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• Full report - HM Revenue & Customs: 2011-12 report and accounts

Amyas Morse, the Comptroller and Auditor General, has yesterday issued a report on the 2011-12 accounts of HM Revenue & Customs. The report details progress by the Department in stabilising the PAYE service since the serious problems that emerged when it introduced the new National Insurance and PAYE service (NPS) in 2009. The report also covers HMRC’s performance in managing tax debt; and its progress in tackling fraud and error and in managing debt in respect of tax credits.

In 2011-12, the Department received total revenue of £474.2 billion, an increase of £4.5 billion (0.96 per cent) more than in 2010-11. Tax revenue has continued to recover from the effects of the recession in 2008-09 and 2009-10. VAT revenue has increased by £9.3 billion, largely because of the VAT rate increase and increases in revenue from the oil, gas and business services sectors. Revenue from corporation tax has decreased through turbulence in the financial sector, offset by increased revenue from offshore companies because of higher oil and gas prices.

The Department is part way through its plan to stabilise the administration of PAYE. It has met its target to process 6.7 million end-of-year reconciliations relating to the 2008-09 and 2009-10 tax years. In addition, it is on track to reconcile the 2010-11 and 2011-12 tax years by March 2013; and, by December 2012, to clear outstanding reconciliations predating the introduction of NPS relating to 2003-04 to 2007-08.

Yesterday’s report points out, however, that stabilising PAYE has come at a cost, in terms of the amounts of tax the Department has decided to forgo to keep workloads manageable. In 2011-12, it remitted an additional £12.7 million relating to claims from taxpayers, bringing the total of those claims to £53.7 million.

The NAO recommends that, as a step towards forecasting its overall work load and the operational resources required, the Department complete its review of its PAYE operating model, taking account of the findings from the pilot for testing its new ‘real time information’ (RTI) system.

The value of tax debt at 31 March 2012 under active management stood at £13.3 billion, compared with £15 billion in the previous year. The Department has made progress in implementing its debt strategy through tailoring its approach based on the characteristics of the debt. The Department’s records show a large increase over the last two years in the amount of tax which the Department has decided not to pursue, especially for income tax which was £756 million in 2011-12. This is in part owing to PAYE stabilisation work but also as a result of improvements in the recording of remissions.

The NAO recommends that the Department identify the full cost and evaluate the cost-effectiveness of each of its debt collection activities. It should also accelerate its work to undertake full risk profiling and customer segmentation of its debt balance, as recommended by the Public Accounts Committee in 2004 and 2008.

In 2010-11 (the latest year for which figures are available), the Department overpaid between £2.08 billion and £2.46 billion to claimants as a result of error and fraud and underpaid between £0.17 billion and £0.29 billion to claimants because of error. The Department has not met its target to reduce the level of tax credits error and fraud to no more than 5 per cent of entitlements.

The Department met its target to reduce tax credit debt to £4 billion at 31 March 2012 (down from £4.7 billion a year earlier), but only after writing off old debts of £1.7 billion during 2011-12. It estimates that £2.3 billion of the £4 billion is unlikely to be recovered. The Department’s campaign approach, aimed at collecting tax credits debts more promptly, has had limited success.

Amyas Morse, head of the National Audit Office, said today:

“Our high level recommendations in today’s report are that, first, the Department should get a better understanding of the costs and benefits of its interventions – such as debt campaigns and initiatives to drive down levels of error and fraud in tax credits.

“Secondly, it should prioritise and target its activities on the basis of a better understanding of risks, such as risk profiling of taxpayers.

“Finally, before implementing significant structural changes, the Department needs to be clear about what its future operating model will be: it needs to understand how its business will change following the introduction of real-time information and Universal Credit.

“There are broad lessons here which reinforce the messages in our recent value for money work on tax administration. The Department should seek to apply those lessons across the full range of its activities.”

Notes for Editors

1. The Department may clear a debt in one or more of four ways:
   • the money may be collected: the Department collects the debt either in full or by instalment arrangement. 
   • the revenue losses may be remitted: the Department decides not to pursue a tax debt, because of hardship or value for money.
   • the revenue losses may be written-off: the Department assesses the debt to be irrecoverable because there is no practical way to pursue the liability, for example, the taxpayer cannot be traced or has gone bankrupt.
   • the liability may be reassessed: the Department amends or cancels the debt as further information is received that determines the taxpayer’s final liability.
2. Press notices and reports are available from the date of publication on the NAO website, which is at http://www.nao.org.uk/. Hard copies can be obtained from The Stationery Office on 0845 702 3474.
3. The National Audit Office scrutinizes public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Amyas Morse, is an Officer of the House of Commons and leads the NAO, which employs some 860 staff. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund have used their resources efficiently, effectively, and with economy. Our studies evaluate the value for money of public spending, nationally and locally. Our recommendations and reports on good practice help government improve public services, and our work led to audited savings of more than £1 billion in 2011.