Oral evidence: Tackling tax fraud: how HMRC responds to tax evasion, the hidden economy and criminal attacks, HC 674

Oral evidence, 13 January 2016.

Witnesses

Dame Lin Homer, Chief Executive and Permanent Secretary, Jennie Granger, Director, General Enforcement and Compliance, and Simon York, Director, Fraud Investigation Service, HMRC, gave evidence.

Chair

Welcome to the Public Accounts Committee on this 13 January 2016. I welcome our witnesses. Congratulations on your damehood, Dame Lin. We are interested to hear your other news and we will not say goodbye to you just yet because you will be in front of us a fair few times before you depart for other ventures. Today, we are looking at the National Audit Office Report into tax fraud. Our witnesses are Jennie Granger, director general of enforcement compliance at HMRC; Dame Lin, permanent secretary and chief executive of HMRC; and Simon York, director of fraud investigation. Before touching on those bigger areas, clearly it is vital to deal with fraud because every pound that is not brought into the Exchequer must be found from taxpayers in another way, so we are behind you in your task of achieving that, but we want to question how well you are doing and whether you could be doing better. If you will indulge me, I want to touch on a couple of issues before going to the main report. Just before Christmas, The Guardian did a very good investigation around Sports Direct and its staff having to do other things, such as being searched on the way out, which meant that their salaries or wages allegedly went below the minimum wage. It was widely reported, Dame Lin, that a direct allegation by an employee would trigger an HMRC investigation. Is that true?

Dame Lin Homer

No, it is not entirely true. We absolutely ensure that any allegation by an employee will be investigated, so if an employee comes to us we will always follow it up but, as in so much of what we do, regardless of where information comes from, if it seems to have any signs that would warrant it, we would investigate. In any case where we pick up information from wider sources that looks credible, we follow it up. That area is also under Jennie’s responsibility, so if you would like a bit more information about the number of cases we have done this year, she will be able to give it to you.

Chair

I think we would because—I know you don’t wish to talk about individual companies—any information you can give us will be welcome. We have had evidence from Unison with real concerns about home careworkers and the long-running issue about not being paid for travel time, which means effectively going below the minimum wage. That has been a regular concern for many people. Jennie Granger, perhaps you would explain what HMRC is doing about these pretty wicked workarounds, which hit hard some of the poorest paid workers in this country and mean that the big corporates are getting off paying their dues. Perhaps you would explain what is happening.

Jennie Granger

First of all, as Lin said, we follow up on 100% of employee complaints and we are in contact with an employee on a complaint referred to us on the helpline within five days. We are much quicker off the mark than we have been in the past in relation to that. So far this year, we have helped 46,000 workers—a hugely big increase—

Chair

Is that 46,000 individual complaints or a multiple?

Jennie Granger

No, it’s how many—

Chair

So if I complained on behalf of a group of workers, would you count the group in that, or the individual complainants?

Jennie Granger

We count the workers whose arrears we have been able to adjust in that figure.

Chair

Right, so it is not 46,000 phone calls you have had.

Jennie Granger

No. To give you an idea of that, about 1,000 individual complaints have come through this year so obviously we do a lot more work.

Chair

So far in this financial year.

Jennie Granger

Yes. So far in this financial year, 46,000 workers have had £8 million recovered. That was by this Christmas. To put that in context, by last Christmas, it was 26,000 workers and £3 million. We have upped the level and we have done that through a mixture of improving our approach to and how quickly we deal with complaints. We have also started to trial some of the strategies that you are more familiar with from our tax work around campaigning in particular sectors—you just touched on one. Our very first campaign has been in the hairdressing sector, because that has a lot of apprentices. That approach is basically a warning—“Come clean now and approach us.” We also encourage self-correction, and not just through the campaigns. Where we find particular problems, we then ask employers to go back and look at what else they need to improve in their systems across the board. That is why we are finding we are able to get a greater impact in what we are doing. On medium and large employers, just to put that in context, about 30% of our investigations at the moment are on large and medium employers, but basically, whether it is a big or small company, temporary or full-time employees, if you complain, we will act on it.

Chair

To be clear, how many investigations have you undertaken because a third party has reported it? As I say, The Guardian did a thorough investigation. It seemed there was clear evidence. Surely something like that would warrant an investigation as well. How many of those have you done?

Jennie Granger

I do not have a separate split for how we got the intelligence. I can tell you that we follow up on 100% of employee complaints, which is part of our agreement for prioritisation with BIS. With third-party information, what we would typically then do is be in contact with both the employer and the employees, because obviously that is more indirect information. We welcome information from any source.

Dame Lin Homer

Sometimes it will come from more than one direction, so we may well have a number of individual employees and some third parties. Obviously, that gives us a different and a better spread.

Chair

One of the characteristics of the case I highlighted was that people were treated very poorly by their employer in a very humiliating fashion. It is quite a risk for an employee who is low paid in an area where there may not be other jobs they could easily get. What support and protection do you provide for someone who is effectively a whistleblower for a big corporate or any employer breaking the law?

Jennie Granger

We do deal with those situations, and we will treat that complaint confidentially and take a broader approach when going in, so that it is not obvious where the complaint came from, where we can.

Chair

Do you do any monitoring of the impact on employees after an investigation has been what you would call successful, which is when the employer has had to pay up?

Jennie Granger

There is—I don’t have the detail on this—a level of going back and testing the systems later on, but that is not at the individual employee level. Obviously, if there is a further problem with the minimum wage, which is what it is about, they can complain again, and of course we will go back in if that is the case. I should add that there are some quite stiff penalties for employers, as you will be aware. It is basically 100% of the arrears that we have found, and in fact that is about to be adjusted up to 200%. The only mitigation for that is if you pay up fast, within 14 days. Our experience is that most employers do co-operate and adjust quite quickly. The issue is often working out the facts between both the employees and the employers.

Chair

Can you give us some examples of typical fines, even if you cannot name the companies concerned, that have been coughed up for 100% of arrears?

Jennie Granger

So far this year, there has been about £1 million in penalties across the piece.

Chair

That is the total fine?

Jennie Granger

And the reason that that is less than the £8 million in arrears is that we are actually getting a lot of willing self-correction now, which we see as a benefit. We can get employers to pay up with bigger impacts.

Chair

I have to say that that is not a great deal of money in the grand scheme of the Exchequer. If I were a bad employer, trying to bend or break the rules, is that enough of a disincentive for me to do that?

Jennie Granger

Leaving aside the monetary value, a 100% penalty is a fairly strong penalty. As I said, it is about to go up to 200%.

Chair

We may well come back to this, because it is a big concern. We, as MPs, get concerns about this. I know that the trade unions do as well. Presumably you would respond to a trade union inquiry if there were a concern from a trade union—just to be really clear—as a third party.

Dame Lin Homer

We have talked with you before and we may well talk again today about the fact that we take information directly from many sources over all of our compliance work. Simon, who is responsible for our fraud investigation, uses a wide range of resources. I write a number of letters to MPs where whatever the source is, we are not always at liberty to come back and give running commentaries on cases to the people who provided information.

Chair

We will be moving on shortly to the issue around prosecutions and how you deal with this. One of the concerns we have is that where someone voluntarily complies, that is never made public because they have no interest in doing that and you cannot break their confidentiality, but, where there is stiff prosecution, that is in the public domain. We believe, as you know, that that is a big deterrence. We may want to probe further about how often you go back to check that people have not been slipping back into their bad habits.

Jennie Granger

Very happy to provide more information. One more point that I am sure you will be interested in is that as soon as there is more than £100 of arrears, then BIS has the ability to name that employer—

Dame Lin Homer

And they do.

Jennie Granger

They do. So there is quite a low threshold. Also, one of our priority programmes is the care sector, which you have mentioned to us. We have checked about 20% of that. We started with the big players. We are doing a range, but we are looking at that sector quite carefully.

Chair

We may well come back to that, because that sector certainly is a big concern. It is very difficult to monitor, given the small scale of some of the employers, and in the relationships and domiciliary setting in particular it gets quite tricky. We understand that, but it is vital that the minimum wage is implemented properly, because it has such a huge impact on people’s lives. When we met in March last year, we talked about HSBC and the Swiss prosecution. You will be aware, Dame Lin, that last week the Financial Conduct Authority announced that it was choosing not to take any disciplinary action on this. If you look at today’s Report, page 32, paragraph 3.11, the NAO says, “The main reason why prosecuting authorities will not prosecute a case is because the evidence is insufficient.” Do you think your evidence was insufficient for the FCA to proceed?

Dame Lin Homer

I think we have had this conversation before. I do not think it is for me to comment on another organisation’s decisions, but what we have tried to explain to you—again, Jennie and Simon are very deeply involved in this—is that we will consider the whole range of options. First of all, as a number of your Committee members know and understand well, the threshold for a prosecution is different for civil: the quality of the information in terms of completeness, timeliness and ability to affirm it—all of those things are taken into account. We go through a very rigorous procedure with the CPS—we are not a prosecuting authority in our own right. We share information with them early and we take their advice. We currently present to them cases we are considering before a final decision to charge and we take their advice on whether we can strengthen that. At the moment, we probably present a reasonably accurate proportion of cases to the CPS. They do not turn many down, but none the less there are a number where they still tell us, “There is not sufficient evidence to proceed.” So it is always about the quality of the evidence in the round.

Chair

But you provided evidence to the FCA.

Dame Lin Homer

The FCA is a separate organisation. It has different powers. We have been sharing data—

Chair

So you have been sharing data. That is the point I was asking you about.

Dame Lin Homer

But their decisions about prosecutions I am sure will be similar to ours, but they will be made by themselves.

Chair

Sorry, but you did provide them with information? I just want to get that clear.

Dame Lin Homer

Yes.

Chair

I will hand over to Stephen Phillips on this point.

Stephen Phillips

I do not want to stop Mr York from giving his evidence but there was a sharing of information between HMRC and the FCA in relation to the latter’s investigation—is that right?

Dame Lin Homer

Yes. Just for me to answer before I hand over to Simon about how we work, I think it was on the last occasion we were in front of you that we had had agreement from our French colleagues that we could use the information we had had from them for wider purposes. We have both been working with our French colleagues and with colleagues here.

Stephen Phillips

Yes, we remember that, Dame Lin. What you said initially was that the French authorities had prevented you from using the information to mount criminal prosecutions and what we then heard from the French authorities, via another source, was that that was not the case at all.

Dame Lin Homer

I would rather not argue about absolute semantics. We did not say that they had prevented. What we are being clear about is that we were given the information for a particular purpose; they then agreed to widen that.

Stephen Phillips

The FCA was carrying out, as I understand it, a regulatory inquiry, not an inquiry with regard to whether or not there should be any prosecutions. As we learned early this year, that investigation resulted in no action being taken against HSBC, and that decision was communicated to the bank several months ago. It didn’t come into the public domain. When did you learn that the FCA were not going to be taking any action in this regard?

Dame Lin Homer

I might refer that one to Jennie.

Jennie Granger

Yes, we have been in contact with the FCA. They say that they have made no formal statement in relation to HSBC, and that they will continue to work to ensure they address any current practices in the culture of the bank that need addressing.

Stephen Phillips

In other words, in the context of a regulatory inquiry, they decided that no further action should be taken and washed their hands of it. The sources who spoke to the media last week, when it finally emerged into the public domain that the FCA are not going to do anything, basically put the ball back into your court and said it is for HMRC to conduct any investigation that might lead to a criminal prosecution. Are you doing that?

Dame Lin Homer

We have been through this in some detail with you before. We have always—

Stephen Phillips

It is a very simple question, Dame Lin. Are you conducting a formal investigation that may lead to a criminal prosecution of those responsible within HSBC for the oversight of its Swiss subsidiary? Yes or no.

Dame Lin Homer

We always consider criminal proceedings when there is evidence. We told you on the last occasion that we have not received information that we thought was likely to lead to criminal prosecutions based on the data. We had another look, and we think it unlikely that there will be prosecutions coming out of the Falciani data.

Stephen Phillips

When did you have that further look?

Dame Lin Homer

We have been doing it continuously, and we will continue to keep an open mind. If you would like Simon to give you a bit more information about the work we have done with the French since we were in front of you last spring, we are happy to do that.

Stephen Phillips

Let me help you out. I, and I suspect most, if not all, members of this Committee and most Members of Parliament, find it extraordinary that a bank that is domiciled in this jurisdiction, with oversight of its Swiss subsidiary, has had no action whatever taken against it, either by its regulator or by you, who are responsible for investigating it and passing papers to the CPS to conduct criminal prosecutions if appropriate, in relation to the events that we heard about last year when they came into the public domain. HSBC was essentially advising, through its Swiss subsidiaries, investors to evade tax in this country.

Dame Lin Homer

I can make no comment on your opinion. We have to progress on the basis of what we and the CPS think is possible.

Stephen Phillips

Right. Now, you said that the investigations are ongoing. Is that right, Mr York?

Dame Lin Homer

Our analysis—

Stephen Phillips

Sorry, Dame Lin, I’m not asking you. I’m asking Mr York, whom you said was responsible.

Simon York

We have been working with that data and all the information we have around the people who featured on the HSBC list and any other entities involved in that for some time. We do not have a current criminal investigation, in relation to any entities connected with the data.

Stephen Phillips

Well, there it is. It looks as though they have got away scot-free.

Chair

Can I move on to another issue, just before we get into the main Report? Since we last saw you, you announced a major programme of office closure and reconfiguration. I think you announced that in the middle of November.

Dame Lin Homer

The middle of November, yes.

Chair

I think I am right in saying that you plan to close 137 by 2027 and 50 by 2017. Given all the things you are dealing with, in terms of digital tax, the cutting of staff and the reshaping of the workforce, there is a lot on your plate. I want to ask you a couple of questions about that, bearing in mind that the NAO will be looking at the estate management in HMRC and reporting to us in the autumn. I don’t know whether Dame Lin or Jennie Granger should answer this. One of our concerns is about the loss of experienced staff. If you are closing offices in some areas and regrouping into regional centres, not every member of staff will relocate. Isn’t there a concern that if the highly experienced staff are lost to HMRC, that will affect the ability to collect taxes?

Dame Lin Homer

That is absolutely one of the considerations we took into account in producing out plans. We have had an ongoing couple of decades of estate and location consolidation. When HMRC was created 10 years ago, there were about 530 offices.

Chair

Can we talk about the plans before you, because of the time?

Dame Lin Homer

This is not new territory for us. The need to plan the next five to 10 years comes because we are approaching the end of our long-term PFI. A number of the longer-term Committee members have probably sat around and discussed the STEPS contract. We are in a position where, by 2019, we must make decisions about which of those leases, if any, we continue, and, if we don’t, where we go, so this is the right point to make decisions about the future. We have proposed a consolidation into 13 regional centres, but we are stepping towards that for exactly the reason you have indicated: we want to ensure that we give staff as much chance to continue working with us as possible.

Chair

When you say as much chance—

Dame Lin Homer

I was about to explain the numbers. Everyone has a choice to make. One of our challenges is that a significant proportion of our workforce is over 50 and, indeed, over 55, particularly some of Jennie’s staff. We are aware that people might choose not to move, but we believe that more than 90% of our workforce are within reasonable daily travel. We have proposed arrangements to give reasonable daily travel assistance to those people, and we will undertake one-to-one discussions with all staff so that they can think about that. We have also indicated that we are very happy to consider arrangements. One way in which we are most successful in holding on to our slightly older talent is partial retirement. A number of our experienced tax investigators are increasingly choosing, as they reach beyond 60—indeed, some beyond 70 in Jennie’s area—to stay working with us, but possibly only two or three days a week, instead of the five days a week that they have worked previously. We are very keen that we do not face a cliff edge because of the demography of our people, or the locations, but we do think that this is one of the things that will allow us to give the quality of office accommodation, technological support and training that will make us a strong organisation.

Chair

I understand you are proposing to have 8,000 staff based in Stratford, in what we might call central London, but you might call east London. Those of us from east London might call it central. Is that right—yes or no?

Dame Lin Homer

Yes—well, we are open-minded about location to the extent that we don’t want to get to the point where only one developer can serve our needs, but we think it makes much more sense for HMRC to have a couple of big bases on the edges of London, not in the most high-priced, very central London locations.

Chair

You say that, but Stratford is pretty pricey, what with the channel tunnel rail link. As an east London MP, I know that.

Dame Lin Homer

Not compared with many of our existing offices.

Chair

Okay, but 8,000 people in Stratford compared with Portsmouth—I think Portsmouth was on the list for closure and it is within striking distance of London. I will not read them all out, but I have a list of offices for closure.

Dame Lin Homer

The numbers in London will go down under this arrangement, but not substantially, because London is the big trading centre of the country where a significant amount of business is.

Chair

My point is: will there be people based in Stratford dealing with, for example, tax issues in Portsmouth?

Dame Lin Homer

I will hand this question over to Jennie. We already deal with enforcement as a national business, so this is a current, not future, challenge.

Jennie Granger

As Lin says, one of the challenges—

Chair

First, can I repeat the question? Perhaps Portsmouth is not the right example, but will people based in Stratford be dealing with tax issues for businesses and others in other parts of the country outside London?

Jennie Granger

There are already people in London or in any of our offices who deal with national issues. That is the way of the world. Businesses these days are as much on the internet as they are anywhere else.

Chair

But they always have someone local to speak to—because of the local offices, there is a local connection.

Jennie Granger

No. In fact, we actually get to more places locally through our taskforces than by having very small numbers of people based somewhere. In some places, I have only five people, and they are very much locked into a little local area. Taskforces are being deployed from a number of regional centres around the country, which allows us to be in more places, physically, than we can be at the moment. As Lin said, one thing we are doing is that, if we did this based only on risk, we would be concentrating people in London and the south-east ahead of everywhere else. Our belief that we can deploy nationally and deal with more things when we need to go out physically from a number of places is what is leading us to say that we will build up in a range of regional centres.

Q37Chair

Where will these field officers be based? Will they have to stay in hotels or something?

Jennie Granger

No. We worked through, extremely carefully, where all the regional centres are to ensure that we can deploy to most places around the UK, according to risk. That is the whole point about agility: being able to follow where we need to and, to be honest, to keep people guessing a little about where we might check next. At the moment, we telegraph very strongly, by how we are locked in geographically, what we are focusing on.

Chair

Will these new offices—the new regional hubs—open before or after the local offices have closed? You mentioned, Dame Lin, the STEPS programme. There is obviously pressure on parts of the estate right now. We know that much, so will those offices close before the regional hubs have opened?

Jennie Granger

There is a very carefully thought through programme, and a lot of it has been driven by working through how I retain many of the experts that I need to make sure that we can make that switchover. We expect many of them to retire, so we bring on new people or they come with us. Yes, it is timed around when leases end and when they move. As we stand up regional centres, if people want to move sooner, I would personally like to move them in sooner, because I can give them better kit, better tools and better access to experts than they can currently get remotely in tiny groups. But it has been thought through very carefully to try to minimise that. As Lin said, I have more than 50% of E&Cs over 50; in fact, I think it is closer to 80%. It is getting younger, because we have been recruiting. The bigger challenge for me is the generational change that we are going through, but we have worked through this in such a way as to minimise the property costs, because I want the money to go into the new tools and kit that my teams need.

Chair

This will come out when we hear the evidence based on the NAO’s autumn Report, but there will be issues, I guess, with leases coming to an end in relation to Mapeley Estates. They may have to be renewed before the regional centres are ready. Is that factored in to your planning?

Dame Lin Homer

We know when all our leases end, so that won’t surprise us.

Chair

But will the regional hubs be ready? It is very difficult to get these things to align.

Dame Lin Homer

This is part of our planning and part of the negotiation. We are clear that we are going to move in the majority of cases, but we are also potentially going to renew some leases, and we are confident that we can both save money on property—I would rather spend money on Jennie’s staff than on property if I can do that—and provide better technology and better training. Yes, we think this is a manageable plan. It is a 10-year plan; we are not trying to do this at breakneck speed. We have signalled to people not only the final regional centres but the transitional centres. Some of our folk who might only be working for us for another two, three, four or five years might choose to work out of a transitional centre rather than move all the way to a new centre. In the north-east, there is a very interesting dynamic. We will keep for quite a long time Waterview Park, which is south of the river and which will, we hope, form a base for a significant number of the people from some of the smaller sites in the north-east that will close. So we have sought to be very thoughtful, and as I say, once we have one-to-one discussions with staff, we will adjust as well as we can, in terms of what we can do for them, to try to make sure we keep our valuable staff as long as they want us to.

Chair

We will be watching this—

Dame Lin Homer

So will Jennie.

Chair

One thing we may share, even though it may not seem so from your side of the table, is that we want compliance to work, and to work well. Good, experienced staff, in the right places, doing the right thing is what it’s all about. I am going to ask Deidre Brock to come in, and then Chris Evans briefly, and then we will move on to the main hearing.

Deidre Brock

Dame Lin, there is a lot of concern in Scotland about these proposals. You will be aware of that, I am sure. It is rather ironic that before the independence referendum, we were told that HMRC jobs would be under threat if Scotland became independent, and now of course we are being told that most of the offices in Scotland will be closing, and 2,000 jobs, I think, are potentially under threat. A big concern has been raised about the closure of the Inverness and Aberdeen offices. What are your arrangements for people in Shetland, in Orkney and in the far north if they are looking for face-to-face help? Unlike a lot of the UK, we do not have superfast broadband, so the ability to access things online is reduced. Can you tell me what those arrangements will be?

Dame Lin Homer

Our position on Scotland is that we see it as continuing to be one of the regions we have our biggest presence in, so although the numbers will reduce—I am sorry, I do not have the absolute numbers for every region in my head today—Scotland will still have a bigger proportion of our staff than the relative population proportion. So we see Scotland as a significant base for HMRC for the long-term future. Our plan there is the same as elsewhere: we do intend to consolidate and concentrate in Glasgow and Edinburgh. It will mean the closure of a number of smaller offices in Inverness, Aberdeen and Dundee. Those are timed, we think, to be manageable. Scotland, like other areas that Jennie described, will be subject to forms of support, and the support that we call compliance, as is appropriate. For instance, we do not wholly manage the oil and gas industry in Scotland with people based literally in and around the oil and gas industry now. More and more of our support is by telephone and online—and will be. I do not think we currently have offices in Shetland as it stands, so we are proving that model already with Scotland. So it is about a commitment to Scotland, both to investing in highly skilled staff and investing in the right support for customers, and an absolute assurance to you all that evaders and criminals in Scotland will get just as much of Jennie’s attention as anyone else.

Deidre Brock

There used to be a tax office in Wick, but I believe you closed that some years ago.

Dame Lin Homer

We tried a number of innovative things in Wick. That was one of the examples Jennie just gave. I think we had six people in Wick by the time we closed it. It is very hard both to support them and to give them meaningful career opportunities at that kind of scale.

Chris Evans

One of the biggest issues that I have relating to the tax office in south Wales in my constituency is businesses telling me that the tax office simply does not pick up the phone. There is a proposal to close the tax office in Llanishen. I have lost count of the amount of times that people have fallen foul of HMRC rules simply because when HMRC does answer the phone, the case disappears into the abyss, and the next thing the business hears from it is some sort of summons through the post. It is then corrected through a byzantine system of me writing various letters to all sorts of people. With the closure of Llanishen, will Welsh taxpayers have the same level of high service—I say that with all sarcasm—that they have been having from HMRC recently?

Dame Lin Homer

We do not answer the phone from the local office, so the closure of our smaller offices does not impact on our call handling directly. I am sure your question might be one of a number I get on customer service. When I came before you in July, I told you then that we had had a bad first quarter. I had already apologised to the public for that. What I would say is that we were quick and effective in recognising that we had created poorer customer service than was acceptable. We took early, and I think very effective, action. In the second quarter we remedied the position, and over the quarter our performance was broadly equal with our performance last year. We have just completed the third quarter, and we have been answering 81% of our calls with six-minute waits. I believe that we are in a very good shape for SA, which we are just a few weeks away from now. Indeed, if I could make a quick advertorial, we are going to be doing a House of Commons digital teach-in next Wednesday to assist MPs if they would like to access their digital account. I think that last year, we moved you online for the first time. I do apologise again for that bad first quarter, but I have to say that the changes we are making are enabling us to serve customers better and better, and I think we are heading into the kind of territory that you as a Committee have wanted us to be in.

Stephen Phillips

It’s not really better and better, is it— 81% of calls answered within six minutes?

Dame Lin Homer

Yes, I think it is. When you have plans—

Chair

Dame Lin, if I can just interrupt for a minute, Which? did a survey last September, and just at the point when we were hearing that things had been getting better, it showed a very poor service, so it seems to us that it goes very much up and down. You come and tell us it has got better, but then we hear “Another bad quarter”. The lack of consistency is one of the issues.

Dame Lin Homer

I think consistency is absolutely one of the things that we are keen to drive at.

Chair

But you would acknowledge that it is not a consistent or good service at that—

Dame Lin Homer

I will acknowledge that it is not a consistent service. I think that a lot of the time it is extremely good and some of the time it is not. We have tried to be very honest about that. One of the ways we think we can make it better in the future is with the more routine questions—it is incredibly frustrating to wait even for six minutes on the line just to tell us you think your tax code is wrong. So one of the reasons for our plan to offer online services is really to allow customers greater choice about what they do, but while we are moving to give that choice, it is important that we improve services as much as possible. We have had a number of Reports from the NAO into customer service particularly, and when you deal with 45 million customers there will always be some that you fail—there are times of day and times of week that are not as good as others—but I do think that we are improving our service.

Chris Evans

It is all very well you stating statistics at us about how you are improving, but I have had a mountain of cases that I could present where people have spoken to the tax office on the phone thinking that action is going to be taken in their case, but they have disappeared into the abyss. The next thing they have had is a letter on their mat that is either a summons to appear in court or a massive tax bill. They then try phoning again and can’t get through. They are coming to me almost in tears, saying, “I don’t know what is happening to me.” We are here to ask you for an answer. What do you say to those people?

Dame Lin Homer

I probably write to more taxpayers than—

Chris Evans

What I am actually asking is: how is it measured that, when you finally get through to HMRC, those cases are being seen to? If I, as a Member of Parliament, don’t follow through on a case, I expect people to come down on me like a ton of bricks.

Dame Lin Homer

Of course. We do follow up. We have a number of measures. We measure the satisfaction with the service when you get through. It is actually very high. A lot of people complain that they wish they got through quicker, but we have satisfaction levels in the 80% and 90% ranges in terms of the service that we give when you get through. Again, I will say that our belief is that, across the range of services, we are improving access. The Chair’s point about consistency is a fair one, and it is one we are working on, but we don’t believe that we will be able to get consistent access until we are able to give people more choice about services. If you have something relatively routine to tell us or to ask, using online services, webchat and our online assistant may well be better. We have a lot of evidence that customer satisfaction with those new approaches is much higher than the traditional phone call.

Chair

We are in danger of getting into discussing customer service. I would just add that this Committee has more letters about HMRC customer service than any other single issue, and we do quite a lot of work on this Committee.

Dame Lin Homer

We are the biggest customer service business in the country.

Chair

Right. The key thing that we pick up as constituency MPs, if I can speak for colleagues, is that if people don’t trust the system, they want to ring up to hear for sure—they are worried about sending out something online, or filling out a form, and getting it wrong, because it is a big issue and a big fine hits them if they get it wrong. I am sure you understand that.

Dame Lin Homer

I do understand that.

Chair

If you give a word of assurance to the public that you are on to this, we can move on to Mr Mills.

Dame Lin Homer

I would like to assure them both that we are on to this and that we have been clear. I will say it again: we don’t use our penalty system to punish people who make an honest mistake. We were clear on that last year. We are slightly damned if we do and damned if we don’t, because I think we were accused of an amnesty when we assured people that if they made an honest mistake and had a reasonable excuse we would not penalise them. What we want to do is to help people get their tax right first time and feel confident. Some of our new online approaches, for instance, give a confirmation number so that people know that they have submitted and that they have a number that they can follow up. That is absolutely where we want to be, alongside you.

Chair

We will pause on this for now. Even if it is not you, Dame Lin, your successor will be here in front of us again on customer service. The Committee would quite like it if we didn’t have to come and have a long hearing on customer service at HMRC. We look forward to that day. In the meantime, I am going to hand over to Nigel Mills, who is going to start our questioning on the Report in front of us on tax fraud. Of course, we should just remind anyone who is interested that tax fraud involves significant losses—around £16 billion a year is your estimate and the NAO’s estimate. Almost half the tax gap is through fraud.

Nigel Mills

How would you assess how HMRC has been doing in tackling tax fraud?

Dame Lin Homer

Actually, I think I would use the NAO’s words, if I may. I thought they captured it rather fairly. In paragraph 2 of the summary, the NAO said: “Tax fraud is a longstanding and intractable problem, not only for HMRC but for tax administrations across the world. Reducing the amount of tax that is lost because of people and businesses acting illegally is a high priority for HMRC.” I think they got that spot on. Our record in this case is good, and indeed the two people either side of me deserve the credit for that. Truthfully, as all tax administrations know, there will always be people who want to evade tax. This is one of those areas where you have to remain vigilant. One of the challenges for us is that some of our effort simply stops this tax gap increasing, and I looked quite closely at the figures here. We have made some progress in reducing the proportion of the tax gap due to criminal attack. At the same time, we have seen the proportion relative to the hidden economy go up slightly, so it feels like one of those fairground games, I am afraid, where you thump one nail on the head and another one jumps up. But we are determined to progress. My two colleagues are experts at not only bringing in new rules that help us, but also using data and investigative techniques to be, I think, one of the leading tax administrations in this field.

Nigel Mills

We know that roughly half of the tax gap is tax fraud. Do you know roughly how much of your tax compliance activity is on fraud rather than avoidance or error?

Dame Lin Homer

I will ask Jennie to answer that, if I may.

Jennie Granger

We can tell you some of the statistics that directly relate to some fraud, for example around the hidden economy. The reason we cannot very finely split out the £26 billion-plus that we collect is because when we tackle issues with the taxpayer, it is usually more than one issue, so we do not split up the yield result so that there is this much due to evasion, this much due to error and this much due to whatever. To put in context why that is difficult—in fact, one of the things on my board agenda for this period is a better case management system that allows me to give finer detail—it is because we do more than a million interventions right across the system. So when you ask us to split up those amounts within a taxpayer action right across all of that, it would fragment things in a way that is not possible for our systems and would lead to a really complicated overlapping of results. In fact, I think you would start to worry about the risk of double-counting things. On the key risks such as the hidden economy, we can tell you what we directly did there, but a lot of our work involves more than that.

Chair

Sorry, there is a problem with the acoustics.

Jennie Granger

I have got a quiet voice; I will try to lift it up a bit.

Dame Lin Homer

I have tried to teach her to bellow, but I have not succeeded so far.

Jennie Granger

I think it is wise in my role, perhaps, to have a quieter voice.

Nigel Mills

In paragraph 13 of the Report, the NAO estimates that about 30% to 40% of the compliance yield comes in relation to tax fraud, which looks a bit out of kilter with 50% of the tax gap being there. Do you think tackling fraud gets the right level of priority?

Jennie Granger

I think we have been putting increasing resource into tackling—

Nigel Mills

That wasn’t quite the question.

Jennie Granger

I know. I am not trying to dodge it; I am trying to think how to help with the answer. First of all, I am going to say something a little bit different. I think that what is very important is a spread of activity right across the system. The reason the UK has been able to sustainably bring down the tax gap and increase the revenues over a period of time is that it does not put all its eggs in one basket. In fact, it is really risky to do that. That is very important. We have given evidence before on what we do around large businesses and what we do in the hidden economy. As I said earlier, a little bit is to keep it moving. This is a system you constantly calibrate. Having said that, we look at the tax gap every single year, and at what the analysis is telling us to help us think about where we need to up the ante and where we might be able to move back a little bit from what we are doing. In terms of activity, we have built our tackling forward activity not just in terms of criminal and civil investigation, which Simon is leading, but also in terms of how we can knock it off at the front. If there is one mantra for the next five years—digital service is part of it—it is, how do we make it easy to comply and tough not to? That is where we are going with our strategies. In an ideal system, you would not need a really big capability in Simon’s area, but I am not moving away from building that. In fact, I am building it up some more over the next five years from where it is now.

Nigel Mills

Do you worry that the survey evidence cited in the Report suggests that individuals at least do not think enough is being done to tackle evasion, and they do not believe it is likely that there will be any prosecutions for evaders? Does it feel a bit hard to go after people who are deliberately breaking the law? Is not quite enough being done?

Jennie Granger

The answer is yes. I would like a further shift in those percentages. One in three individuals and nearly three quarters of businesses believe there is a risk that if they rort the system, they will be caught and prosecute. Those are pretty good perception rates. I think we need to do more work, and we have been doing it, on publicising the consequences and what prosecution means. We do a lot of media on the outcomes of prosecutions—

Nigel Mills

I thought you were issuing fewer press releases on it now.

Jennie Granger

No. In fact, we are the very big part of HMRC and in recent years we have done more and been more explicit in terms of naming. Also, on our website now we have a crime map as well.

Dame Lin Homer

To be honest, we don’t get very much attention for our prosecution successes at national media level, but if you look at your local media you will regularly see lots and lots of cases led by Simon’s people that are being brought to justice in local areas. In some ways, that is where you mass up the deterrence effect, because people think, “It’s a fast food outlet I know, I’ve used and been to”, or, “It’s an architect or lawyer I’ve used”. So the local impact of regional news is very important for us on the deterrence basis.

Nigel Mills

Do you assess the deterrence effect or how you are increasing that?

Jennie Granger

The very big deterrent impact, of course, is how the tax gap is trending. If you have had a look at the publication, you will see that it gives a number of views: how it’s going by tax product; how it’s going by behaviour, such as evasion; and how it’s going by different market segments. That’s the biggest and, if you like, the most strategic outcome. I have already mentioned surveys; people’s perception of the risk of being caught is part of that. On individual projects, we will have a look at how far people are likely to comply as part of that; so, we look at that. We have a monitoring programme for everyone who is levied a deliberate penalty and we do not release that. You can be in that monitoring programme for up to five years and we do not release people from it until we see a change in behaviour, and about half of those eligible for release are released early, because we do see changes. There are perspectives on individual programmes, but why I say that the tax gap overall is the most important way to look at this is because it’s not like for like. There is growth in populations; there is about a 15% growth in microbusinesses over the last five years; and about 40% of new businesses don’t survive the first three years. A very important thing around the hidden economy in particular is that we need to be continually understanding that we have new populations and changing populations. So it’s not just, “I impact on you and therefore that’s the end of it.” And of course your own circumstances change as well.

Dame Lin Homer

I will just give you an “eg” on the evaluation. I am afraid I can’t remember if it was a taskforce or campaign, but after we did our taskforce or campaign on plumbers, the following year 2,000 more plumbers filed their SA forms. That suggests to me that there was a deterrent effect, not only on those people who we dealt with in that campaign but on the sector more generally.

Jennie Granger

I thought you were going to mention our doctors campaign.

Dame Lin Homer

I was not going to mention doctors; I think they are enough in the news at the moment as it is.

Simon York

We got similar results from a number of campaigns. We think we have got strong evidence that there is a deterrent impact. And of course, it is an underpinning principle of criminal justice systems and tax systems across the world that criminalising behaviour, investigating that and prosecuting it does deter people, so we are not on our own here. This is a widely accepted view of the way this works.

Nigel Mills

The NAO’s findings in the Report were that you did not really understand which actions you took worked, which ones worked best and which ones you ought to prioritise going forward. Is that something you would like to know more about, or do you think that is just not possible?

Dame Lin Homer

I am going to say one thing here—this was a bit of the Report we did not wholly agree with. We’ve been through the lot of it.

Chair

It’s an agreed Report.

Dame Lin Homer

We agreed the Report; we did not agree all the opinions in the Report. I think our enforcement and compliance business has been getting more and more strategic; I did not recognise the description of us as being tactical and incremental. But of course we accept that there are more things we can do going forward. My own view is that this business has been getting cleverer and cleverer for some time. There are aspects of the way we tackle evasion, the hidden economy and criminal attacks that I think are leading edge. We are absolutely sure that our introduction of strategic prioritisation of risk, which Simon is leading, will allow us to go further, but we think that this has been based on targeted, prioritised work for a number of years.

Simon York

We deploy a really quite strategic mix of a number of different interventions. Over the past five years or so, we have developed the campaigns that we have talked about, which use a number of features. We have our criminal prosecutions. We use publicity. We educate people. We track people. We publish names of defaulters, and we track people’s behaviour after that. That is quite a sophisticated mix in what we do. In my area particularly, even with criminal attacks, which can be some of the most difficult to deal with, we are looking for the most impactful mix of interventions that we can use. Let me give you an example. When attacks against our repayment systems first started emerging as a significant risk, a lot of what we began to do was to criminally investigate those groups. They are quite sophisticated groups, often based overseas and attacking us using cyber means, so it is really quite difficult stuff to deal with. Once we got to understand what they were doing and how they were operating, we moved into a different mode. It was about the best way to protect our systems—“Let’s prevent those people from getting repayments in the first place, rather than trying to investigate our way out of it.” The way we deploy our resources changes quite significantly over time, and we have been really successful at that. We are having to do far fewer criminal investigations in that area, because we are not losing as much money. We now have sophisticated risking based on what we learn from the criminal investigation. It constantly moves.

Sir Amyas Morse

There is a slight sense of déjà vu about this conversation. What we say in our Report is that you do not understand the impact of some of these activities, which is evidenced by the fact that you carried out research to try to understand it better that has not been successful so far. You are aiming to take a more strategic, selective view, which we also say in our Report.

Dame Lin Homer

You do, and I agree with it.

Sir Amyas Morse

I do not really know what point you are making, to be quite frank. It is really odd. We think you need to understand more. You think you need to understand more. You are doing things to understand more. We are not telling you that you shouldn’t; we are encouraging you to carry on down that road and to not change your mind about it. It is not some subtle criticism. We are just saying that we all seem to agree you need to understand more. I am sure there is some subtle point I am missing.

Dame Lin Homer

I think there is: paragraph 20. I tried to be clear, Chair, that there is a lot in the Report we recognise and a lot we agree on. I do not believe we recognise ourselves as having an approach that is “incremental and tactical”. We have an approach that is strategic. I completely agree with the Comptroller and Auditor General: it can, and I think will, be better still. It is not necessarily a big difference, but I was asked directly and I do not wholly recognise the organisation described in paragraph 20. It is not a big difference.

Chair

Before I bring Nigel Mills back in, we have just heard a lot about the tax gap from Jennie Granger. Overall, the tax gap may have gone down a bit—obviously, it is difficult to agree a figure, but that is the figure we are working on. The tax fraud gap, however, has not gone down a great deal. Overall, the tax gap has fallen 0.9 percentage points from 7.3% to 6.4%. Figure 5, which we touched on, shows that the tax gap for tax fraud has fallen 0.2 percentage points from 3.2% to 3%, so it has been fairly static. Why has the gap for tax fraud reduced less quickly than the overall tax gap? Is that not a sign of failure by HMRC?

Dame Lin Homer

The tax gap has gone down overall. Tax fraud is a description that NAO is using for three areas. We tend to use the labels “hidden economy”, “evasion” and “criminal attack”. Overall, the tax gap has gone down, and as a proportion of that smaller amount, those three elements have slightly varied. I said this at the beginning: criminal attacks have gone down as a proportion of the tax gap, and hidden evasion has gone up. It is broadly flat; it is 0.2 percentage points smaller, which is smaller, and it is a smaller tax gap overall.

Chair

We can quibble about it being 0.2 percentage points, but it is basically flat. Do you agree that it has not gone down a lot? It has gone down less than the overall tax gap. That is a statement of fact.

Dame Lin Homer

I am not overclaiming, but I think I said earlier this is an area that is most at risk of going up if we do not keep our eye on it. I think the fact we have been able, particularly in criminal attacks, to reduce it, is evidence of success, but I would accept this is partial.

Chair

Okay. We would recognise—I think anyone would recognise—obviously people trying to evade tax who are actually seeking not to tell you stuff: it is hard. We know that; but I do not think you can really claim—okay, it’s gone down 0.2%. In any other sphere it is keeping it static: you may count that as a measure of success. We would like to see that go down. I know you would too.

Dame Lin Homer

I would accept we have been more successful in—

Chair

I just think we need to inject a note of reality into the conversation. If we are having a discussion about the tax gap dropping, the bit that we are talking about today, fraud, has not actually really done down. It is at 0.2%.

Nigel Mills

I suppose what I was asking at the start was how much focus you put on tax fraud rather than tax avoidance, but is it not arguable that as we move to being a more cashless society, the hidden economy and that kind of issue should start to get a bit less, and a bit easier to prosecute? Wouldn’t you expect this to be going down a bit, and not up?

Dame Lin Homer

Jennie?

Jennie Granger

I am really glad you asked me that question. Thank you. Partially the answer to the question the Chair raised is that the nature of evasion that we are dealing with is changing; and I would expect that. I would always expect that there will be changes in what we need to deal with as the way people live and work changes. One of our great strengths as a community and also a challenge for us is what digital means. The answer, quite simply, is yes, there are some fantastic advantages for us in the digital age and going cashless, one of which is that we have data associated with that; and we have given testimony before to this Committee about the successes we are getting with merchant acquirer data, which are picking up offshore transactions as well as onshore, because offshore is a big challenge for us. At the same time, I am also seeing digital second sets of books, where you might be using your card to pay for your meal and your transactions go into an offshore account, and the next transactions go into an onshore. You won’t see any difference, but we have to learn to pick that up, which is why we think about data and other things. It does give us some insights. It also gives us some new challenges, and one of them is speed, because the records can be in the cloud and money can move very quickly when we come in to try and deal with people who are trying to avoid us. It is one of the reasons why I am so keen on national approaches and national kit, because we have got to be agile.

Chair

Sorry, can you speak up?

Jennie Granger

Sorry, we have got to be on the net as well as on the street. It is why we have put such huge investment, over the last few years, into developing Connect, and developing our ability to do analytics. It is why I am very keen on the changes we are doing to our systems that will allow us to do more of what Simon has mentioned, about in-transaction risking, to know when our system is being either rorted by criminal attack or when people are being tempted to have a go and claim repayments they shouldn’t, or under-declare. So that is the future. It does give us advantages, but it also gives us new challenges.

Q61Nigel Mills

Right; I think I got an answer to that question. It was a bit of a long one. I suppose people out there would be, rightly, very angry that there are a lot of people who deliberately choose not to pay the tax that they legally owe. We are talking about actual law-breaking here; we are not talking about interpreting the law or trying to be clever. This is just flatly deciding not to pay tax that you owe. I just sense you seem to be doing a lot of clever and complicated things on avoidance, but if I look at the breakdown of prosecutions, the value of risks on income tax, national insurance, capital gains tax and inheritance tax is 42%. Yet prosecutions are about half of that—as a proportion of prosecutions. Is it just too hard to go for these people—is that what we are saying: that it is easier to go for indirect taxes where you catch someone with a truckload of cigarettes, where they have not paid the duty, and that is a kind of easier prosecution? Actually finding people who are cleaning windows or plumbing or all that kind of stuff and just not declaring it is too hard.

Jennie Granger

I think it absolutely is important, as you have said, to do a range across the board. In this last period, we have been building up prosecutions that reinforce and taskforces that look at plumbers and professionals and go right across this. Prosecuting is not the only activity that we do. As I’ve said, we do a million interventions and our taskforces and campaigns brought in £1 billion in revenue last year, which is not small beer. However, we do need to do more. We had an investment in the summer Budget and we will be expanding the complex and wealthy investigations in Simon’s area, which we think is one of the areas where we need to build up more. I want to be clear that we do a range of things, but we use prosecutions to reinforce broader action, because prosecution is not the answer every single time. We need to use it to have a broader effect.

Nigel Mills

Okay, so if we look ahead to the next five years—I guess that it’s not such a problem for you, Dame Lin.

Dame Lin Homer

I don’t know. You could call me back over that length of time.

Nigel Mills

When we get this report in five years’ time, what do you think the level of tax fraud is going to be? We can break it down by the three categories, but do you think it will be lower in cash terms or lower as a share of the economy or do you think it will, if you’re lucky, stand still? What’s the aim here?

Jennie Granger

Our knowledge, analysis and intelligence experts, who have been analysing this, are predicting that we will make some more incremental inroads into the tax gap. I am not brave enough to say exactly what the composition will be, because we need to respond to the conditions that will come through over the next five years. I know that you would like to see huge inroads into the tax gap, but HMRC already has one of the lowest internationally published tax gaps in the world. We are the only country that publishes every single year with this kind of analysis. I expect it to be incremental. Every now and then, we will find something that will help us with a big breakthrough. I believe that digital will help us there. I believe that some of the changes that we’re making—

Nigel Mills

You said that you aren’t brave enough to make predictions, but I assume that when you, as a Department, bid for money and ask for extra resources so you can make more interventions, somebody must be brave enough to say, “If you give us this money, we can raise this amount of money.”

Dame Lin Homer

Yes, we put forward a case on each project. Over the last spending review, we scrutinise it ourselves, the Treasury scrutinises it, and the OBR scrutinises. The Chancellor then funds it. We have just had an investment package of £2.1 billion into HMRC for the next spending review. That is based on both specific business cases in the enforcement and compliance area and proposals around general transformation.

Nigel Mills

I assume that you have targets.

Dame Lin Homer

But your question was specifically about the proportions. I think that both Jennie and I would be disappointed if we can’t maintain the broad trend slowly downwards over a number of years. What I think you are asking us is whether we can forecast the proportions by behaviour, but that is a harder thing to guess. One of the things that Jennie has not said, but which she deserves credit for, is that if we didn’t do as much as we did, we know from our analysis that the tax gap would go the other way. So the question about how much of our effort simply prevents tax gaps from growing is one of the things that we don’t discuss. This is not a question of achieving it one year and then starting the next year with that banked; Simon and Jennie effectively start again every single year. It is a bit like painting the Forth bridge.

Nigel Mills

I get that, but Figure 11 in the Report lists a load of measures announced in the Budget and the estimated Exchequer impact. These are obviously measures to tackle illicit tobacco, illicit alcohol, the hidden economy and wealthy individuals and they end up in that figure of £7.2 billion. I suppose that we might naively think that we could bring an extra £7 billion in and therefore the tax gap could down by something equivalent to however much a year that is. What you are saying is that is not what we will see. We will see more money being spent and you claiming that more money is being raised, but somehow that would not appear in the tax gap calculation.

Dame Lin Homer

No, the tax gap is going down, but you can’t absolutely—

Nigel Mills

We are not totally sure that it is, for tax fraud. That is where we started from a few minutes ago.

Dame Lin Homer

Well, the tax gap overall is going down. Tax fraud is slightly, I will say again—

Nigel Mills

And this £7 billion is all tax fraud.

Dame Lin Homer

—it is now 3% of 6.4, when it used to be 3.2% of 7.3. The position we are in is that we do think we can ensure more money stays in the Exchequer’s coffers, but some of what would happen if Jennie and her team were not on the ball is more money would be lost. The tax gap is not a static thing; it could go up as well as down. Some of our effort prevents it going back up, and some of it reduces it further. OBR actually now try to separate out those two things.

Nigel Mills

In the past period, you had a target of £26 billion—

Dame Lin Homer

Which we exceeded.

Nigel Mills

And you claim you achieved £26.6 billion. It is just not immediately apparent—we do not see that appearing in the tax gap. It looks like you are spending a lot of money and a lot of effort almost to stand still.

Dame Lin Homer

You are spending some effort to stand still, yes. That is what compliance is like, I’m afraid. You are spending some effort to prevent the new criminals from thinking they can get away with it, even if you have locked up the old criminals. You have chief constables in front of you, and it is a bit like saying, “Since you sorted out crime last year, you don’t need any policemen this year.” That is not true. We think that the work we are doing is decreasing the risks in our system, and we are trying to be honest with you and say that in the areas of hidden economy, criminal attack and evasion, we don’t want to guess what proportion of the tax gap that will be, but we will continue to work on those areas. Our annual report, which is, as Jennie says, one of the most detailed that is produced anywhere, is partly what Jennie and Simon use to work out where to put their resources in the next year. We are moving resource into hidden economy, because we can see a growth in microbusinesses and we can see a growth in online trading, and we want to ensure that that does not become an area that grows in the tax gap. That is quite a good example.

Nigel Mills

I suppose what we might like to see in a couple of years’ time is some of this appearing in factual form. When I ask you how much of your resource you spend on tax fraud, you kind of don’t know. When we look at how much of your compliance activity is raised from tax fraud, we don’t know, but we think it is 30% to 40%. Then you start saying, “We will now move some more resource in,” but that will not be visible because we do not know how much resource you are starting with or how much resource you will end up with, so we will not even be able to track that. Then when we talk about all these £7 billion-worth of impacts you can make, that will not appear in the tax gap analysis. Don’t you think you need to have some more data and a bit more precise target, so that we can work out whether these successes that you claim, and your claim that you are ahead of targets, are real and not just an adding up of things that perhaps are not quite linked to this?

Dame Lin Homer

I think it is a fair challenge that NAO have given us and you have given us that we continue to try to present what is a lot of data—I do not think that we are short of data—in a way that is really easy for everybody to understand. I accept that as a challenge. I think we do know what benefits we are getting from our resources. What we are not able to do is, if you like, track that in a very granular fashion to every one of Jennie’s 1 million interventions and label that.

Nigel Mills

We are not asking you for that, are we?

Dame Lin Homer

Yes, you are, actually, and that is what we are saying is difficult. As we build better MI, we will be able to cut it different ways. But we currently cut the tax gap by types of tax, types of behaviour and types of customer. Nobody else in the world even publishes any report annually, let alone dissected three ways, so I do slightly resist the challenge that we are not trying to show this well. I accept the challenge that we could go on trying to show it better.

Nigel Mills

One last question from me, Ms Homer. Do you accept that it is a bit hard to balance the fact that one minute you say the risks are increasing despite all the activity, and the next minute you say that you are having a successful deterrent impact? It kind of suggests that if the risks are increasing, people are becoming more evasive, not less.

Dame Lin Homer

No, no, they’re not. The tax gap is going down. Let me say that again. Jennie has said it, and I have said it.

Nigel Mills

But the tax fraud gap and the hidden economy are not going down. Can we try to stick to this topic?

Dame Lin Homer

Well, what is this topic? On the three things which the NAO is calling tax fraud, we are marginally better now than we were four or five years ago, so that does not sound like failure. On hidden economy, it is marginally more challenging than it was three or four years ago, but on criminal activity, we are actually in a better place than we were. All of that is very clear from the tax gap.

Nigel Mills

Okay, but my question was that you are trying to claim success as being a deterrent to people doing this and then you are trying to claim that the risks are increasing. Presumably, the logic of that is that if more people are becoming evasive, they are not feeling deterred.

Dame Lin Homer

No, I am simply saying that there will always be criminals. I am prepared to forecast that.

Nigel Mills

But I think you are suggesting that there will always be more of them. We seem to be raising more and yet chasing more.

Dame Lin Homer

No, I don’t think we will ever have a point where Jennie’s bit of the business will not be needed.

Nigel Mills

No one is suggesting that.

Dame Lin Homer

However, I do believe that we have a largely compliant population in this country—we have the smallest tax gap that we can see reported anywhere—and that when we turn our attention on areas of activity, we are successful. Most law enforcers find that you have to, as Jennie has suggested, be prepared to be adaptable and flexible. Sometimes you have to return to an area on which you called success a few years before, because people get blasé again and you go back into it. That is the kind of strategic assessment that looks at the facts and figures but uses professional judgment to work out what the response is.

Chair

I have been on this Committee for about five years. Mr Bacon has been on it for 15, or is it 16 now?

Dame Lin Homer

Longer than me.

Chair

Our Vice Chair is a long-serving member. Other Members have been on the Committee for a period of time as well. We keep hearing that it is going to get better.

Dame Lin Homer

It is better.

Chair

Well, by 0.2%.

Dame Lin Homer

No, by 2%.

Chair

Well, we are talking about fraud today, aren’t we? Paragraph 10 on page 8 of the summary of the Report highlights that you are looking at small and micro businesses. Jennie Granger has touched on that a bit. It is clear to us why organised criminals are a tax fraud risk, but why do smaller businesses pose more of a tax fraud risk than other groups, especially given that many of those small businesses are working in a digital world? The era of cash businesses is not yet dead but there is an easy way of tracking people’s transactions, so why are they a higher area of fraud?

Dame Lin Homer

Let me get Jennie.

Jennie Granger

Small and micro businesses is one of our biggest segments and it turns over constantly. Whoever we have been measuring in the tax gap the year before is not the same group each time. One of the inherent challenges, particularly for microbusinesses where the owner is often self-employed, is that they are cash-poor. They live on the cash flow so the temptation is to put off paying the tax. There are two biggest risks in that sector. One is evasion—simply not registering in the system. Often that is motivated by the fact that they do not understand their responsibilities well or they are cash-poor. The second is payment compliance, which is one of the biggest factors in our debt recovery. Both of those things are important. It is not the same group each year, which is part of the challenge. We need to do that continually. You are absolutely right that digital helps with some of this. It helps us to detect. I am interested in moving that upstream so that businesses get it right first time and we do not have to chase them. One of my measures of success is that earlier intervention makes a difference and we are not having to prosecute as many as we do. That is the challenge. Whether it is digital or on the street, this is inherently a cash-poor group that is often new to its responsibilities. We need to educate and tackle.

Chair

So, a lot of MPs hear from small businesses feeling that they are under the cosh. Based on what evidence do you conclude that large businesses are not such a great risk for evasion or fraud?

Jennie Granger

Both Jim Harra’s large business service and our tax gap analysis is showing us—from our own activities and from that analysis—that the main risks that large business poses to us is around legal interpretation and avoidance, including offshore transactions. Those are the two biggest compliance risks around large businesses. It is not saying that there cannot be some evasion at the edges around that, but typically these businesses that are well informed on their legal obligations understand them. If anything, they play the grey around the law, not deliberately break it, which is what evasion is.

Chair

Which is something that we have covered.

Dame Lin Homer

And it is one of the reasons why a lot of the enforcement activity still goes into avoidance, not just what you classify as tax fraud.

Q80Chair

To go back to small and big businesses, VAT evasion is an interesting issue. We all see examples on the high street and elsewhere of companies that set up and then liquidate after a certain period of time. Given the timetable on VAT payments and the fact that, as you said, people defer payments for all sorts of reasons, can you be confident that you are capturing VAT evasion by companies that close and then open again the next day under a different name? That is one example of VAT fraud that we all know about.

Jennie Granger

Phoenixism is an absolute scourge. It is absolutely a challenge for us. Deliberately shutting down quickly and moving on makes it difficult for us to catch up with people. We have specialist insolvency expert teams in Simon’s area; it is their job to detect this and tackle it. We are getting better at tracing through directors. The challenge there, of course, is that they often use straw people. I am not going to say that we get every single one of them, but we absolutely treat it as a priority, and we have expert teams that are there to build up knowledge of that quickly and tackle it where we can.

Chair

If you are given direct evidence, how easy is it? If, for instance, I were to give you the name of a company now—

Jennie Granger

Please do.

Chair

I would be very happy to give you that evidence, but because some of the people as well as the companies are fly-by-night, how hard are they to track down? There is certainly clear evidence out there that people are dodging the system for a number of years, if they ever get caught. You have given me a general answer, Jennie Granger, but I am not confident from what you have just said that you have really got a grip on this. Perhaps you could give me more to convince me, and those watching who do pay their VAT on time, that you are catching these VAT fraudsters.

Dame Lin Homer

Yes, please do give us information. The second thing to say is that we are working much better across all Government bodies so that information held in one part of the system can be put together with information held in another. Both Simon’s team and our RIS team—the research and intelligence team—are using a lot more third-party data. As Jennie says, again, it is one of those risks that will never wholly go away, but it is one that we would like to crack down on. It is our belief that our approach to making tax digital, which I know brings its own challenges of communication—

Chair

But that would not necessarily resolve VAT.

Dame Lin Homer

No, because making tax digital will allow us to see all of small businesses’ tax affairs in one place—

Chair

But that is what they are declaring.

Dame Lin Homer

So what you find is that very few businesses are complete ghosts. They may not tell us that they exist, but they might tell the licensing organisation. They might, as Jennie said, have some money going through one set of accounts and some through another. What we are getting better at is watching whether the shadow is the same size as the body, if I can put it like that. We are able now to investigate a lot more cases where we can start to show—to go back to our discussion about how much evidence you need for a prosecution—matching evidence or un-matching evidence that allows us to start investigating. We are getting better.

Chair

I am going to hand over to David Mowat in a moment. The real concern on this particular issue is that if you have a legitimate business trading alongside a business trying to dodge its VAT, by the time you have caught up with them and taken action, damage can be done to a good, legitimate business trying to pay its staff well, pay its taxes on time and do the right thing.

Dame Lin Homer

I think the FST would say that one of the reasons why he is keen that we progress making tax digital is that it creates a better, more level playing field.

Chair

We keep hearing that that is going to be the great solution, so we will—

Dame Lin Homer

We think it is.

David Mowat

On VAT evasion, there is a debate here in the House of Commons tomorrow—you will be aware of it, I guess—

Dame Lin Homer

Yes. Q88 David Mowat —on what appears to be the latest mechanism used, which is overseas suppliers using eBay and Amazon effectively to evade VAT. I have seen estimates of £10 billion in lost revenue, plus of course the collateral damage to the high street, which cannot compete. I am interested to understand where you are on that and how big an issue you think it is.

Dame Lin Homer

I think Jim Harra’s team think this is a big issue. The UK has embraced online shopping even faster than most of our European colleagues. We are seeing the development of entirely new marketplaces. You used that word, but because they are marketplaces in the ether, the question whether the purchaser knows or even thinks about where they are buying from, and whether they ask or understand the right questions about import duties—both VAT and excise duties—is a very big issue.

David Mowat

There is no chance of the purchaser having that responsibility. It seems to me that the only possibility of progress is if you are able to hold eBay and Amazon accountable as facilitating that trade.

Dame Lin Homer

Well, they are not accountable for the tax, but I think expecting any provider—

Mr Bacon

I’m sorry, can you just say that again? You mean that Amazon aren’t accountable?

Dame Lin Homer

They are not accountable for VAT, for instance, that purchasers using their marketplace avoid.

David Mowat

I understand the difficulty in it, although it seems to me that to make progress on this, whether there is a conspiracy angle or the fact that they are facilitating with their platform the people you can’t get to—

Dame Lin Homer

What I can tell you is that from spring last year, Jim had a team looking at this, along with Jennie and her team. We feel, just as we do with beer and alcohol, that the people who manage the supply chain should ensure that their supply chain has enough diligence built into it. So we do think marketplace providers and supply chain providers have responsibilities. We will always work in any of these sectors with the people with those supply chain responsibilities.

David Mowat

Sorry, does that mean that you are in a position, even with the law as it stands, potentially to act against marketplace providers such as eBay and Amazon, or do you require a law change before you are able to do that?

Dame Lin Homer

It means that we are looking both at behaviour changes within the supply chain and at any policy changes we might need to make to improve it, just as we do whenever we see a new market develop.

Mr Bacon

How long has that looking at it been going on?

Dame Lin Homer

As I say, we started having a deeper investigation in spring last year. We are talking with colleagues in Europe, and that has already revealed to us that this country’s online shopping habits are changing faster than anyone else’s. France and Germany are already prepared to look at this with us. Some of this may well need international change as well.

David Mowat

Finally—and then Richard can come in—the figure of £10 billion was mentioned in this area, but is it ballpark? Do you recognise that figure? Because if it is anything like that, it is just enormous.

Dame Lin Homer

I am not going to try to guess at that. I am very happy to get Jim to drop you a note about what we have been doing and what it covers.

Chair

Yes, please.

Dame Lin Homer

But what we are certain of is that it is growing.

David Mowat

You must have some idea of the exposure, even if you don’t think it is £10 billion or you don’t want to say what it is. Are you taking action on it? It must be a priority if it is of that size. The damage is huge.

Dame Lin Homer

I am happy to write a note. We are absolutely sure it is a growing risk in the system, just as carousel fraud was four or five years ago. I think we are really good at being probably the first people to spot it. That doesn’t mean it will go away, but it does mean that we have got a head start in thinking about what changes in behaviour and, if necessary, policy and law might be needed to bear down on it.

Chair

Dame Lin, in answer to David Mowat, you didn’t actually answer the question about whether you could prosecute under current legislation. You talk about future law changes, but could you do something today, now, under the law to tackle this?

Dame Lin Homer

The question of whom we can take action against is the thing we are having to consider.

Chair

So you do need a change in the law?

Dame Lin Homer

We don’t think providing a marketplace makes the marketplace provider responsible for criminal activities that happen within it.

Jennie Granger

But we can—

Chair

Richard Bacon, then Stephen Phillips.

Dame Lin Homer

I think Mr Bacon is interested in that.

Mr Bacon

This is not a new problem. In the previous Parliament—I’m not sure whether this was with your predecessor or with you—Ian Swales, who was the MP for Redcar, raised in this Committee when we were looking at Amazon the issue of having bought from amazon.co.uk an iPad, which ended up being delivered from some warehouse in Luxembourg. He asked for a VAT receipt and couldn’t get one. Amazon said, “We are not in a position to give you a VAT receipt.” That is what he was told.

Dame Lin Homer

That is not the issue. In this case, we are talking about non-EU imports that are evading European VAT. I don’t completely remember Mr Swales’s point. I think it was a hearing when Jim was with me. The question of whether, under the current European legislation, you can sometimes choose to pay another European member state’s VAT, rather than ours, is different from whether it is an import paying no VAT to Europe at all.

Mr Bacon

It might not have been your issue, but it was my issue. I was talking about within the EU. His issue was that he could not get a VAT receipt from anybody for an EU jurisdiction. You are talking about this now, quite a long time later, and there is the non-EU issue as well—

Dame Lin Homer

They are two different issues.

Mr Bacon

I understand that.

Dame Lin Homer

So we have a situation where we are within the marketplace of Europe and where people are allowed to bring goods across European boundaries if VAT is paid. I do not recall Mr Swales’ specific point about VAT receipts and the right to them, but the point that is being debated tomorrow is about the avoidance entirely of paying anyone in Europe VAT.

Mr Bacon

Yes, and this was my question too about what Mr Swales raised within the EU—within an EU country—where he could not get an EU receipt to pay any VAT to anybody. He could not get a VAT receipt, so it looked like no VAT was being collected in any EU jurisdiction. We said at the time that that must be plainly unlawful.

Dame Lin Homer

I am happy to ask our VAT experts to write you a note on when you are entitled to a receipt.

Mr Bacon

This is not a new problem. It may be a growing problem, because of the propensity of British people to buy online, so it is obviously growing.

Dame Lin Homer

It is.

Mr Bacon

But it was always there as a problem. It is now a problem that is growing quite rapidly. And you are still talking about considering what action may need to be taken or considering what policy changes may be needed. How long is it going to take you before you get to the point where you can say, “This is what we need to do”?

Dame Lin Homer

It is a different problem. We are a member of Europe—

Mr Bacon

In relation to both problems.

Dame Lin Homer

In relation to European VAT, we have talked to you about the frustration, but on the legality of carrying VAT-paid goods across borders, the question you have asked is about the production of a receipt.

Mr Bacon

No, I did not ask a question about that. With respect, Dame Lin, I did not ask a question about goods with VAT that has been paid and carried across borders. I asked a question about an iPad upon which it appeared that no VAT had been charged by any EU jurisdiction at all, and we made the point that that must plainly be unlawful.

Dame Lin Homer

I would rather not guess at the question Mr Swales asked several years ago. I will ask our VAT experts—

Mr Bacon

My point is that several years ago the issue was raised, and several years later you still appear to be struggling with it.

Chair

Dame Lin is saying that she has not got the answer at her fingertips.

Dame Lin Homer

My recollection is not that we conceded or accepted that that was non-VAT-paid, so that is my concern.

Mr Bacon

Can I just get an answer to my question? If it is in two parts because there is a non-EU part and an EU part, then give the answer in two parts. I want to know, since you have obviously been considering this—or certainly should have done—for quite a long time, when are you going to be in a position, rather than simply considering it, to decide and to state what action you are going to take in relation to both EU and non-EU streams?

Dame Lin Homer

We take considerable action day in and day out on VAT fraud. Every day. VAT fraud is a big chunk of the tax gap and we do prosecutions and investigations probably every single day. So we are taking action on VAT fraud.

Mr Bacon

Sorry, are you taking action every day on VAT fraud in a cross-border example, or are you just talking about—

Dame Lin Homer

Much of it is, yes. Most of the alcohol is, and lots of the tobacco is.

Jennie Granger

I know we are short of time, but I would be happy to add to that note with what we have done operationally, including, as much as we can, details about a £500,000 seizure of goods that we did last month.

Mr Bacon

With respect, we were talking about online. I am not talking about alcohol where booze is brought across from France and excise duty or VAT or whatever that should be paid is not paid. I was talking about a specific example of online purchasing.

Jennie Granger

I am not talking more generally, either. I will add to that note some of the activity we are doing on—

Dame Lin Homer

Recent online seizures relating to online goods brought into the country just before Christmas—no doubt expected to be Christmas presents—mean that Jennie will have spoilt some Christmases. We had £500,000 worth of goods seized because they were not correctly imported.

Mr Bacon

Right.

Simon York

We have dedicated teams on that.

Mr Bacon

So in relation to the other bit that you are considering, when are you going to be in a position to take action?

Dame Lin Homer

So what we are looking at is whether, because more and more individuals are buying online, we have to make some changes in the system to alter the risk that individuals unknowingly are becoming the importers of goods. In a sense, they are the person responsible for excise and VAT, but they think they are just the purchaser of goods. That is the new challenge that we are looking at. It is particularly related to non-EU and we have been investigating this for a number of months. We are already doing some things, and we think there are more things we can do, but that is the sort of emergent risk as people get more confident about becoming personal importers.

Chair

Okay. I will hand over to Stephen Phillips. We will be coming back to this issue of VAT, I have no doubt.

Stephen Phillips

To return to today’s topic, Dame Lin, the title of the Report that we are considering is “Tackling tax fraud: how HMRC responds to tax evasion, the hidden economy and criminal attacks”. I suspect that it will come as no surprise to you, or to Ms Granger, that I want to concentrate my questioning on the manner in which you tackle tax evasion and, in particular, on the way in which prosecutions are approached. That is in essence Part Three of this Report. Before I do so, I want to see if we can agree some common ground with a number of relatively straightforward points that I want to put to you and that I think you can agree with. Let us see if we can start out with some common ground at the beginning. First, tax evasion—that is, deliberately not paying the taxes that you should be paying—is wrong and is a crime. Yes?

Dame Lin Homer

Yes.

Stephen Phillips

Secondly, Parliament has established through a variety of statutes that individuals who evade their taxes may be brought before the criminal courts and prosecuted.

Dame Lin Homer

Yes.

Stephen Phillips

Parliament intends, when establishing criminal offences, that where the elements of the offence are made out, prosecution should take place in appropriate cases.

Dame Lin Homer

Yes.

Stephen Phillips

One of the reasons that Parliament establishes criminal offences is so that prosecutions may take place, so that others are deterred from engaging in the same illegal behaviour. Yes?

Dame Lin Homer

Yes.

Stephen Phillips

Prosecutions have a deterrent effect. When properly publicised, they deter people from deliberately not paying their taxes. Agreed?

Dame Lin Homer

Yes.

Stephen Phillips

HMRC is the authority responsible for investigating tax evasion and for presenting papers to the Crown Prosecution Service so that prosecutions may take place?

Dame Lin Homer

Yes.

Stephen Phillips

In general terms, Parliament therefore expects HMRC to discharge its functions by properly investigating tax evasion and mounting prosecutions of those who have evaded their taxes, unless there are good reasons why that should not take place. Agreed?

Dame Lin Homer

Yes.

Stephen Phillips

That is very helpful. Just before we come on to the position as it now is and, indeed, might be in the future, can we have a look at the woeful state of prosecutions in the past? Can we look at paragraph 3.14 of the Report? In 2010, as I read the Report, other than in relation to organised crime, there were only 165 prosecutions that were brought to court by the CPS on behalf of HMRC for what you call “volume crime”, which is basically tax evasion.

Dame Lin Homer

Yes.

Stephen Phillips

The Report tells us that the coalition Government then increased funding for those prosecutions and you set yourself a target of 1,000 prosecutions annually by 2014-15 and that that target has now been marginally exceeded. Is that right?

Dame Lin Homer

Yes.

Stephen Phillips

Just looking at this figure of 1,000 prosecutions, where did it come from? It seems to have been plucked out of the air completely.

Dame Lin Homer

I was not here when it was set, so I do not want to try to determine where completely. From the discussions that I have had, in the SR spending round the enforcement and compliance team at HMRC made a case to the new Government that the level of prosecutions that we were undertaking was a risk to the taxpayer. So we needed to undertake more in order to ensure, first and foremost, that there was not a perceived red line below which we would not go—therefore, an overly significant sense of confidence—and, secondly, so that we were able to assure ourselves that we were achieving a deterrent effect. It was broadly described as a fivefold increase in prosecutions and, indeed, in one of my early hearings—