HMRC's compliance strategy

Speech by Jennie Granger at the first annual HMRC stakeholder conference on 18 July 2013.

[Slide: Headlines]

HMRC has certainly been hitting the headlines recently.

As the Minister said earlier, media coverage plays a big role in furthering the debate about what is acceptable and what is not acceptable tax behaviour.

Very importantly media coverage also plays a very important compliance role, through successfully publicising the risks we are concerned about we can influence people not to take them or to get back on track.

So as opinion shapers, I want to thank you for helping us to talk up the risks and consequences of getting it wrong.

The headlines illustrate there is a lot we’re doing to tackle tax avoidance and evasion.

And to reduce fraud and other criminal activity, whether it’s targeted at the tax system or the tax credits system.

My focus today is on HMRC’s compliance strategy.

It’s about balance across the entire system and all taxpayers: encouraging all to do the right thing by also dealing with those who are not.

As Lin said it’s very important to public confidence in the system.

An effective compliance strategy starts with good law design and how we assist those who want to comply to get it right.

So really the story of our compliance strategy started with the earlier presentations.

I am going to focus on the next stage: what we do to level the playing field by dealing with the relative few that don’t comply.

I say a relative few because over 90 per cent of the £475 billion HMRC collected in revenues last year came in on time, with little additional effort.

Less than 5 per cent of this (£20.7 billin) was as a result of our compliance activities.

By the way, this was about £2 billion more than our target emphasising there is plenty to do to tackle compliance risks.

And a little over 9 per cent (£44 billion) needed debt collection activity.

[Slide: Tax Gap]

Our measurement of the tax gap also confirms this trend.

We estimate that gap every year to help us understand the compliance trends in the economy: our current estimate is that the UK’s tax gap represents £32 billion, or 6.7 per cent of the total amount that should be paid.

Compared to other countries that publish tax gap estimates, and allowing for differences in methodologies, we believe that the UK’s tax gap is towards the lower of the range.

That’s good news but it also says there is more to do.

The components show the complexity of the challenge in designing our compliance strategy.

We need to deal with everything from error through to systemic criminal attack; and all taxpayer groups.

We’ll be publishing a new tax gap estimate in October.

[Slide: Our Progress]

So what’s our progress?

We have a huge programme that covers intense man-marking of large business by our tax experts through to highly leveraged activities and mass customisation in our small business and personal tax markets.

So I will rattle quickly through some key areas to give you a flavour of the progress we are making.

I mentioned £20.7 billion of compliance revenues last year – it was our largest ever.

£8 billion (about 38%) of this came from large business.

Our efforts to tackle marketed tax avoidance schemes are bearing fruit.

We’ve won 8 out of 10 tax avoidance cases in the past year, protecting more than £1 billion.

The number of new schemes being disclosed has also reduced.

Judith will talk more on our strategy for tackling avoidance later.

55,000 taxpayers have now come forward through offshore disclosure facilities, generating £1 billion in tax, penalties and interest.

[Slide: Campaigns and taskforces]

We’ve lifted our coverage of compliance risks in the small business and individuals markets using some innovative approaches and by expanding our compliance workforce.

Our campaigns approach is achieving results, working across professional and trade sectors, giving people the opportunity to put their tax affairs in order before we take further action.

There is real evidence that this is changing behaviour across sectors. For example, the Plumbers Campaign brought over 2,000 plumbers out of the Hidden Economy and with a good knock on effect a 15% increase in reported profits from plumbers submitting simplified accounts.

We are seeing similar trends in other trades and professions we have targeted.

Word gets around!

Our Taskforces target attention on high-risk sectors and locations.

In July 2011 we launched a fast-food taskforce here in London, which brought in more than £25 million in compliance revenue; And again we are seeing sustained improved VAT compliance.

Since 2010 we’ve also reduced the debt balance by £7.4 billion, but that is not the entire story: we’ve also listened to and supported many viable businesses with time to pay arrangements (we’ve got agreements with over 600,000 business and individuals) to work through a tight spot.

[Slide: Publicity - HMRC’s most wanted]

We’re using publicity to amplify the impact of our direct campaigns and taskforce activities, both through extensive national and regional media coverage and through advertising.

We got huge publicity for the ‘HMRC’s most wanted’ media campaign, exposing the top 20 fraudsters and criminals.

It sends a strong message and its backed up with action. We are increasing our criminal investigations tackling fraud and criminal attack with over 770 prosecutions last year – including three barristers, one of whom was sentenced to three and a half years for trying to cheat us of £600,000.

This shows that we’ll take action against those who deliberately choose not to pay what they owe – whoever they are.

[Slide: Levelling playing field and No safe havens]

We’re also lifting our game on making our approach more transparent so everyone can judge the balance of the programme and be up front with people and businesses about the risks they should not take.

We published our strategic approach to compliance in two reports at Budget 2013:

‘Levelling the Tax Playing Field’, about our overall compliance strategy, and

‘No Safe Havens’, specifically about offshore tax evasion.

The booklets illustrate the scale and the diversity of our taxpayer base and that our approach has to be tailored to the various risks and their complexity a balanced program is definitely not ‘one size fits all’.

As this quick tour illustrates we can point to impressive successes But there is more to do and Lin outlined the challenges we face to achieve greater results with less.

[Slide: Looking Forward]

So on to the future and how we’ll meet that challenge.

Until now, our compliance efforts have been targeted much more at cure than prevention.

The reinvestment in digitisation is a fantastic opportunity to transform what we do.

We’ll focus less on catching people after the event and much more on prevention: encouraging to get it right first time and giving them an opportunity to put things right, at the point of transaction.

When we do need to respond, we’ll respond with a range of interventions.

We will, of course, still be vigorous in our pursuit of those who are deliberately not complying or those who are defrauding the system.

This is not only a much more effective use of our resources it is a much better outcome than catching taxpayers out after the event.

We call this our Promote, Prevent, Respond approach.

Designing compliance into our systems will be challenging.

They will need to support encouraging compliance at all stages without designing in unnecessary complexity.

And our workforce will need to be more flexible and dynamic: able to learn new skills and change between processes quickly.

They will be more engaged in design and promotion and increasingly our experts will focus on responding to the smaller number of more complex cases and those that won’t do the right thing.

While we don’t have this digital capability yet, in the meantime, we’re already developing innovative approaches and capabilities that will help us build towards the digital future.

[Slide: Making the Connection]

Clever analytics is one of the keys to designing in compliance in all our systems and processes.

Our award-winning data analysis system, Connect, is already leading the way. It is a game changer.

It holds more information than the British Library.

It has made more than 4 billion connections across our customer base.

It makes linkages that we could never have done manually.

At the touch of a button we can map an individual’s unique financial fingerprint and identify discrepancies between the picture we have and the tax liabilities they are declaring.

We currently use it to target our downstream interventions, that continues.

In the future we want to expand our use of analytics to promote compliance and prevent non compliance upstream.

There’s a stand outside where people can tell you more about Connect; take the time to visit it if you can.

[Slide: Prompting Compliance]

The way we interact with our customers has a very clear link with compliance.

So influencing behaviour through prompting customers to get it right is another key to the future.

We’re already developing our ability to nudge and we are achieving some good results encouraging self correction.

Our largest scale nudge is our high-profile evasion publicity campaign last November, which we’re about to repeat.

While it’s early days, it is already showing signs of impact.

It’s about prompting compliance – demonstrating to people that we’re actively looking at those who don’t pay what they owe and that there is a hard-edged follow up, while reassuring those who do comply that they have nothing to worry about.

Our most well known example is our debt collection letters where, in carefully targeted campaigns, 18% more taxpayers paid in response to letters that highlighted that few pay late and that made the connection between paying taxes and funding local services.

We also recently nudged a group of 2,700 affluent tax payers we believed may not have disclosed offshore income.

90 per cent engaged with us and over 400 customers disclosed non-compliance.

We’re now following up on many of those who haven’t disclosed.

[Slide: Global partnerships]

So after that quick trip to the digital future there is one other important trend I should mention and how we are responding.

Globalisation has offered some wonderful opportunities and is changing how we do business, work and live.

It’s also making the world a smaller place.

Hiding assets and income offshore has been a significant challenge for us, how do you detect what is not there?

A sea-change is occurring: not only are our analytics helping us flush out discrepancies, And increasing international financial transparency is also extending our reach beyond the UK.

Offshore and overseas agreements have been in the spotlight this year, with ground-breaking agreements signed with the Isle of Man, Jersey and Guernsey.

We’ve also got commitment to increased transparency across financial centres in the overseas territories.

This gives us greater access to UK residents’ offshore financial dealings, which makes it ever harder to conceal undisclosed income from us.

Also changing is how countries work together. for example we’re building on our very good relationships with other countries including pooling our expertise to make the connections and tackle common risks.

We recently announced collaboration with the US and Australia and we work with colleagues across law enforcement and internationally to combat tobacco and alcohol fraud. We expect to do more in future.

The future is exciting.

We hope we’ve whetted your appetite to help us shape it.

For now, our message is that we do want to continue to promote good compliance and prevent taxpayers getting it wrong or take the opportunity to get back on track when we offer it.

And for those who don’t want to do the right thing our message if that we are determined to level the playing field and increasingly there is no safe haven where people can stash income and dodge their obligations to pay their fair share of tax to fund public services.