Last week the Commons Public Accounts Committee published its latest report on HMRC's compliance and enforcement programme and amongst its five conclusions and recommendations included specific remarks about the use of personal service companies within the public sector.
The report stated that, “The Department lacks a clear and coherent policy on its approach to the use of managed service companies for public sector employees. We are concerned by reports that the Department had given advice that using managed service companies to avoid tax could ever be appropriate for full-time employees of public bodies, especially, as in one case, when this was contrary to the advice provided to the individual concerned by one of the leading accountancy firms. The Department should have a clear and coherent approach to all forms of tax avoidance. The Committee will consider the issue further in the light of the Government's report on the extent of this practice in the public sector.”
Presumably the Public Accounts Committee is referring to personal service companies and not managed service companies.
Whilst the committee's comments were valid they did come a day after HMRC had published the consultation document, 'The Taxation of Controlling Persons” that aims to eradicate the use of personal service companies by individuals who are able to control the major activities of an organisation be they in the public or private sector.
The report praised the compliance and enforcement programme's achievement of generating an additional £4.32 billion of tax yield during the period 2006 – 2011, which represents a return of 11:1 on the £387 million invested. Off the back of that success however, HMRC negotiated, as part of the 2010 Spending Review, that it would re-invest £917 million of its efficiency savings until 2014-15 in further compliance and enforcement work. The aim of this investment being to generate an additional £7 billion a year in tax revenue by 2014-15. To enable the Revenue to achieve this the committee made the following recommendations to bring about the higher levels of performance that will be required:
- Over the programme's lifecycle HMRC estimated that by cutting staff numbers by more than 3,300 (about 11%) reduced their ability to increase tax yield by £1.1 billion. This decision was questioned by the committee as to whether it represented value for money for the taxpayer. HMRC need therefore to be clear about the marginal rate of return it could achieve from different levels of spending;
- Delays in the introduction of IT systems resulted in the extra revenue generated by these systems being lower and later than anticipated. Furthermore, staff were not fully trained to make maximum use of the technology and therefore future training will need to be more targeted and timely than it has been. HMRC will also need to plan more effectively to integrate new projects into existing “business” practices and strengthen its procedures for managing ICT contractors;
- HMRC should be more accurate and precise in monitoring and evaluating the benefits derived from its compliance and enforcement programme; and
- HMRC should be transparent and consistent in its approach to all forms of tax avoidance.
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