HMRC and the taxpayer: improving compliance
During these difficult economic times, the way tax is collected has rightly come under increased scrutiny. At a time when we all have to pay more, and are all making sacrifices to sort out the nation’s finances, Government and HMRC need to work even harder to make sure that no-one is taking a free ride at the expense of others - whether by exploiting dubious loopholes through contrived avoidance, or breaking the law by evading tax altogether.
Ensuring we have an effective system of collecting tax means meeting two key requirements.
First, we need high performing tax administration, supported by the right systems to make collection, compliance, and enforcement easy, efficient, and effective.
Second, we need to command confidence from the taxpayer that the system is being administered effectively and fairly, promoting a self-sustaining culture of compliance.
I am proud to say that in the UK that culture of compliance already predominates. It is rare for British taxpayers to avoid or evade tax, and around 92 per cent of tax receipts are collected - compared to 86 per cent in the US, for example. The vast majority of our tax revenue is paid when due and without active intervention by HMRC.
To maintain and improve that record, the administration of tax needs to be comprehensive and just, and be seen to be so. Avoidance and evasion raise taxes for everyone else and distort the market. But they also strike at the heart of the system by undermining the actions of the majority.
So today I want to talk to you about how HMRC is achieving those two goals - using effective systems to improve the efficiency and effectiveness of tax administration, and effective practices and communication to maintain the public confidence that they are doing their job effectively and fairly.
First, public confidence in tax administration needs to be underpinned by mutual understanding between the Exchequer and the Taxpayer. All too often, taxpayers see tax as something that simply happens to them, and the Exchequer as a black hole for their money. And for too long, Government has allowed that perception to continue.
Our approach to tax transparency is changing that perception - working towards a world in which citizens know what they pay, and what their money is spent on.
In May this year, HMRC launched a new online tax calculator and phone app so that individuals who pay tax through PAYE can see how much income tax and National Insurance they can expect to pay, and an illustration of how their taxes contribute to public spending.
And from April 2014, around 20 million taxpayers will receive a new Personal Tax Statement, detailing how much income tax and National Insurance they have paid, their average tax rates, and how this contributes to public expenditure.
And as well as understanding better how their hard-earned money is collected and spent, it is important to maintaining compliance and confidence that HMRC communicates effectively with taxpayers to let them know that they are not in the minority - so that they feel they are part of a collective effort and not just pulling harder on behalf of those who want a free ride.
To achieve that, HMRC is using insights from behavioural economics. By developing a more nuanced understanding of people’s behaviour, they can improve their services and support people to make better choices for themselves without coercion.
HMRC has already made significant strides testing and embedding behaviour change within letters, forms, telephony and digital channels, and the results have been impressive. For next to no cost, HMRC has seen up to 15 per cent improvement in payment behaviour in some trials, simply by changing the way in which they communicate.
There are enormous benefits to improving communication with taxpayers. But that needs to be underpinned by effective administration so that HMRC can be good to its word and secure the right amount of revenue from everyone.
As much as HMRC can build goodwill and co-operation by improving communication and understanding, it’s important not to tax that goodwill (if you’ll pardon the expression) by making compliance harder than it needs to be.
And regardless of how successful HMRC is at encouraging people to be good citizens, there will always be a few who are determined to profit at the expense of others. While transparency and effective communication help to maintain the good will of good citizens, effective administration lets HMRC clamp down on those who still refuse to comply.
This is something that the current Government has always taken seriously. At the 2010 Spending Review, we re-invested over £900 million back into HMRC towards this goal, allowing it to deliver £7 billion a year of additional revenue by 2014/15, in addition to the £13 billion to which it was already committed.
And twenty-first century technology presents excellent opportunities to put that investment to good use - helping HMRC to understand the people with whom they interact with, target their involvement, and ensure their actions are appropriate and proportionate.
HMRC, like a business, needs to understand its customers to be successful. Every taxpayer is unique, and given the sheer variety - almost every business, every household, and every employee in the UK - the best approach can vary dramatically.
And because HMRC interacts with almost everyone, it holds a vast amount of information about the taxpayers it deals with - more pieces of data than the British Library. In fact, the sheer volume of information held is the main challenge for putting it to good use.
But through use of cutting edge technology - known as CONNECT - HMRC can now cross-match over a billion pieces of data to enable them to segment taxpayers according to their behaviour and their past relationship with the Exchequer.
By applying analytical techniques, they are able to separate those who are willing and able to pay their taxes, from those who might need help, those who might push the boundaries of the law and, at the extreme end, organised criminals dedicated to attacking the system.
This segmentation means HMRC can deploy its resources more effectively, ensuring that highly-trained evasion and organised crime specialists are not drawn in to deal with honest mistakes. And it helps to maintain the good will of the well intentioned. Customer segmentation has doubled compliance revenue to almost £14 billion in 2010/11, even during a period when expenditure on compliance activities has dropped by a fifth. Through using technology, skilled tax and data analysts, and common sense, HMRC is literally providing more for less.
CONNECT also allows HMRC to ensure that data collected by one part of the department can be used across all of its compliance areas. It means new relationships can quickly and easily be uncovered between people and organisations that would otherwise remain hidden, so that fraud can be detected and stopped in a way that was simply not possible before.
Let me give you example. CONNECT has enabled a much more systematic and targeted approach with regard to Inheritance Tax.
HMRC receives around 300,000 paper returns on bequeathed estates every year - including around 200,000 from estates claiming to be below the tax-paying threshold. Due to the very large number of returns received, it was very difficult to identify high risk cases where more tax was due than what was in fact declared.
To develop a more thorough and efficient means of enforcing compliance, HMRC experts developed a single risk code that sifts over 50 million lines of data to spot where estates might have been falsely submitted as exempt. HMRC utilised the massive amount of information it held on property ownership and transactions, company ownerships, loans, bank accounts, employment history, and self assessment records that had previously been unmanageable. All of this was turned into a single code that indicated when the return was likely to be inaccurate and why.
The results were impressive - HMRC interventions on non-taxpaying estates increased many times over; and in the first year of operation, an additional £26 million was raised from Inheritance Tax through the use of CONNECT.
And there are plenty more examples - preventing hundreds of millions of pounds in fraudulent VAT claims, and enabling identification of offshore non-compliance to yield over £50 million that will continue to increase further as enquiries are settled.
Overall, through making better use of the data HMRC has, CONNECT has already generated around £1.4 billion in additional tax yield.
As the department finds new ways to exploit technology further, there will no doubt be more that can be done to make data handling even easier, more thorough, and more effective. My ambition is for the UK to become the market leaders at using data analytics to drive a more effective approach to taxpayer interactions - moving towards a data-driven view of taxpayers that automatically draws on comprehensive data from across the department, wider government, and third parties.
Through doing so, HMRC could reinvent the way it interacts with taxpayers - its marketing, customer education, compliance risking, and fraud prevention.
Through harnessing technology to use limited resources more effectively, I see HMRC at the forefront of the nation’s deficit reduction ambitions.
In response to the improved information HMRC now receives, it has also adopted another innovative technique to improve awareness and compliance. Through so-called ‘campaigns’, they identify whole groups where the data suggests particular compliance issues - medics, plumbers and private tutors have been recent examples - and then provide opportunities for those in that group to ensure they are compliant. They make it easy for people to correct mistakes - and easier to see who is choosing not to as a result.
The process also means everyone in the group - including the majority who pay the right amount of tax on time - is targeted through marketing. So as well as tackling the problem of underpayment directly, it lets those who are doing the right thing know that HMRC are after those who are not, helping to dispel the myth that ‘everyone is at it’ and gets away with it.
To date, the Campaigns have brought in more than £510 million in voluntary compliance. And CONNECT has helped enable HMRC to recoup a further £120 million by finding and taking action against those who refused to engage. Campaigns have also exposed examples of behaviour that is deliberately non-compliant and potentially criminal - with, for example, 18 criminal investigations into tax evasion underway following the Plumbers Campaign, two of which have already resulted in prison sentences.
These kinds of campaigns are particularly important, since all too often a tax evasion issue concentrated in a single professional market tips the whole balance against the compliant, and means that the compliant find business harder as a result of less scrupulous competitors undercutting them by evading tax.
And, as I know there are those uncomfortable with criticism of those who negotiate cash discounts to facilitate tax evasion, it is important that we have a culture of tax compliance in this country. Effective measures taken by HMRC in dealing with the hidden economy play an important role. And, again, greater use of technology which can identify disparities between declared income and living standards can, and increasingly does, assist HMRC in focussing on those who break the law.
I’ve talked about the responsibility of taxpayers, but HMRC too has responsibilities - not just to work hard and efficiently with the public resources allocated to it to collect taxes, but to do so in a way that maintains the confidence of the public. Lin Homer, HMRC’s Chief Executive, will be saying more on this theme this evening, and on her ambitions to make sure that HMRC continues to operate in a way that is both efficient and accountable. And Edward Troup will talk tomorrow about his responsibilities as Tax Assurance Commissioner to make sure that the public and Parliament can be sure that the tax system is being administered even handedly, without fear or favour.
I for one know HMRC takes that responsibility seriously. And I believe it is discharging it admirably.
HMRC’s recent consultation, which I launched when I last spoke on this subject, is looking at how we can strengthen the disclosure regime so that HMRC can identify and deal with peddlers and users of avoidance schemes. And they are separately consulting on how a General Anti-Abuse Rule might deter and tackle a range of the most egregious arrangements.
The High Net Worth Unit, has already raised over half a billion pounds since it was formed three years ago: double the original estimates. And in 2011/12 we brought in eight times what was secured from the equivalent customer base before the unit was formed.
Around £30 billion of compliance revenue has been collected through the Large Business Service since 2006-7.
And HMRC has taken decisive actions to close a string of avoidance schemes by firms and individuals this year, securing hundreds of millions of pounds of tax at risk.
HMRC and I will continue to do all we can to make sure everyone pays the tax they should. And HMRC will continue to use all the means available to do so - working closely and communicating openly with taxpayers, and ensuring the data held is exploited to its fullest extent through cutting edge technology.
As the world continues to develop and technology to progress, new challenges and opportunities will arise, and methods of administering taxes will continue to change. For example, the continuing trend towards online banking and electronic transfers could allow for enormous gains to tax compliance and make black market transactions increasingly difficult.
And as government, households, and companies increasingly hold and share information electronically, the opportunities to improve operations through data analysis and knowledge sharing are potentially limited only by our imagination, creativity, and initiative.
Of course, that also raises some challenging questions, not least about the powers of government and the rights of the individual. I acknowledge that there is already a trade-off between effective compliance and the right to privacy that needs to be treated with respect. And that balance will only become more important. The extraordinary power of electronic data means we must consider carefully what information it is acceptable for a government to hold and to use.
While we must bare this firmly in mind as we look at how we can improve our service to the taxpayer further, we should continue to look at how better systems can help to deliver fairer, more effective, more efficient tax administration.
And HMRC will continue to improve its practices and communications to ensure that it continues to command the confidence of the taxpayer.
I am confident that the approach that the department is taking to meet its dual responsibilities will ensure that the UK maintains its status as one of the most tax compliant countries with one of the most efficient tax administrations, and I am sure what we will hear from my HMRC colleagues later on in this conference will support that message.
But let me conclude with this point.
The short term pressures on the public finances are considerable, and there are further long term pressures as a consequence of the demographic changes that we face.
But through the use of new technology and targeted investment, there are great opportunities to improve transparency, reduce burdens on taxpayers, and ensure that the tax that is due is collected. I know that those of us in the Treasury and HMRC want to take those opportunities.
For now, though, thank you once again to the IFS for hosting this excellent event, and thank you all for listening.