central bit of glue that holds all the different Departments together. We work less closely with Treasury on this, but the Department for Work and Pensions is a key example. We exchange data with them. Our RTI pay-as-you-earn system, for example, provides data that enables them to operate universal credit. Our national insurance records enable them to administer the state pension and vice versa. Yesterday, for example, DWP had a short outage on its universal credit website. That had a knock-on effect on our services yesterday. They are all interlinked in that way.
Q60 Oliver Ryan: Sir Jim, on customer service costs and where they have grown, why have the costs of serving each corporation and VAT taxpayer increased?
Sir Jim Harra: In the case of VAT, a significant part of that is the temporary effect of introducing in this period Making Tax Digital for VAT. That was introduced from 2019 and became compulsory for all VAT payers from 2022. That has significantly reduced the non-compliance in VAT, particularly in error, but during this period involved quite a bit of cost for us in terms of implementing the programme and one-off costs for businesses in terms of acquiring the correct software they needed as well.
What was the other one?
Oliver Ryan: It was corporation tax.
Justin Holliday: The unit costs in the report cover the total cost of the system divided by the number of taxpayers. As we have put more compliance effort in, the average cost per taxpayer has gone up. That does not mean it costs more for each taxpayer.
Q61 Oliver Ryan: There are a few things that are raised in the report. One is why you do not use cost per taxpayer as a metric. The other is why, on average, the cost of dealing with VAT and corporation tax has risen by 5% whereas the cost of dealing with income tax has fallen. Is there an answer as to why that cost has increased for corporation tax?
Sir Jim Harra: If you look at the corporation tax gap, you will see that that has significantly increased in recent years. It is a major focus for us to get that back down again. A significant proportion of our compliance resources are being poured into managing the corporation tax gap. That will be reflected in the costs of administering CT. It will not necessarily impact on every CT payer. It is only those that we intervene on with a compliance check, for example, that will feel the burden of that.
Q62 Oliver Ryan: I understand it is not a magic measurement and it is not necessarily precise, but would you consider using cost per taxpayer as a measure of broader efficiency going forward in further investigations?
Sir Jim Harra: It is not one that we have focused on to date. There are a variety of ways you can look at your costs. You can look at it under head of tax. You can look at it according to taxpayers. As a more significant proportion of our costs comes from our compliance work, we segment our compliance workforce against different types of taxpayers. We have mentioned wealthy and large business. Applying it across all taxpayers may not give a particularly useful metric, but it is something that we will look at. The NAO has brought this out in its Report. It is not a metric that we focus on ourselves.
Justin Holliday: The challenge in this area, when you divide something by something, is how both of those are controlled and influenced. Something like taxpayer numbers can be influenced by threshold changes, for example, which is not within our control. With any measure, you have to be careful in thinking about who is influencing it and how it is being influenced. I do not think there is a magic measure. You have to look at the number.
Q63 Oliver Ryan: This is a much more general question. On the basis of all of that, some of the answers that you have given today and the talk we have had about the simplification of the tax system, in your view, relative to the cost versus the revenue they create, what is the most costly and time‑consuming element of the tax system that you would review if you were starting from base principles today, based on the work you do and the outcomes it provides?
Sir Jim Harra: The general story is that it costs 51p to collect £100 of tax. That has stayed pretty stable. However, during that time, we have brought the tax gap down. There is no doubt that we are being given more resources to reduce the tax gap. That is what you see in our costs.
There are two areas that we are increasingly focusing on. Debt is one of them. Getting on top of our debt and getting the debt balance down involves extra costs. We are seeing an increase in non-payment, which is driving cost in HMRC to manage that non-payment and collect the debt. We need to understand better what is driving that non-payment and what the different solutions are that might be brought to bear on it, quite apart from deploying more debt collectors.
The other is compliance. We have seen a significant growth in the CT gap. That is a self-assessed tax. Therefore, you tend to respond to that compliance risk by putting investigators in to investigate after the event. Although we get a positive rate of return, in absolute terms it is nevertheless a significant cost. The tax gap for small business, particularly small corporates, and the growth in non-payment and debt are two areas that we are focusing on.
Q64 Chris Kane: I am going to give you a quote from the PAC Report “Progress with making tax digital” from 2023: “HMRC announced in 2015–16 that its flagship digital transformation programme Making Tax Digital, would make it easier for taxpayers to get their tax right, helping to reduce the £9 billion of tax revenue lost each year from taxpayer errors. HMRC has had some success with Making Tax Digital for VAT and estimates that this is contributing £400 million a year in additional tax revenue”.
When I look at paragraph 3.15 of the current NAO Report that we are looking at, there is a quote that says, “HMRC estimated in February 2024 that income tax self-assessment customers will face transitional costs of around £561 million and a net increase in ongoing annual costs of around £196 million for those businesses mandated to use MTD for income tax self-assessment”. Why is Making Tax Digital increasing the burdens on self‑assessment taxpayers?
Sir Jim Harra: The key driver for Making Tax Digital and the key benefit that we score in our business case is the reduction in non-compliance. This is really about getting small businesses to be more compliant by requiring them to use business accounting software to keep their records up to date and to make more accurate findings to HMRC.
For those businesses that currently do not use that business accounting software, there is a cost. For the self-assessment programme, the last estimate was about £110 per business annually. That will be the ongoing cost of that. For those who already use those kinds of software, it will be less. For those who do not keep records at all and who are going to be obliged to keep them in the future, the costs will be more. We can debate what the right level of cost to expect from a business to comply is, but that is the key driver of that.
However, from the experience with VAT—we published our evaluation of that on 27 February—we have seen significant benefits for businesses outside the tax system. VAT payers who have moved to business accounting software for the purposes of MTD have reported that they see other benefits to their own business. We do not quantify that and score that as a benefit in our business case, but promoting the digitalisation of small businesses will promote productivity of small businesses as well as help tax compliance, which is what we score.
Q65 Chris Kane: I will give you another quote from the PAC Report from 2023. This is continuing from the quote I gave you earlier on. “However, HMRC has lost sight of the need to put customers at the heart of its changes to the tax system. The programme was originally expected to reduce the overall burden on customers but will now impose significant additional burdens and costs on customers at a time when many can least afford it”.
Have we learned the appropriate lessons from that quote from a couple of years ago? Are we more aware of where customers sit in the heart of the system?
Sir Jim Harra: MTD delivery has changed over time and we have learned more and more about the costs and benefits of it over time. If you look at the first phase, which is now complete, there is no doubt that it has delivered benefits. In terms of tax compliance, there is £4 billion of additional tax revenues up to 2029-30 and those reported benefits that customers have told us about, which we have included in our evaluation.
When we look at the costs to business, there is a one-off transitional cost in that phase of about £249 million and then over five years an ongoing running cost of £544 million. That is something that we are continually reassessing, re-evaluating and learning from. We have not lost sight of the needs of customers at all, but we need to keep focused on what we are trying to achieve here, which is making tax compliance easier.
I am afraid that a significant number of these taxpayers were not complying in the first place. There is an added burden on them because we are now requiring them to comply.
Q66 Chris Kane: I am very supportive of what you are saying about customers who are non-compliant, but some customers who are complying are then seeing an additional burden. Are you getting the balance right, in not overly penalising compliant customers by approaching this in terms of the acceptable burden on those who are not compliant?
Sir Jim Harra: That is a valid question. It was a choice that had to be made. There are a number of different ways you could have approached this. The approach that we and successive Governments have adopted is one of a universal drive to encourage small businesses to improve their record-keeping and to improve their use of software. For some who are already doing that, the burden here is low to zero because they are already using the best possible methods. For others, there will definitely be improvement.
In the early days of MTD, I remember sitting down with an agent whose client had perfect copperplate handwritten business records. The question did arise, “Do we really need to require those people to change the way they keep their records?” We are asking small businesses to keep up with the modern world here. They will see benefits from that.
Q67 Chris Kane: I have one final question, just expanding on that. You are absolutely right that Making Tax Digital was about bringing things into the modern world. It is a journey that started 10 years ago, but it is getting a turbo boost now with digital and AI. We have already covered that. Digital is going to be more all-encompassing as we go forward. What lessons should HMRC learn from the last 10 years of Making Tax Digital, as we start the next phase of this all-encompassing digital journey?
Sir Jim Harra: When we have completed the current phase of MTD, virtually every business in the UK will be using business accounting software that speaks directly to our systems. That is a base from which we can exploit further. We need to look at the functionality in that software that helps businesses. For example, can we build into it things that guide them and support them better than we currently do? Can you build other things on it that help businesses?
The Government are about to consult on e-invoicing, for example. Now we have all businesses, through MTD, using business accounting software, I would hazard that that is functionality you could relatively easily add on to that base.
There are certainly lessons for the future. Having secured this improvement in the way businesses keep their records, how can we then leverage that not just for tax compliance but to help businesses with their productivity as well?
Q68 Chris Kane: I have one final point on that. We are talking about the ease of compliance, the ease of doing business and the way digital can make life easier for HMRC. There is a human element to digital. Not everybody reacts to digital in the same way. There is a psychological approach to it. Some people are very happy in a digital world; some people do not like it at all. There is a lot of anxiety with dealing with it. As we embrace the opportunities of technology, you need to ensure that the vision for that will not just be driven by the designers of software but will also be influenced by the users of the system. Will you make sure that all levels of happiness and all levels of interaction with digital will be heard when you are designing the systems?
Sir Jim Harra: I have two points on that. First of all, yes, when we were introducing Making Tax Digital for VAT, there was a lot of apprehensiveness and anxiety about the need to make the change to the new software. The evaluation that we published last week showed that a lot of businesses that have now made that change report that they feel more confident that they are getting their tax right, that they find that easier to do and that migrating to the new software has been easier than they had anticipated.
When it comes to the quality of the software, this is a private market. HMRC does not provide this software. We oblige businesses to use that software. There are a whole variety of products on the market that they can use. One learning from our evaluation that we published is that those businesses that have opted for the slightly more expensive and higher-functioning software have seen better benefits than those who have gone for the most basic product.
Helping businesses to make the right choice is something that Government can do, but some 71% of all these businesses use a tax agent. The tax agent is a key intermediary that can help them make the right choices. It is for the market to meet the user’s needs. When we have a competitive market, hopefully that is what we will see.
Q69 Chris Kane: Perhaps I will leave you with a comment. I almost agree with that. It is also your responsibility at HMRC to help customers to have a good experience. It is heartening to hear that a lot of your businesses are finding the journey acceptable, but we have to make sure we have heard the voices of the marginalised ones. It is absolutely for the market, but I would argue that it is also for you to engage with that marginalised element and ensure you are doing all you can to make their lives a little less anxious, as they are interfacing with HMRC.
Sir Jim Harra: As I could only get you to almost agree with me, I am going to let Lucy come in.
Lucy Pink: We do agree with that point. The point I wanted to add is that we also have a number of forums where we actively reach out to those in the voluntary sector, who represent some of the customers that you are talking about, to hear their voices. We really recognise that there are customers that will have different emotions and different experiences of our journey to digital. We bring those voices into our programmes and our ongoing thoughts about digital services. We have forums to listen to those voices.
Chris Kane: It will certainly help trust, if you get that right. That will impact the trust issues that we were talking about earlier.
Q70 Chair: I agree entirely with Chris Kane. Sir Jim, you did mention something that I was going to ask about at the end, which is this consultation on e-invoicing. It is something that is used in the commercial sector. It is laid out in paragraph 3.12 on page 45. It is used in other countries. Could you just tell us very briefly what you are consulting on and what benefits you expect it to bring so taxpayers can know what they are likely to be facing?
Sir Jim Harra: Yes, it will be a joint consultation between HMRC and the Department for Business and Trade. It is not just about the tax system. I will bring in Lucy.
Lucy Pink: We are consulting on a couple of things. We are introducing the concept to businesses. It is a really good example of a consultation where we are asking businesses and customers what their views are and what the costs and benefits from it are.
We are also consulting specifically on the model. There is a preference from the Government for a decentralised model, but you could also have a model where some of the information has to be fed through back into HMRC—a centralised model. It is an interesting example in light of this focus on the costs of the tax system, where we are actively consulting on some choices over where some of those administrations can take place.
Finally, the consultation also talks about whether there are also further benefits from more real-time information and what more we can do about that. It asks some open questions about that.
Q71 Chair: There are probably lessons to learn from Chris Kane’s line of questioning on Making Tax Digital. I felt it was all rather imposed on business without too much consultation and without them knowing what the administrative costs were going to be. If we are going to introduce further changes in this area, it would be really helpful to understand not only the type of system there will be but the compliance cost of doing it for most businesses.
Lucy Pink: Yes. If you read the consultation, it is incredibly good. There are detailed questions asking businesses to talk us through their experiences, their views on the pros and cons and what effects different models might have. That will be really helpful for this conversation.
Q72 Mr Betts: I have a brief follow-up on the question of the software packages that are available to businesses. Are you in any way concerned about the security challenges that some of those could potentially pose?
Sir Jim Harra: We publish on gov.uk a list of all of the commercially available software that is MTD-compatible—in other words, it will file something to HMRC that meets our needs—but it is an open market. These software products do not particularly pose security risks to HMRC because this is software that the business uses. It is not software that we use.
We do set some requirements that the software must meet in order for us to list it as a product. We are conscious that we have, if you like, delivered a captive market to these software providers. We want to make sure that they, like any other intermediary in the tax system, add value from our point of view and from our taxpayers’ point of view. We see that we have a duty of care, but I am not aware specifically of security concerns.
Q73 Mr Betts: Are you in any way probing into whether they could pose concerns? There are some very clever players out there now. They could have a package of software that interacts with your software.
Sir Jim Harra: If you do not mind, I will go back and ask the programme perhaps to write to you on that because I do not have the information for you.
Q74 Mr Betts: That is fine. Let us go on to something called the failure demand, which is a phrase I had not heard until we came to this session today. I understand that includes customers who are calling you because they have not had an answer in time, customers who have not understood something that they should be doing and have called you for advice and information, or customers who call you when they might be better able to do something online but do not understand how to do it or are uncomfortable about doing it. Do you have a cost for failure demand? What are its main causes? What can you do to reduce it in the coming two or three years?
Sir Jim Harra: There are two slightly different metrics that we use here. The first, as you have mentioned, is failure demand. That is contact demand to HMRC caused by either an error the customer has made, an error we have made or a perceived delay on our part. That could be a real delay or it could be that we are within our service standards, but our customers have a higher expectation. The other metric we use is avoidable contact. That is where a customer rings us or writes to us in relation to something where we believe there is a good online service that they could have used instead.
Both of those drive a cost to HMRC and a cost to the customer as well. They are an opportunity, which I mentioned earlier, to make savings. We reckon about two thirds of the calls we receive are avoidable, in the sense that the customer could have carried out the transaction they want to carry out or found out the information they want to find without having to contact us. The cost of servicing that is available to make savings on, if we can divert or deflect that contact away from a less desirable channel to the online channel.
Q75 Mr Betts: To what extent is the onus on you to deal with that problem rather than simply saying, “The customer could have done it better”?
Sir Jim Harra: It is our job to make our digital services as good as we can possibly make them, to make sure our customers are aware of them and to encourage them to use them.
We have done some research, which shows that about 86% of our customers say they would be happy to deal with us digitally. A number of things cause that to drop off very rapidly. If the customer feels the matter is too complex, they are much less inclined to deal with us digitally. If they are concerned about whether they are going to get it right, they are much less likely to deal with us digitally. We have to build reassurance into the design of our products to make sure that they stay in that channel. There is one other bit of resistance. People are happy to look at things online, but, when it comes to giving us their debit card number or their bank account number, they are understandably worried about security. We understand that those are the factors that we need to work on to drive down this avoidable contact.
Q76 Mr Betts: Are there any ways in which you are not using electronic communications or digital systems that you could be in the future?
Sir Jim Harra: Yes. One of the frustrations for me is when an action on our part drives the customer out of the digital channel into another one. One key thing is we send out a lot of paper outputs. To some extent, that is driven by legislation. To some extent, it is driven by us not having signed up our customers to the available services. For example, if you take your pay-as-you-earn code, a lot of people get that electronically, as I do, but we still send out millions of paper copies. When we do that, there is an inclination for the customer to ring or write rather than go into the digital channel. Yes, there are things that we need to do to drive down those kinds of contacts as well.
Q77 Mr Betts: You say that some of it is driven by legislation. You can tell us now. I know that legislation and policy is not within your remit, but, as your retirement gift to Ministers, could you suggest some changes to legislation that might improve this?
Sir Jim Harra: As you would expect, Ministers are absolutely on this. I said some of it is driven by legislation, but some of it is driven by our own processes. We need to improve on all of those.
Mr Betts: There is legislation that needs changing.
Sir Jim Harra: Yes. If we want to go to a wholly electronic way of communicating with our customers, I am sure that some legislation will require change.
Q78 Chair: Sir Jim, can I take you to paragraph 3.24 on page 48? This is all to do with the regime ownership model. I do not mind whether you answer this or one of your colleagues answers it. Basically, under the regime ownership model, for the first time there will be data-driven, end-to-end individual tax regimes. What benefits could this new model bring?
Sir Jim Harra: Yes. We are organised around activities, specifically providing services and managing compliance, but through that we deliver a significant number of taxes. We are able to see things through a tax lens and say, “This tax drives this cost or this level of non-compliance”. Making changes at that regime level is important.
With VAT, we have piloted an end-to-end regime model where the VAT regime owner is expected to have a dashboard that monitors how the VAT system is working, what costs it is driving in customer contact or non-compliance, what design solutions could be made either in the legislation or in our processes and systems to drive down those costs and drive up customer satisfaction and accuracy. That is something that we are increasingly concentrating on. We started with VAT, but we are now applying that across the regimes.
We also count as regimes, in this context, cross-cutting value stages such as registration. Each tax has its own legislation requiring people to register and they are all slightly different. Managing registration across them all and making sure that is secure and promotes good compliance is an example of how we are using regime ownership.
Q79 Chair: That is really helpful. Will you task regime owners with reducing the cost and time taxpayers spend dealing with the end-to-end system?
Sir Jim Harra: Yes. I would expect every regime owner to understand how difficult and costly customers find it to interact with their regime. We will then prioritise the regimes that we want to focus on. I may not require every regime owner to do that because we may decide it is best to invest in certain ones. Yes, the aim is that, when it comes to customer costs and HMRC costs, each regime owner understands what those are, what drives them and what interventions could make them different.
Q80 Chair: I am caveating myself before I answer this question because this Committee is not to become a vehicle whereby we take up individual tax cases—far from it—but we have received some evidence from an organisation called VAT Solutions, which we have agreed to publish today and it has now been published. It raises a number of issues regarding VAT. You may or may not wish to answer now, but we would like to have a little note as to whether these are generic problems or whether this is just VAT Solutions’ experience. I do not know.
I will just list them all very briefly. Compliance checks were commenced in August and September 2023. The responses given by taxpayers in September 2024, October 2024 and November 2024 have still not been answered. They say that is not unusual. Of course, repayments of VAT are not made until checks are completed. All these checks tend to delay VAT repayments, and of course that has an effect on cash flow. They say that HMRC has mislaid payments. In one recent instance, £500,000 was not traced for a full month. They are saying that the problems with computer systems must be recognised. In the last six weeks alone, they had two clients who submitted VAT returns by the due date for which HMRC did not take payment of the VAT due.
As I say, I do not want to become a one-person tax investigator, holding you to account, but do you recognise any of those problems? If you want to write to us or you have any sort of answer now, it would be helpful.
Sir Jim Harra: It is best that we look into those specific examples and write to you. I will just make a general comment about VAT repayments. The way VAT is designed means there is a very high level of repayments in it. That poses a significant fraud risk and we are targeted by fraudsters. Therefore, every VAT repayment is risk-assessed. If we have concerns, we will generally check before we make the repayment. We try to target those checks as tightly as we possibly can so that compliant taxpayers are not caught up in them, but it is inevitable that some will be.
I do not recognise that we have problems with our VAT systems. When it comes to posting payments, we have some routes that really ensure that your payment gets posted to the right liability, but often people will use other methods of payment, which mean we have to intervene clerically to allocate it to the right liability. Chair, I will write to you in detail.
Chair: That is really helpful. As I say, we will publish it, but we can let you have a copy of it. Unless anybody has any more questions, I think we are probably done.
Sir Jim, thank you very much for all your forbearance with this Committee over the years. We will miss you. We look forward to meeting your successor, John-Paul Marks, in the relatively near future. Thank you to your colleagues for coming today as well.
An uncorrected transcript of this hearing will be published on the Committee’s website in the coming days. The Committee will consider the quite wide range of evidence you have provided us with today and we will be producing a report with recommendations in due course.