Written evidence from HM Revenue and Customs

 

Following the Committee hearing on managing debt owed to central government on Wednesday 7th May, I wanted to write to you about the debt balance reduction of £6bn and the cumulative remissions figure of £6.2bn, which were discussed.

 

The Committee were concerned that the reduction in the debt balance since 2008-09 arose as a result of written-off/remitted debt. That is, had HMRC suddenly increased write-offs/remissions causing a fall in the debt balance.

 

During the period 2008-09 to 2012-13 in HMRC over £249 billion new debt flowed into Debt Management. During this period:

 

Below is a breakdown of Figure 3 at P15 of the NAO Report showing HMRCs stocks and flow:

 

Figure 1: Debt flows 2008-09 to 2012-13

 

This analysis shows that the reduction on the debt balance was a result of increasingly effective collection operation, and not debt write-off/remissions.

 

Write-offs and remissions are part of the economics of the HMRC ‘debt business’ and they relate to the flow of our operation, not the year-end balance.

 

Write-offs relate to debts that are due but which cannot be collected owing to the circumstances of the debtor. 95% of write-offs arise from insolvency of individuals and businesses, leaving, on average £200-300 million per annum written-off due to other reasons – the principle one being that HMRC is no longer able to find the taxpayer.

 

Remissions are usually made where it is no longer economic for us to pursue a debt. By the time of remission, debts have typically been through five or more interventions.

 

We expect to incur £5-6 billion of ‘losses’ per annum across the economic cycle.  This is shown in figure 11 which is the amount across Government, of which HMRC is a major part. The reduction of c£6bn shown in figure 4 of the report reflects all components of HMRC’s debt collection and the impact that has had on reducing the debt balance – as per the graph above.

 

 

Figure 2: HMRC Losses 2008-09 to 2012-13

 

The data in the chart shows that losses have been stable over the period: exceptions being 2009-10 VAT Multi-Trader Intra-Carousel Fraud (MTIC) and 2011-12 Tax Credits remissions. Much of the latter was both over 3 years old and uneconomic to collect, and should have been remitted in a more orderly way over previous years, along the lines now recommended by the NAO.


To summarise: there has been no sudden change in write-off/remissions policy or levels which would account for a structural reduction in the level of the debt balance. I apologise for not having that information to hand at the hearing.

 

I also agreed to write about how HMRC selects Debt Collection Agencies, please see information annexed.

 

 

 

 

 

 

Lin Homer

Chief Executive

19 May 2014


Debt Collection Agencies (DCAs): selection process.

 

Background

 

HMRC procured a Framework Agreement, with multiple Service Providers, for Debt Collection Agency services across the United Kingdom including Northern Ireland. It can also be used by Central Government Departments, Executive Agencies and Non-Departmental Public Bodies. There are 12 DCAs on the HMRC panel.

 

The Framework does not guarantee volumes and values. Charges for the service are on a commission basis and paid in respect of the amount of debt recovered.  The commission rates which are “commercial in confidence” vary between heads of duty and between DCAs.

 

HMRC uses DCAs to provide additional capacity in the collection of debts.  We target their use later in the collection cycle as a follow up to our large scale campaign telephone/lettering activities before we consider firmer and more costly enforcement action.

 

In the event that a DCA is unable to make contact, secure payment either in full or as part of an agreed Time to Pay arrangement, the debt will be returned to HMRC. HMRC will then consider whether further pursuit action is appropriate, e.g. further campaign action, a face to face visit, legal proceeding or (exceptionally) write-off/remission.

 

Debts under various Heads of Duty (namely Self Assessment, Value Added Tax, Corporation Tax, Pay As You Earn and Tax Credits) have been referred to DCAs for collection.

 

From July 2010 to 31 March 2014, of the £183 billion new debt flowing into DMB, HMRC has referred approximately £3 billion to DCAs of which £604 million has been collected. The referrals to DCAs were less than 2% of the overall new debt flowing into Debt Management and Banking for collection. 

 

HMRC Framework Agreement

 

The contract was let via a formal tender. The procurement was the subject of a Prior Information Notice (PIN) published in the Official Journal of the European Union (OJEU). The tender attracted considerable industry interest and was fiercely competed with 52 full tenders received and 38, which met all the selection criteria, fully evaluated. The process concluded successfully at the end of May 2011 with the announcement of the successful bidders.

 

Selection criteria

 

As well as rigorous technical selection criteria there are a number of pre-qualifying requirements to which the bidder must self certify before any proposal is evaluated, e.g. HMRC is required by law to exclude bidders from participating further in a procurement if the bidding organisation, or any directors, partners, or persons with decision making powers, have been convicted of:

 

 

This list is not exhaustive. Additionally there are discretionary grounds for exclusion, e.g.

 

 

Award Process

 

EU law allows bidders to be excluded from a competitive exercise on the grounds of non-fulfilment of tax and social security obligations. Revenue compliance checks are undertaken by HMRC at various points within the procurement and contract management cycle.

 

Prior to Award of Contract, compliance checks were carried out on the prospective bidders at the Expression of Interest stage and again (during the Tender phase) prior to award of contract.

 

HMRC also has a standard clause inserted in all contracts (including the DCA Framework Agreement) that states the Contractor shall at all times comply with the Value Added Tax Act 1994 and all other statutes relating to direct or indirect taxes. Failure to comply will result in termination of the contract. The condition also allows HMRC to obtain VAT details in respect of any sub-contractors engaged by the DCA.

 

Finally, before the DCA is permitted to pursue HMRC debt, systems and processes are tested to ensure that they are equipped to handle our data securely and accurately and that they are capable of discharging HMRC’s requirements. Successful testing is a condition of securing finance accreditation which certifies that the DCA is compliant with HMRC’s accounting policies and standards.

 

We have robust arrangements in place to monitor DCA behaviour, handle any complaints received and assure adherence to contractual requirements. For example, on audit and assurance visits we: 

 

 

In addition to the above, the Cabinet Office’s current policy, applying to all central government contracts over £5million, is that bidders must self-certify their tax compliance and this would apply to any future Tenders for DCAs.

 

EU Directive and UK Law

 

Under EU Law we cannot exclude bidders who are not UK domiciled as Regulation 4, Economic Operators, of the Public Contracts Regulations gives effect to the EU directive which states that: “a contracting authority (such as HMRC) shall not treat a person who is not a national of a relevant State (namely an EU State) and established in a relevant State more favourably than one who is”