The NAO has published its report on the 2010-11 accounts of HM Revenue and Customs.

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Amyas Morse, the Comptroller and Auditor General, has today issued his report on the 2010-11 accounts of HM Revenue & Customs. In 2010-11 the Department received total revenues of £468.9 billion, £33.1 billion (7.6 per cent) greater than in 2009-10.

The increase in tax revenue from the prior year reflects the improving economic situation, as well as the impact of rate and duty rate changes including: £5.1 billion (2 per cent) rise in Income Tax and National Insurance contributions; £13.2 billion (17 per cent) increase in VAT; and £8.0 billion (21 per cent) increase in Corporation Tax.

At 31 March 2011, the Department was investigating over 2,700 issues with the largest companies, with potential tax at stake of £25.5 billion. The NAO has reviewed whether the Department’s processes for settling tax disputes with large companies were adequate to establish a sound position on the tax due. This did not involve coming to an independent judgement on the tax liability in individual cases. The NAO found that the Department had established sound governance arrangements for settling tax disputes and, in a substantial majority of cases, had complied with these. In three of the largest settlements examined, one or both of the Commissioners signing off the settlement had also participated in the negotiations. This reduced the demonstrable assurance to taxpayers and Parliament that the settlements reached were appropriate.

The Department made significant progress during 2010-11 in stabilising the administration of PAYE. By the end of March it had successfully reconciled the vast majority of records available for automated reconciliation for 2008-09 and 2009-10 and processed the associated overpayments or underpayments of tax. It also ensured that over 99 per cent of annual codes for the 2011-12 tax year for issue to taxpayers were dispatched on time.

The Department will now have to deliver on its plans to manually clear the records relating to 2008-09 and 2009-10 which cannot be processed automatically. The Department has committed itself to clearing all cases relating to its legacy PAYE system by the end of 2012 and plans to stabilise its PAYE service by 2013. While the Department has lost the opportunity to recover underpayments for the 2006-07 tax year, it plans to complete the reconciliation and process the repayment of tax overpaid in the 2003-04 to 2007-08 tax years by the end of 2012.

In 2010-11, the Department spent around £28.1 billion on tax credits. The latest estimate by the Department is that in 2009-10 it overpaid between £1.75 billion and £2.14 billion to claimants arising from error and fraud, and underpaid between £0.25 billion and £0.55 billion to claimants as a result of error. The overall level of error and fraud has decreased from between 8.3 and 9.6 per cent in 2008-09 to between 6.6 and 8.1 per cent in 2009-10 but, as this expenditure has not been for the purposes intended by Parliament, the Comptroller and Auditor General has qualified his opinion on the regularity of tax credits expenditure.

The Department’s plan to develop a more active approach for managing tax credits debt, including the use of a campaigns-based approach, has so far met with limited success. At the end of March 2011, the overall level of tax credits debt stood at £4.7 billion, compared with its target of £4.3 billion.

"There is clear evidence that HMRC is beginning to stabilise its administration of PAYE, following the disruption to processing which flowed from the introduction of its new computer system. However, stabilisation will not be fully complete until 2013, according to the Department, and it will need to deliver its plan to improve PAYE data quality if it is to realise the benefits of the new system and prepare for the move to real time information.

"In a substantial majority of cases, the Department has complied with its governance arrangements for settling tax disputes with large companies. To give confidence to external and internal stakeholders, however, HMRC needs to ensure that, for all major tax disputes, there is a demonstrable separation between those responsible for negotiating the settlements and those responsible for approving them.

"HMRC’s revised strategy for dealing with error and fraud in the tax credits system, including the increase in the number and depth of checks at the point of claim, is beginning to reduce the amount of losses. The Department has made less progress in dealing with the overall amount of tax credit debt, which continues to increase."

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"There is clear evidence that HMRC is beginning to stabilise its administration of PAYE, following the disruption to processing which flowed from the introduction of its new computer system. However, stabilisation will not be fully complete until 2013, according to the Department, and it will need to deliver its plan to improve PAYE data quality if it is to realise the benefits of the new system and prepare for the move to real time information.

"In a substantial majority of cases, the Department has complied with its governance arrangements for settling tax disputes with large companies. To give confidence to external and internal stakeholders, however, HMRC needs to ensure that, for all major tax disputes, there is a demonstrable separation between those responsible for negotiating the settlements and those responsible for approving them.

"HMRC’s revised strategy for dealing with error and fraud in the tax credits system, including the increase in the number and depth of checks at the point of claim, is beginning to reduce the amount of losses. The Department has made less progress in dealing with the overall amount of tax credit debt, which continues to increase."

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"There is clear evidence that HMRC is beginning to stabilise its administration of PAYE, following the disruption to processing which flowed from the introduction of its new computer system. However, stabilisation will not be fully complete until 2013, according to the Department, and it will need to deliver its plan to improve PAYE data quality if it is to realise the benefits of the new system and prepare for the move to real time information.

"In a substantial majority of cases, the Department has complied with its governance arrangements for settling tax disputes with large companies. To give confidence to external and internal stakeholders, however, HMRC needs to ensure that, for all major tax disputes, there is a demonstrable separation between those responsible for negotiating the settlements and those responsible for approving them.

"HMRC’s revised strategy for dealing with error and fraud in the tax credits system, including the increase in the number and depth of checks at the point of claim, is beginning to reduce the amount of losses. The Department has made less progress in dealing with the overall amount of tax credit debt, which continues to increase."

Amyas Morse, head of the National Audit Office|Amyas Morse, head of the National Audit Office|Amyas Morse, head of the National Audit Office

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