HMRC needs to do more to tackle VAT fraud, step up its anti-avoidance activities and improve its customer service, according the National Audit Office (NAO) report on the department's 2012-13 accounts.
The NAO qualified HMRC's resource accounts for the period because of material levels of error and fraud in the payments of personal tax credits. In 2011-12 (the latest year for which figures are available), HMRC overpaid between £1.9bn and £2.3bn to claimants, and underpaid between £170m and £360m. However, the 2011-12 estimate of error and fraud is 7.3%, the lowest since the current personal tax credits scheme was introduced.
Tax credits debts stood at £4.8bn at 31 March 2013 (up £0.8bn from a year earlier), and HMRC analysis suggests that only 31% of the balance is likely to be recovered.
The tax gap for VAT in 2010-11 was £9.6bn, or 30% of the total estimated tax gap of £32bn. NAO said that while HMRC had prevented £579m of erroneous and fraudulent repayments in 2012-13, it does not carry out comprehensive real-time checks across all VAT returns. The watchdog is also concerned that HMRC is not reacting with sufficient urgency to the emerging threat of VAT losses due to online trading.
The NAO said HMRC had met its target to be operating a normal PAYE service by March 2013, and the stabilisation process had cost less than expected, at £78.9m compared to an initial estimate of £80.9m. However, an estimated £953m of tax has been foregone, relating to tax years 2003-04 to 2009-10, to keep workloads manageable.
The financial and accounting systems supporting RTI are not yet fully accredited because of a number of issues around producing and reporting financial information on PAYE. The NAO wants HMRC to address these weaknesses 'urgently'. It also cautions that the RTI programme budget does not include contingency for any significant extra development costs, even though some system functionality such as end of year returns is still being tested.
Amyas Morse, NAO head, said there were 'inherent tensions' in reconciling HMRC's priorities of improving the customer experience, reducing operating costs and increasing tax revenue.
'We have found good progress by HMRC in reducing costs and meeting its revenue targets. In respect of raising customer service levels to an acceptable standard, it has a much longer way to go. HMRC faces a considerable management challenge if it is to meet its commitments to increase revenue by stepping up its anti-avoidance and anti-fraud activities. It needs to strengthen its own efforts in tackling avoidance. But it also requires the help of legislators and changes in international tax rules, if it is to respond effectively to the "borderless" internet world,' Morse said.
In 2012-13, HMRC received total revenue of £475.6bn, £1.4bn (0.3%) more than in in 2011-12. Corporation tax revenue decreased by £0.9bn. VAT revenue increased by £1.4bn. Tax revenues for income tax and national insurance decreased by £0.8bn. The value of debt either written off or remitted during the year was £5.3bn.
