HMRC Annual Report and Accounts 2015-16

18 July 2016

HMRC has published their Annual Report and Accounts for 2015-16 which at 292 pages covers in detail all aspects of what HMRC do, how they have performed against various targets and how they are held accountable.

HMRC is one of the UK’s biggest organisations. At 31 March 2016, they had around 58,600 full-time equivalent employees in 167 offices across the UK, collecting tax and duties from 45 million individuals and more than 5.4 million businesses, and paying tax credits to 4.4 million families and Child Benefit to 7.4 million families.

The National Audit Office (NAO) has issued their report on HMRC’s Accounts; Amyas Morse, Head of NAO said:

“HMRC is running a complex and challenging set of change programmes, and aiming to maintain service to taxpayers at the same time. On the one hand, it needs to keep its nerve and commitment to its goals even if there are occasional setbacks along the way; on the other, it needs to ensure that it does not make the taxpayer underwrite the risk of failure through service breakdowns.”

Two of the areas covered in the NAO report are tax revenue and spend, as normal, and also HMRC’s plans to transform tax administration.

Tax revenues and spending in 2015-16

The annual cost of running HMRC was £3.2 billion in 2015-16 (£3.1 million in 2014-15). HMRC raised £536.8 billion of tax revenues this year, an increase of £19.1 billion (3.7%) on 2014-15 and paid out £40 billion in benefits and credits (approximately one-fifth of the government’s total benefit expenditure). The taxes that contributed to most of this increase were:

  • Income Tax and National Insurance contributions which together increased by £10.3 billion (3.8%)
  • Corporation Tax which increased by £4.1 billion (9.9%)
  • VAT which increased by £2.1 billion (1.8%)
  • Capital Gains Tax which increased by £7.3 billion (28.1%)
  • Insurance Premium Tax which increased by £3.7 billion (27.6%).

HMRC’s other key performance indicator is its compliance yield which measures the effectiveness of its compliance and enforcement activities. HMRC’s estimate of compliance yield in 2015-16 was £26.6 billion against a target of £26.3 billion. Compliance yield is not simply a cash figure, it draws on a range of different measures of revenue generated or losses prevented all of which involve a degree of estimation and uncertainty.

The National Audit Office (NAO) recommends that HMRC should work to provide further explanation so that readers are better informed about the estimations and assumptions that underlie HMRC’s reporting of its performance.

Transforming tax administration

HMRC has begun to implement its plans to transform how it administers tax. Its vision is to have “the most digitally advanced tax system in the world”. By 2021, it expects to employ 16% fewer staff, substantially rationalise its estate and automate more of its processes. In the past year HMRC has made plans to invest more than £2 billion on its transformation in the next five years; launched digital accounts for individuals; announced plans to close 137 offices and the location of 13 new regional hubs; and secured agreement for its plans to replace its IT services contract, Aspire, which it has revised to reduce the risk of carrying out too much change too quickly.

According to the NAO HMRC’s approach looks credible and proportionate to the scale of the risks involved, and it has worked closely with the Treasury and Cabinet Office to develop and refine its plans. It is too early to evaluate how well its approach is working but one of the most critical tests will be how management responds when things do not go as expected. NAO have identified two areas of risk:

Optimism bias in key assumptions – in the last Parliament, HMRC was over-optimistic about how much change it could deliver all at once, and how fast it could reduce demand for telephone contact in particular. This resulted in a collapse of its service to personal taxpayers in 2014-15 and the first half of 2015-16. HMRC has since recovered the quality of its service to personal taxpayers by recruiting more staff and has adjusted its future resource plans in the light of this experience.

Understanding the costs and benefits to taxpayers – HMRC has yet to estimate the costs for individual taxpayers or businesses of making the transition to online services or to quantify the benefits they can expect. Over the next year, it plans to develop a fuller picture of what it will cost taxpayers to use the new systems. Most business customers will be required to update HMRC quarterly rather than annually about their tax affairs, and some may need to purchase new software that works with the new systems. Some businesses are sceptical of HMRC’s evaluations of the costs and benefits of previous changes to the tax system.

Employment and Payroll Group (EPG)

One of the areas covered by HMRC in their report is about how they work proactively with different organisations that represent their customers - from small to large business groups, professional bodies and charities. Within their report is a piece about the Employment and Payroll Group (EPG):

“The EPG is our principal formal consultation forum for employers, employment taxes and wider payroll obligations. EPG is co-chaired by the Chartered Institute of Payroll Professionals, who have supported us on a number of research and customer insight challenges, providing evidence and running policy think tanks.

The forum members work with us to help identify issues and concerns. It provides the opportunity for early review of guidance, policies and processes to ensure they are designed with customer input, and explained so that customers understand what is required of them.

EPG has been closely involved in a number of significant changes: supporting us on how we interact with customers around underpayments and overpayments of tax, and supporting the development of guidance for new reporting arrangements for intermediaries. More recently EPG has been directly involved in supporting the implementation of changes to employer National Insurance Contributions for employees under 25, and the new Apprenticeship Levy.”

CIPP comment

The Policy team run several Think Tanks throughout the year; look out for news items inviting members to participate – your input is invaluable to help influence and mould future guidance, policies and processes.

The next EPG meeting is scheduled for 7 September 2016. If you have any agenda items, or any issues you would like the CIPP to raise, please email policy with the details.

Follow these links to read HMRC’s Annual Report and Accounts for 2015-16 and the NAO report.