‘All-time low’: HMRC customer service deteriorates amid taxpayers’ exasperation finds PAC inquiry

HMRC appearing to struggle to cope as taxpayer population and tax complexity rise

Significant drop in criminal prosecutions sends wrong message while approach to IR35 rules deters legitimate economic activity

Customer service levels at HM Revenue & Customs (HMRC) are at an all-time low. In a report published today, the Public Accounts Committee (PAC) expresses its disappointment as service levels at the tax authority continued a five-year decline, with written evidence to the PAC’s inquiry about HMRC’s performance demonstrating taxpayers’ exasperation.

Since the PAC’s last report in January 2023, HMRC’s performance has continued to deteriorate. In 2022-23, 62.7% of callers waited more than 10 minutes to speak to an adviser, up from 46.3% in 2021-22. HMRC told the PAC’s inquiry that it did not have the resources to meet rising demand for its phone and post services at expected standards. It instead is directing callers to use digital services which it insists are good quality. The PAC received a lot of evidence to the contrary from taxpayers and their agents. The Committee agreed its report before the publication of the HMRC consultation response which indicated that it will not now require digital interaction until a service is of a suitable standard.

With a twin rise in the taxpayer population and the complexity of people’s tax affairs, the PAC states in the report that HMRC is apparently struggling to cope. At £814.0 billion in 2022-23, tax revenues are at a record high, but HMRC still fell £2bn short of its £36bn target for compliance yield (the additional revenue that would otherwise have been lost were it not for HMRC’s intervention), and expects to do so again in future years.

The PAC’s report notes a significant reduction in criminal prosecutions by HMRC, from 691 in 2019-20 to 240 in 2022-23. HMRC says that it is increasingly selective in using its criminal investigation powers and seeking prosecution (in part due to backlogs in the criminal justice system), but the PAC is concerned that if fewer criminals are prosecuted this sends the wrong message.

At the same time, the PAC scrutinised issues around the IR35 rules on off-payroll working. The PAC is concerned that HMRC’s approach to tackling IR35 is deterring legitimate economic activity, and that a lack of confidence in how to apply the rules, together with HMRC’s tough approach when taxpayers make mistakes, is unnecessarily putting companies off using contractors.

Dame Meg Hillier MP, Chair of the Committee, said: “Almost eight years have passed since our Committee challenged HMRC over its telephone lines’ holding message being one of the most streamed pieces of music in the country. Our latest report into its performance sadly illustrates a continued tale of decline in its services.

“Our report also poses serious questions as to whether HMRC is getting the balance right between its civil and criminal prosecutions. Our findings show a steep drop in the latter at the same time as we see HMRC going to great lengths to challenge people in court over their employment status. Our Committee has heard the frustration felt by the many taxpayers and organisations who provided evidence to our inquiry loud and clear. HMRC would be well-advised to do the same.”

PAC report conclusions and recommendations  

HMRC’s customer service levels are at an all-time low because of conscious choices made by HMRC and HM Treasury. Since we last reported in January 2023, performance has continued to deteriorate, particularly for telephony services. In 2022-23, 62.7% of callers waited more than 10 minutes to speak to an adviser, up from 46.3% in 2021-22. Demand for HMRC’s phone and post services is increasing by more than 10% a year, driven by increases in the number of people paying tax, due to fiscal drag, and the complexity of their tax affairs. HMRC says it does not have the resources to meet this demand at expected service standards. It is instead insisting callers use digital services where they are available, and is closing helplines and redirecting callers to online guidance. HMRC insists it has good-quality digital services for customers to manage their taxes but this is not the experience shared by the taxpayers and their agents that got in touch with us.

Recommendation 1: HM Treasury and HMRC should ensure HMRC’s customer services are sufficiently resourced in the short as well as the longer-term so that it can meet its service standards until its digital services adequately address the needs of taxpayers and their agents.

While we recognise the progress HMRC is making to tackle tax debt, we are concerned that it should have sufficient checks to protect taxpayers from being pursued too forcefully. HMRC says it has now worked through the debts created during the pandemic but still new tax debt is being created at record levels, driven by self-employed people and small businesses in financial difficulties. It is reassuring that HMRC appears to be staying on top of these new debts, with the debt balance expected to reduce slightly over the course of 2023-24. It is also positive that HMRC is driving more value from the external agencies it uses to collect debts, with the rate of return improving from £23:£1 to £32:£1. However, we have heard about cases where taxpayers are being pursued repeatedly for often trivial amounts. While HMRC should make every effort to recover its debts, this should be proportionate to the size of the debt and the circumstances of the taxpayer. We are not convinced that customers have an easily accessible and responsive route via which they can raise concerns about HMRC’s debt collection activities.

Recommendation 2: HMRC should:

1. a) establish a clear, easily accessible route for taxpayers to report issues they face when dealing with debt collection agencies working on behalf of HMRC; and
2. b) report back to the Committee with a summary of any issues raised and how HMRC has dealt with them.

HMRC is not taking seriously enough the distress caused to innocent citizens when companies use the wrong address to register their business. One particular case involved a taxpayer receiving more than 10,000 letters due to an agent registering companies for VAT at the taxpayer’s address rather than a serviced office that shared the same postcode. Despite this Committee repeatedly raising this case, HMRC was unable to prevent further letters being sent out to the wrong address, including demands for payment, and even now HMRC cannot guarantee further letters will not be sent. We are concerned that there will be other cases not brought to our attention that remain unresolved. These cases create particular distress for innocent citizens receiving these demands for payments, and an extraordinary amount of time and effort to resolve with HMRC. While HMRC considers this particular case to be a “bizarre accident”, it accepts there is a more widespread issue with bogus registrations from companies seeking to defraud HMRC. It expects new powers for Companies House will help the entire system tackle this issue.

Recommendation 3: We expect HMRC to take serious action against companies registering with the wrong addresses. HMRC should report back to us the Committee on:

• the scale of the issue and the level of tax at risk; and
• its plans for ensuring innocent people do not suffer from bogus registrations and HMRC’s demands for tax from the wrong people.

We are concerned that HMRC’s approach to serious abuse is not deterring criminal activity sufficiently, while at the same time its approach to tackling IR35 is deterring legitimate economic activity. HMRC says that it is increasingly focusing its criminal prosecutions on the most serious cases, with the number of criminal prosecutions falling from 691 in 2019-20 to 240 in 2022-23. But we are concerned that if fewer criminals are prosecuted this sends the wrong message. In the case of civil disputes over the application of IR35 rules, HMRC said that it has been using litigation through the courts to test the employment status rules and that it may need to update its guidance and tools on the basis of the courts’ judgements. HMRC said that the reforms to IR35 shift the burden of determining employment status from workers to employers. Since the IR35 reforms, employers have moved between 150,000 and 200,000 workers from contractor status onto their own payroll. However, we are concerned that a lack of confidence in how to apply the rules, together with HMRC’s tough approach when taxpayers make mistakes, is deterring companies from using contractors unnecessarily.

Recommendation 4: HMRC should:

1. a) provide to the Committee further detail of the value of tax at stake in cases of criminal prosecutions in recent years and further explanation of how HMRC is using fewer prosecutions to achieve greater deterrence of egregious non-compliance;
2. b) provide to the Committee the number of active litigation cases for IR35 and the amount of tax at risk; and
3. c) assess the impact of HMRC’s approach to administering IR35 reforms on the use of contractors in different sectors.

HMRC has been too slow to identify the scale of error and fraud in research and development tax reliefs and its approach to tackling offenders does not sufficiently target those committing serious fraud over those making honest mistakes. We have been highlighting the risk of error and fraud on these schemes for a number of years. HMRC has improved its methodology and now has a more accurate picture of the level of abuse. Its estimate of error and fraud on the schemes in 2020-21 has more than trebled, from £336 million to £1.1 billion. On the scheme for small- and medium-sized enterprises, it has found one-quarter of the value of claims were non-compliant. However, HMRC’s approach to recovering this error and fraud is too passive and places too much reliance on companies correcting their own previous mistakes. We are not convinced that it is bearing down strongly enough on those companies, and the agents representing them, that have been consistently abusing the system.

Recommendation 5: Now that it understands the true scale of error and fraud, HMRC should ensure it goes back over previous years. This should involve:

• going back sufficiently far to tackle egregious fraud; and
• telling those businesses who made honest mistakes to correct their returns or risk investigation.

HMRC’s reliance on the tax gap measure is not providing a sufficiently stretching target for its compliance performance. The tax gap is subject to a variety of factors, not just HMRC’s compliance performance, and its relationship to compliance yield is not straightforward. In 2021-22, the latest year available, HMRC estimated the tax gap had remained at 4.8% of all liabilities, despite compliance yield as a proportion of theoretical tax liabilities declining in that year. The lag in measuring the tax gap means that HMRC must pay closer attention to compliance yield as an indicator of performance in the short term. In 2022-23, HMRC’s compliance yield was £34 billion, against a target of £36 billion, set at a level to maintain the tax gap. HMRC expects to miss its compliance yield target again in both 2023-24 and 2024-25, and identified inflation as negatively affecting its performance on compliance yield. We are concerned that HMRC places too much reliance on the tax gap measure to justify its performance, rather than focusing on achieving its compliance yield targets, which are a more direct measure of its performance.

Recommendation 6: HMRC needs to demonstrate that its compliance yield target is sufficiently ambitious to provide stretch in HMRC’s performance each year and to take account of inflation in the tax base.