Briefing for Westminster Hall Debate Tuesday 5 February 2013

1. Reduced Resources

  • In the 10 years since its formation in 2005 to the end of SR2015 HMRC will have almost halved its resources with staff levels being cut from c.97,000 to c.55, 000.
  • Recent talk of  “increased numbers of tax inspectors” is not accurate. (See e.g. David Cameron in Commons replying to Teresa Pearce. “We have actually increased staffing levels at Revenue and Customs.” David  Cameron, 19 April 2012. Also see George Osborne’s speech introducing the 2012 Autumn Statement “We are increasing by around 2500 the number of tax inspectors going after      evaders and avoiders.”).
  • In fact, all  that has happened is that one part of HMRC has got bigger by cutting some other parts – robbing Peter to pay Paul. They are a valuable redirection      but the vast majority of the new posts as a result of reinvestment and limited investment are not for Tax Inspectors with a deep professional training.
  • Another example concerns the Autumn Statement.  The reality is that resource moved onto work identified in the autumn statement will have to be moved from other high priority work.  It is worth asking the question how much revenue will be lost in these areas. Put another way; how much more of the tax gap of £50 billion could be recouped with a properly resourced HMRC?
  • HMRC faces a demographic time bomb, over half of its workforce is aged over 45 and 18%  is aged over 55. That proportion is higher for senior grades where around 30% of Grade 6 and above are over 55.
  • Until the early 1990s the department had a well-managed graduate recruitment programme.  But since then recruitment has been stop start.  As an example around 200 graduates were recruited onto the fast-stream programme in 2012 but only 30 or so were recruited in 2011.
  • This makes planning very difficult.  It also makes it difficult to retain essential infrastructure including recruitment at graduate fairs, training and suitable development placements.   HMRC should publish its plans for graduate recruitment over the next ten years.  And these should include recruitment of at least 200 graduates on to the technical fast stream programme each year.
  • HMRC has also failed to invest in career planning and development.  Despite successive government initiatives to move work from London HMRC remains very focused on the capital.  For example the ratio of senior officers and above to higher officers and below is twice as high in London as the North East.

2. Reduced Capabilities

  • The cuts and the impact of the demographics  means there are not enough trained professionals across the various professions. HMRC is now running very hard to catch up. Thorough training  for Tax Professionals can take from two to four years. Many of HMRC’s most experienced staff are now near or over 60 and able to resign at any  moment.
  • ARC told the TSC last October about the  implications of the demographics. At Grade 7 level there are 11 people over 50 to one person under 30. In November 2012 around 40 people graduated from a 4 year tax professional training programme. But there were over 170 business critical vacancies for these 40      people.
  • HMRC is currently carrying at least 150 business critical vacancies at Grade 6 and 7; this will increase with the need to resource the autumn statement commitments and will increase further with the demographic profile of the department’s senior tax professionals.
  • HMRC’s ability to deal with multinational corporates, and in particular issues around transfer pricing, has been in the headlights, ARC would make the following points:

–      it is common for major multinational PLCs to have well-resourced transfer pricing teams – a team of around 15 specialists is not uncommon. These people are experts engaged permanently in maintaining tax efficient transfer pricing structures on a worldwide basis.  At the point where such multinationals become engaged on detailed transfer pricing discussions with the UK or another fiscal authority they would of course supplement their internal resource with Big 4 expertise. Using the model of transfer pricing resource as set out above means that ARC’s best estimate is that Transfer Pricing expert resource available in HMRC is barely four times that of a single multinational corporate – and HMRC deals with hundreds of such multi-nationals. And whilst the autumn statement will give HMRC some additional expertise, that will be nowhere near enough to match that available to corporates.

–      the complex nature of cross border transactions, along with the complicated structures of multinational groups, makes ensuring the correct tax treatment of those transactions among the most difficult work of HMRC’s tax professionals. Tackling that difficult work relies on a properly trained, skilled, developed and properly rewarded, cadre of senior tax professionals. The teams we have in place are incredibly effective, and bring in hundreds of millions to the exchequer, but they cannot deal with everything. And their expertise is sought after by accountancy firms and large corporates, so that there is a real fear that with pay, pensions and conditions being eroded in HMRC, we will lose this precious resource over the next few years.

–      ARC calls for a review of the impact on the UK tax base of new forms of technology, the capacity of businesses to incorporate in a choice of jurisdictions, and growing use of offshore intermediaries. Along with other fiscal authorities, the UK may be losing its ability to match tax revenues with the economic substance of trading and investment activity. To be fully effective we believe this work will have to be done on an international basis, perhaps via a working group sponsored by the OECD.

3. Reduced Morale and Engagement

  • Regrettably HMRC is still near the bottom of the Civil Service Engagement table. And  low engagement and morale is not just an issue for junior staff. A recent      FDA survey of SCS members showed 24% would like to leave their jobs soon      as possible. Even using the Government’s own figures 20% would like to  leave within 12 months – 5% as soon as possible and 15% within 12 months.  HMRC and the unions are working to improve on that, but it will take some time to address the legacy of trust and engagement issues.
  • HMRC staff still work incredibly hard but ARC members tell us they see little in the way of career prospects. Staff are publicly criticised by political  figures who distrust their abilities, at the same time staff do not seem to get Ministerial support. For example, witness the implications in  Austin Mitchell’s recent comments to the Big 4 at PAC “This is a game in which you are battling a slower-moving HMRC      with fewer staff and possibly smaller brain-power.”
  • ARC absolutely refutes the suggestion that HMRC senior tax officials lack brainpower –  far from it, many of the best tax brains in the country work for HMRC. But there is a serious imbalance in the amount of resource available to HMRC to combat tax avoidance and evasion compared with the resource available to the UK’s largest businesses. And, as we demonstrate below, there is a serious imbalance in remuneration paid to HMRC senior tax officials as      compared with those available in the private sector.
  • Indeed, ARC  believes the imbalance is now so great that there is a real danger that  HMRC will face an exodus of talent as soon as the economy recovers. Remuneration  imbalances are at least as great now as those which existed in the 1980s  when Inland Revenue was losing 10% of its trained and experienced senior tax professionals each year. Given current shortages and the demographic profile such an exodus would have a disastrous impact on HMRC’s ability to  tackle the tax gap and on the Government’s ability to reduce the deficit.  ARC urges Government to act now to address these pay disparities in order  to prevent a repeat of the damaging loss of resources seen in the 80s.

4. Reduced Pay

There is a wider issue over lack of genuine reward. Quite apart from the recent pay freeze and current 1% pay cap the Hay Group reported last December to Cabinet Office on pay comparisons, as part of the review of Market Facing pay. The table below compares market facing median total remuneration identified by Hay in each of 3 Zones for private sector jobs to median salaries at Grade 6 and & in HMRC (as at 31/12/2012). As the Hay report says, more senior roles tend to operate in national markets so a 3 zone model was adopted for grades SEO and above, and those zones are:

Zone 3 = Central London,

Zone 2 = Outer London,

Zone 1 = the rest of the UK.

HMRC has two pay Zones – London and National

Hay

 Zone 3

(Central London)

HMRC

London

Difference

(HMRC London to Zone 3

Hay

Zone 2

(Outer London)

Hay

Zone 1

(Rest of UK)

HMRC National

Difference

(HMRC National to Zone 1)

Grade 7 £89,383 £54,453 (£34,930)

(-64%)

£83,300 £74,967 £48,572 (£26,395)

(-54%)

Grade 6 £109,304 £70,784 (£38,520)

(-54%)

£95,841 £86,462 £63,716 (£22,746)

(-36%)

The figures show the extent of the pay lag and the scale of increases needed if HMRC median salaries are to even catch up the levels in the private sector as identified through the Government’s own research. It is worth adding that HMRC’s pay scale maxima are now misleading because the impact of scrapping pay progression in HMRC means most people are stuck at points well below the maxima.  There is effectively no reward for gaining experience in the grade and serious pay inequality amongst people doing the same jobs.

 

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