factFiction4 FactCheck: Has HMRC been spared from the cuts?The claim

“We have actually increased staffing levels at Revenue and Customs.”
David Cameron, 19 April 2012

The background

The Prime Minister raised a few eyebrows this week when he responded to a question from Labour’s Teresa Pearce.

The backbencher wanted to know why 10,000 staff are to be cut from HMRC after a Budget that will bring hundreds of thousands more people into the tax system, creating more work for our shrinking pool of tax inspectors.

Unable to resist a dig at Ken Livingstone, whose personal tax affairs are under intense scrutiny, Mr Cameron replied: “We have increased staffing at HMRC to ensure that we crack down on the sort of tax avoidance that is shown, to put it frankly, by the honourable lady’s candidate for the Mayor of London.”

He added later: “I thought the Labour party wanted rich people to pay their taxes properly. That is what we have ensured through the Budget and through the extra resources for the Revenue.”

Increased staffing and extra resources? That was news to the trade unions who have been fighting wave after wave of redundancies at HMRC for years. FactCheck got to work.

The analysis

Successive governments have been chipping away at HMRC’s resources since 2004, when the Inland Revenue was first merged with HM Revenue and Customs.

The cutbacks started under Gordon Brown. In real terms the department’s total budget fell by 14 per cent between 2005/06 and 2009/10, an average cut of 3.6 per cent a year, the treasury select committee found.

Staff levels, expressed as full-time equivalent posts, fell from 97,073 in April 2005 to 66,992 in November 2010.

That was at a time when most government departments were seeing their budgets grow, and despite the fact that HMRC was consistently bringing in around 100 times more money in tax receipts than it spent.

Worse was to come following the 2010 general election, with further cuts of 25 per cent in real terms from the 2010/11 budget planned by 2014/15.

But there was something of a last-minute reprieve, with the Chancellor allowing HMRC to reinvest £917m from the efficiency savings, as long as it promised to bring in an extra £7bn a year from tax dodgers.

That had the net effect, according to the National Audit Office (NAO), of reducing the real terms cut in running costs from 25 to 16.5 per cent and limiting job losses to 10,000 instead of a potential 19,000.

This is what the government means when it talks about “increased staffing levels” – that the cut is not quite as deep as first envisaged, and is less than the target of 25 per cent imposed on many other government departments and local authorities.

It is still a cut, of course, and one that will leave staffing levels at an all-time low of 56,100 posts by 2015.

Brain drain?

Can a workforce that small cope with the government’s ambitious plans to crack down on tax avoidance among the rich?

HMRC said last year that they will divert more resources into “monitoring and enforcing tax revenues from the 350,000 top earners in the UK”. This was reported at the time as “new posts” being created in the department, but, to be clear, it’s just an internal reshuffle, not a U-turn on the cuts.

Freedom of Information answers reveal that HMRC will increase its Enforcement and Compliance section from about 25,500 to 28,000 by 2015, but those new posts will come at the expense of gaps elsewhere.

Another worry is that the department may have already lost some its most experienced and highly-skilled operators in the cuts even as it fights to stay one step ahead of the tax planning experts.

Chas Roy-Chowdhury of the Association of Chartered Certified Accountants told the treasury select committee: “Those people who could leave did leave; the ones who were getting on into their 50s, I guess. They received good pension pay-offs, but they were the ones with the experience and knowledge in tax..lots of the people who knew about tax have now haemorrhaged from the organisation.”

Graham Black from the ARC union put some figures on the brain-drain this week, saying the number of senior professionals in HMRC “is falling, by around 450 by 2015, and many of those have gone already”. He added: “Even the part of HMRC that deals with the largest corporates is continuing to shrink, and will do so by 20 per cent by 2015.”

HMRC says it doesn’t dispute those numbers, but it insists that there’s no evidence the cuts in personnel are affecting the department’s ability to collect tax.

It’s true that a record £468.9bn was collected in 2010/11, and revenue from enforcement and compliance activities went up from £7.4bn to £13.9bn, despite losing staff.

So if tax yields are going up, all must be well, according to HMRC. We didn’t need all those staff after all…

That makes sense at first glance, but the select committee has specifically warned that it’s not that simple, saying: “Assessing HMRC’s operational performance at ensuring compliance is complex. Tax receipts are affected by numerous factors—including changes to the law, economic performance, cultural attitudes to compliance and HMRC enforcement activity.”

More worryingly, some experts told the watchdog that HMRC has simply been cutting its own workload only to pass the burden on to taxpayers and accountants, creating a false economy.

The committee concluded: “The possible displacing of costs from HMRC onto taxpayers has been a long-running concern for tax agents, businesses and individuals.

“Not enough is known about the impact of resource reductions at HMRC on the administrative burdens faced by businesses and individuals. It would be counterproductive if ‘efficiencies’ achieved at HMRC resulted in greater costs being placed on the wider economy. Such a result would impede growth.”

The verdict

We’re going to give Mr Cameron a “fiction” rating on this for trying to describe a cut that turned out to be smaller than initially planned as an increase.

The jury’s still out on the wider question of whether the cuts are compromising HMRC’s effectiveness.

HMRC made the fair point that some of the earlier cuts that followed the merger of customs and revenue in 2005 were genuine efficiency savings, since sometimes both of the old operations kept an office each in the same town.

That may be true, but the scale and the unrelenting nature of the cuts faced by HMRC since its creation may be unprecedented across government departments.

We reckon HMRC will have its workforce slashed by a massive 44 per cent over a decade.

Of course, none of this matters if the tax collectors still manage to perform, but how do we know whether last year’s impressive haul of tax receipts wouldn’t have been twice as big if HMRC had had more staff?

There’s little evidence that the wider costs of austerity – whether it be losing expertise that has taken years to build up or passing on administrative costs to businesses – have been fully considered.

By Patrick Worrall

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