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Auditor questions HMRC’s drive to digital



NAO report points to good progress but warns against ‘optimism bias’ in channel shift

HM Revenue & Customs (HMRC) has received a generally good review for its 2015-16 performance from the country’s spending watchdog.

But continuing high levels of fraud in some parts of the welfare system and unanswered questions around its digital ambitions remain areas of concern, the National Audit Office (NAO) has said in its review of the department’s accounts and operations.

Her Majesty’s Revenue & Customs Annual Report and Accounts 2015-16 is the summation of the body’s look at the taxman’s 2015-16 accounts, a period where the body collected 3.7% more tax revenues than the previous tax year, delivering a total of £537 billion to the Exchequer.

The result was largely because it collected 3.8% more in income tax and national insurance, or just over £10 billion. It also paid out £40 billion in benefits and credits in the same financial period.

Persistent problems

But problem areas remain. First, error and fraud, with problems for tax credits at central government level and housing benefit at local. The Cabinet Office has been saying for some years that it wants better, more joined up, data-based ways of viewing claimants to head off benefits “shrinkage”. But judging by the NAO’s analysis, these ideas still have not really been implemented.

This is the most likely explanation of yet another “qualification” of tax credit numbers, the latest since they were first introduced in 2003-04. HMRC estimates that overpayment of child benefit due to error and fraud was £170 million in 2015-16, or 1.4% of the total outlay, and a whopping £1.37 billion overpayments – 4.8% of the entirety – on the related benefit of personal tax credits. The main problem here, says the auditor, is out of date information, or an inability to collect the right information from claimants in time.

The use of information seems to be at the heart of the other area of concern for NAO – HMRC’s ambitions to become “the most digitally advanced tax system in the world”, mainly through automation (the plan is to operate with 16% fewer staff inside only five years, as well as other internal tech driven improvements).

In NAO’s words, HMRC has taken a lot on here.

“In the past year, HMRC has made plans to invest more than £2 billion on its transformation… 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.”

Credible against risks

NAO is broadly happy with all this, saying: “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”.

But it cautions that it is too early to evaluate how well the approach is working, and says there is an “optimism bias” that people will be happy with the rate of change, especially the shift away from telephone to online support.

There is also some fuzziness around the specific costs and benefits to taxpayers of the move to digital. As the report notes: “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.”

It likes the fact that in the next 12 months there is due to be some more visibility around what it will cost taxpayers to use more digital, but it also notes that businesses are going to have to invest money in processes (updating records every three months, not just annually) and in IT (“some may need to purchase new software that works with the new systems”). Also, a little ominously, it notes that: “Some businesses are skeptical of HMRC’s evaluations of the costs and benefits of previous changes to the tax system.”

More caution

Commenting on his team’s findings, head of the NAO Amyas Morse suggested the drive to digital and away from Aspire at the back end needs to be done maybe a bit more cautiously than so far.

“HMRC is running a complex and challenging set of change programmes, aiming to maintain service to taxpayers at the same time,” he said.

“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.”

It is worth noting how important all this is to UK plc – and the efficiency of the department’s performance. If it was a standalone business, you’d have to say £537 billion for the Exchequer is a pretty good profit margin, as the annual operating cost of running HMRC was only £3.2 billion in 2015-16, barely up from 2014-15’s £3.1 billion.

But the department is measured by its compliance yield - the effectiveness of its compliance and enforcement activities, such as how well it chases us all down for late payments. Again, this is a healthy figure this year, NAO finds, coming in over its forecast (£26.6 billion versus a target of £26.3 billion).

Read the NAO report in full.


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