The Public Accounts Committee (PAC) has severely criticised HM Revenue & Customs (HMRC) for a whole catalogue of extraordinary and costly failures which have befallen the department in the past year.

Reading between the lines of the PAC’s most strongly worded report on HMRC yet (they seem to get worse each year), HMRC’s management seem to have all the common sense of a herd of rabbits blinded by on-coming headlights. Shortcomings that have all contributed (and continue to contribute) to a series of unquantifiable errors and failures are enough to leave both tax advisers and the public reeling. You could not make this stuff up. From a flawed new PAYE and NICs computer system that not only went wildly over budget but also generates garbage, leading to the writing off of millions of records, to the failure of the department to realise the effect of its own new powers regime, to a murky methodology that could have cost billions (but no one can tell) in settling litigation with large corporates.

To add insult to injury HMRC awarded its IT officer a temporary contract at four times normal rates of pay. Let’s hope he has the decency to ensure that his personal service company operates IR35 on the fees.

Extracts from the PAC’s report:

"Conclusions and Recommendations

1.  The Department has failed in its duty to process Pay As You Earn (PAYE) accurately and on time. Problems in delivering the new National Insurance and PAYE Service (NPS) system delayed the processing of PAYE for 2008-09 by a year. The Department did not tell taxpayers of the delay promptly, causing uncertainty and worry for millions of people. The Department also failed to tackle a legacy of processing backlogs going back to 2004-05. It has now run out of time to collect all the tax due before April 2007, and has not yet repaid the millions of taxpayers who paid too much PAYE in these years. As a result, it has failed to collect tax that is properly due, caused uncertainty to taxpayers and treated them inequitably.

Implementation of NPS

2.  The Department has not delivered an acceptable standard of service to PAYE taxpayers. The Department knew in December 2009 that up to seven million people had over or underpaid tax in 2008-09, yet it did not take steps to identify and inform the individuals involved until September 2010 when it began reconciling PAYE for 2008-09 and 2009-10 combined. In January 2010 it began issuing 25 million coding notices for 2010-11, without first establishing why the number of coding notices was massively in excess of its forecast. It then stopped issuing notices when it realised belatedly the extent of errors in the tax codes. The Department must ensure that coding notices are subject to proper quality assurance before being issued, and that taxpayers are told of their individual under and overpayments as soon as practical.

3.  The Department failed to understand the risks of poor quality data, which undermined the effective operation of the NPS. The Department plans to have stabilised the NPS and PAYE processing by 2012, and to have completed the 2008-09 and 2009-10 PAYE reconciliations by January 2011; but a key risk is the 10 million cases still outstanding where there are issues with data quality that require technical or manual intervention. We look to the Department to be able to clearly demonstrate that it has resolved systemic data quality issues by the end of 2011 and that NPS is delivering the benefits that it was intended to bring - including improved accuracy and speed of processing, and prompt processing of under and overpayments.

4.  To keep PAYE processing volumes manageable, the Department decided to raise the threshold for the recovery of underpayments from £50 to £300 for 2008-09 and 2009-10, foregoing £160 million in revenue. This is inconsistent with the £50 threshold for those taxpayers underpaying in other years, and with, for example, tax credits debtors who do not automatically have debts under £300 written off. In making decisions on thresholds, the Department should consider both the narrow balance of cost and returns for a particular tax stream, but also, with a view to preserving equity between taxpayers, the broader consistency with the decisions it takes in other tax areas.

5.  We do not yet know the full cost of the problems with NPS implementation. In its response to this Committee's recommendations, the Department should provide a comprehensive statement of the costs of the NPS, including the estimated cost to the conclusion of the stabilisation programme. The statement should include the costs associated with recovering the processing of annual coding notices and end of year reconciliations exercise, and the revenue foregone as a result of the delays, and clearly set out the assumptions used in coming to these figures.

6.  The Department re-employed its Acting Chief Information Officer on a three months contract, equivalent to £600,000 per annum, around four times his previous salary. This was after he had been unsuccessful in the competition for the permanent post. The Department should make succession plans for the replacement of senior staff well in advance of their departure dates, particularly when such dates are plainly known in advance due to fixed term contract arrangements, as was the case here.

Backlog of Open Cases

7.  By allowing a backlog of 18 million PAYE cases affecting 15 million people to build up, the Department has delayed the repayment of overpaid tax and put at risk the recovery of an estimated £1.4 billion of underpaid tax. It is unacceptable that so many people have had to wait so long for their tax affairs to be resolved. If the Department had processed PAYE promptly, it should have been able to collect nearly all of the estimated £650 million underpaid tax for 2004-05 to 2006-07. The Department should now set a clear operational standard to process all PAYE cases within 12 months of the end of the tax year.

8.  The Department failed to foresee the consequences of the changes in the statutory deadline for recovering underpayments of tax introduced in the Finance Act 2008. The Department was aware that the change in the deadline would prevent it collecting underpaid tax for 2004-05 and 2005-06, estimated at £150 million. However, it failed to appreciate the impact of the deadline on the 1.9 million underpayments in 2006-07 and lost the chance to recover any of the £500 million tax owed. The Department should ensure that it does not miss the deadline for collecting revenue for 2007-08 and that its assessments of future legislative changes take full account of the operational impact.

9.  We are not convinced by the Department's explanation of how it decides to allocate resources to maximise the collection of PAYE. It has assessed the amount of revenue brought in by staff working in some other parts of the Department, and concludes that they would bring in less working on PAYE. But the Department has not analysed whether employing additional staff on PAYE, rather than reallocating resources from elsewhere, would bring a net gain. The Department should assess the return on investment of having additional staff collecting PAYE and structure its staffing to maximise the net revenue collected.

Corporation Tax

10.  There is little transparency for the taxpayer over the way that tax disputes with large companies are resolved. While we recognise the Department's obligation to ensure taxpayer confidentiality, the Department should consider the scope for increasing transparency in the area of large and complex tax cases and for assuring Parliament and the public that due process in the resolution of these cases is being followed. We look to the Department to cooperate fully with a National Audit Office review of its procedures for resolving tax disputes.

Tax Credits

11.  The Department has a target to reduce tax credits debt by £200 million by March 2011, but this target does not distinguish between debt that is collected and debt that is written off. The Department should set separate performance indicators for the amount of tax credit debt it collected, and for identifying and writing off debt that is no longer recoverable."

The PAC’s Summary

"In 2009, HM Revenue and Customs' (the Department) implemented the new National Insurance and PAYE Service (NPS), the final phase of its project to modernise the collection of income tax through the Pay as You Earn (PAYE) system. The NPS brings together for the first time all of an individual's pay and tax details into a single record and offers the opportunity of increasing the accuracy of tax codes and reducing the likelihood of over and underpayments of tax.

The flawed implementation of the NPS in 2009-10 has resulted in lasting and costly losses for the Department and caused unacceptable uncertainty and inconvenience to the taxpayer. Software problems delayed the processing of 2008-09 PAYE returns until September 2010 - a year late - and data quality issues have further disrupted the issue of tax codes for 2010-11. The Department has failed to tackle a backlog of 18 million PAYE cases from 2007-08 and earlier, affecting an estimated 15 million taxpayers. The exact amounts of tax involved are not known, but estimates suggest £1.4 billion of tax was underpaid and there is £3.0 billion of overpaid tax to be refunded. The Department failed to understand the impact of the Finance Act 2008 on the deadlines for collecting tax, and so is now unable to collect any of the estimated £650 million underpaid in 2006-07 and earlier. The Department does deploy staff according to emerging problems and priorities; but it is not clear that the Department understands enough about the absolute and relative returns on investment from staff working on different tax streams in order to make decisions which maximise net returns to the Exchequer. As a result of its mismanagement of PAYE processing, the Department has not collected tax due from some individuals and has taken too much from others, causing both uncertainty and inequity in the system.

The Department has launched a programme to stabilise the NPS by 2012. It is vital that it demonstrates the ability of the system to process PAYE promptly, accurately and efficiently and restores customer confidence. In future, it should process everyone's PAYE within twelve months of the end of the tax year. It must also make sure it maximises the net revenue it collects before the deadline expires for 2007-08 underpayments of tax, and that it achieves its aim of processing 2008-09 and 2009-10 PAYE by the end of January 2011.

Based on early successes, the Department has extended its campaign-based approach to the recovery of 90% of tax debt. It is planning further improvements in its debt management capability, but these will not be delivered until October 2011.

The Department has increased its focus on preventing fraud and error in the tax credits system and is aiming to prevent £1.4 billion of error and fraud in awards for 2010-11. It is measuring its progress against a series of targets, which it is currently meeting.

The average taxpayer has a right to assurance that the Department has done all it can to maximise returns to the Exchequer when resolving disputes over large companies' tax liabilities. While we acknowledge the Department's legal duty to respect taxpayer confidentiality, we expect the Department to seriously consider the scope for greater transparency over its procedures for resolving such disputes, so that public confidence in the fairness of settlements with large companies is assured.

On the basis of a Report by the Comptroller and Auditor General, we took evidence from the HM Revenue & Customs on the processing of PAYE, debt management and tax credits."


Links: Public Accounts Committee 18th Report: HMRC 2009/10 accounts