BUILDING OUR FUTURE IMPACT ON COMPLIANCE: A FURTHER SUBMISSION BY PCS FOR CONSIDERATION AND DISCUSSION

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1 Revenue and Customs Group 3 rd Floor Jack Jones House 1 Islington Liverpool L3 8EG Telephone: Fax: R&CGroup@pcs.org.uk jon.thompson@hmrc.gsi.gov.uk J Thompson Chief Executive HM Revenue and Customs 100 Parliament Street London SW1A 2BQ 23 March 2017 Dear Jon, BUILDING OUR FUTURE IMPACT ON COMPLIANCE: A FURTHER SUBMISSION BY PCS FOR CONSIDERATION AND DISCUSSION 1. Our written submission dated 12 December 2016 provided you with some of the broad concerns that PCS have about the negative impact of the department s Building Our Future (BOF) programme. 2. To supplement this, in order to compile this further submission, PCS have spoken to a range of members who work in Compliance in different parts of the country. The content of this submission directly reflects the knowledge and actual experiences of PCS members working in these jobs and areas. Brexit, Customs, International Trade, smuggling and other criminal work 3. The decision to leave the European Union (EU) could have a major impact on the work of HMRC, and no-one knows yet precisely what that impact might be. The BOF programme could leave HMRC completely unable to undertake the functions that a future Government will require. 4. At the moment half of the UK's trade is with the EU. Goods and services move within the Union without tariffs and with few restrictions. There is monitoring and data collection, but not on the scale that affects goods from outside the EU. If Britain leaves the Single Market and the Customs Union, HMRC's workload in the area of Customs and International Trade is likely to double. Work at ports and airports will increase considerably. There will be a land border with the EU in Northern Ireland, and the government has not outlined how this border will operate.

2 P a g e 2 5. There are 120 commercial ports in the UK, though nearly 90% of freight goes through just 20 of them. In 2014 the top 10 ports with the most tonnage of goods were Grimsby and Immingham, London, Tees and Hartlepool, Southampton, Milford Haven, Liverpool, Felixstowe, Dover, Forth, and Belfast. Yet under BOF, 5 of these top 10 ports will be located many miles from an HMRC office. This also applies to many other major ports such as Plymouth, Aberdeen, and Holyhead which handled over 2 million tonnes of freight in Leaving the EU ( Brexit ) may also have an impact on other taxes, such as Excise, and perhaps VAT, complete with the potential for changes to rates and exemptions. 7. No-one can know what Brexit will mean for HMRC's work. Yet the Department's leadership have refused to consider PCS call to pause the BOF programme whilst assessing the impact of Brexit. 8. Even if Britain does not leave the Customs Union, the move to just 13 regional centres would jeopardise HMRC's work at ports and airports. Staff need to be there, often at short notice, to do much of the important work. This is not a desk-based job. The whole point is that the paperwork is wrong - you have to physically open the lorry or container and look at what is actually in it. Border Force staff have no power to interrogate and prosecute. There are tight time limits on holding people in custody. 9. The proposed site at Dover will be a Crime Campus site, shared with the National Crime Agency (NCA) and Border Force. As now FIS staff will be outward facing, covering the port at Dover, the Channel Tunnel and also Ramsgate. 10. They would be unable to cover the smaller South East airports which are often used for smuggling. They could not cover the major ports at Portsmouth and Southampton because of the geographical distance. HMRC propose they would be covered in the long term by officers based in the Croydon Regional Centre but at the moment, HMRC has two full teams of 20 staff based in Southampton; and HMRC cover Plymouth from Bristol. 11. Border Force have powers to stop, search and arrest - collectively this is known as an interdiction - and under the protocols they then hand the case over to either HMRC or the NCA. For example if the case concerns tobacco, alcohol, or money being taken out of the country that can be linked to an HMRC offence, the case comes to HMRC. If it is drugs or money from proceeds of other crime it goes to the NCA. 12. To give a concrete example, if Border Force finds half a million cigarettes, they will arrest the suspect. They have to take them to a Custody Suite (Dover has one on the Crime Campus site at St John s Road Dover, which is run and managed by UKBF). Otherwise arrestees have to be taken to the nearest Police Station. For an HMRC, case our staff have to attend the Port area, identify what personal property is required to further the investigation, such as documents, tachograph charts, mobile phones, Sat Navs etc.; take photographs of the illegal consignment, and take statements from UKBF in order to support a prosecution case to put to the Crown Prosecution Service to get authority for the suspect to be charged. 13. Under the Police and Criminal Evidence Act (PACE) the clock starts ticking after their arrest and arrival at the designated custody suite. There can be a rest period overnight, but the Crown has 24 hours before a decision has to be taken regarding charge or release. Built into this 24 hour are reviews at 6 hours, 15 hours and 24 hours. If there are specific reasons to justify an application for a further period of detention, this has to be

3 P a g e 3 approved by a senior Police Officer and extensions beyond 36 hours have to be authorised by the court. HMRC staff have to submit basic charge documents to the Crown Prosecution Service (CPS) electronically to support a request for a charging decision. If the CPS do not make that decision the suspect will be released, either on bail or completely. 14. The illicit goods; such as cigarettes or hand rolling tobacco, will be secured until forensic analysis has taken place. The goods are then tallied by a specialist Border Force team (for Dover only) and then are removed to the central Queens Warehouse (QW) facility in North Yorkshire (Finningley) for storage and final destruction. The QW has to retain the goods for 28 days to allow any appeal against seizure, then they can dispose of the goods. 15. HMRC staff will need to talk to the Border Force staff who did the interdiction at any location to obtain the relevant evidence to pursue an investigation. If our staff have spent several hours travelling to the location it increases the chances that the Border Force officers may have gone off duty (they are entitled to a minimum rest period under the Working Time Directive). Whilst our staff await their return to work the custody clock is ticking. 16. At the moment the Fraud Investigation Service (FIS) have appropriate staff in Dover and that will continue. However Southampton is due to close and it would be hard to cover it from Croydon or Stratford. Crawley covered Gatwick, and Croydon would also be expected to cover that in future. The closure of Staines, which covered Heathrow, was in 2017 and in the interim officers are being moved to Reading. In the long term it is proposed that Heathrow will be covered from Stratford or Croydon. Bristol and Cardiff would remain. Nottingham, Leeds and Newcastle will have to try to cover the east coast ports. 17. On the west coast the office in Liverpool had closed and relocated to Manchester. There were still Liverpool-based staff so a call-out, even at night, is coverable for now but in the longer term could be a problem. Major ports as Pembroke, Fishguard, Milford Haven and Holyhead will have to be covered from Birmingham or Manchester. Stranraer is also a major port for Ireland. 18. Additional problems still remain for FIS with the proposed regional centres as they do not appear to cater for the FIS work environment; we collect evidence, both documentary and more physical items, we need to store notebooks, day books, body armour, radios, vehicles etc. Most offices are being acquired next to public transport with minimal car parking facilities; i.e. Croydon 10 spaced for over 1,200 officers to include disabled as well as official cars. 19. The lack of Border Force staff in some areas has been covered by the use of mobile teams including UKBF Cutters, which used to be a (then) HM Customs and Excise resource. Wherever there is reduced staffing the potential for misuse by criminals increases, but if the Government wanted better checks by Border Force, they would also need HMRC staff to be able to get there when needed. 20. Brexit brings new challenges. At the moment a lot of goods are out of scope because of free movement of trade within the Customs Union. If Brexit brought a range of new tariffs, we could return to the pre-1993 (Maastricht) position, where importers will need to declare what goods are being imported on or before arrival, so that the correct customs

4 P a g e 4 duty can be calculated. Smuggling of a new range of commercial goods might become profitable, for example by wilfully incorrect describing goods, in order to obtain a lower customs duty. 21. More staff would be needed at Dover, including Entry Process Unit staff to scrutinise entries, examination officers, post entry process units and revenue constables to name but a few. Pre-1993 there were hundreds of officers employed at Dover alone to cover these work areas on a 24/7 basis. Since then the volume of ferries has not significantly dropped but their capacity has at least doubled. Currently Dover Harbour Board are redeveloping the Western Docks to provide more Roll-on/Roll-off terminals to cater for the anticipated increase in traffic - and that was on a pre-brexit analysis. There has been similar growth in ferry traffic - people, cars and commercial traffic - in all the east coast ports. At present all the immigration controls, which used to be in Dover, are now in France. One agreement may continue, but the controls at Calais and Dunkirk may well move back to the UK at Dover. Border Force work would then increase, and with it HMRC work. 22. The Channel Tunnel was enshrined under different legislation and the controls - both immigration and customs checks - will remain in France; but anyone arrested will still have to be brought back to the UK for processing through the UK legal system. 23. Northern Ireland is a completely new ball game now, with a land boundary that couldn t be enforced pre-1993 let alone now. If we are to recruit more staff, there would be issues about their training, with lack of facilities, trainers and time. All of this is going to have a cost and that has probably not even been considered yet. Large Business (LB) Customs and International Trade (CITEX) 24. Large Business deals with the largest entities, with a turnover of over 200m in the UK. LB has been leaving locations and concentrating into the cities which will have regional centres. The loss of skilled staff is already taking its toll. Even in Reading, which has a longer term future than many LB offices, there are now only 6 CITEX staff all of whom are relatively inexperienced - and their work is being farmed-out to other offices. Manchester, which has some important CITEX cases, have asked for help with work from offices that are due to close. One such office offered but was then told that half a staff year was needed and they couldn't manage that, and so the offer was withdrawn. More work will be coming into LB from Individuals and Small Business Compliance (ISBC) in April ISBC had carried on doing CITEX work for the former large and Complex cases that moved to LB. That will stop in March In our interviewees office none of the LB or CITEX staff expect to stay in HMRC when it closes under BOF. Employer Duties - Individuals and Small Business Compliance (ISBC) 26. In Employer Duties (ED) and particularly the Construction Industry Scheme (CIS) we have been informed that 70% of their yield comes from visits to business premises, employers and contractors. 27. The unit covers a huge geographical area and the cuts have reduced the number of ED and CIS staff. HMRC is moving to desk based enquiries which relies on what the customer tells you. You can request the records but that has a lot of obstacles - including getting them securely to HMRC and the lack of secure storage space in the office.

5 P a g e If you visit these employers you often see from bank statements and invoices that there have been off record payments, hidden under different headings in the accounts. This cannot be done remotely and needs to be done on-site. 29. Many contractors don't set up a CIS scheme. There are a number of ex-hmrc staff out there now advising these organisations, and they know what HMRC can and can't cover now. Even if HMRC do get in touch, the business can easily disappear and reappear in a new guise. 30. Digitalisation is no help at all when workers are paid cash in hand - they are outside the system. 31. Risk and Intelligence Services (RIS) select cases but if there is a famine - with no cases from RIS - you can self-source. These cases tend to bring the most yield as they are based on local knowledge. 32. One of the other main concerns is the lack of officers who have experience of face-toface work. Where there are opportunities for promotion as business streams are expanding, and on top of the experienced officers who have retired, many of the other staff have been promoted to other streams such as Large Business, Mid-Sized or Compliance Centres. 33. As HMRC moves toward regional centres, there is a risk that many existing staff based near to or in likely regional centres will move to other business streams on promotion, as their skills are in demand and they have experience of face-to-face work. This will exacerbate the shortage of staff with face-to-face experience. HMRC need to do more to recruit trainees to do face-to-face work whilst the existing experienced staff are still here. 34. There is an example of a team with a small number of Employer Compliance (EC) officers, most of whom will have left by Autumn In that example there are a small number of EC officers in an office that is due to close, located in a neighbouring area, where it is likely that some of these will be retiring. This is the level of resource that EC has to cover for SME for the whole of that region. 35. In another area Hidden Economy has taken on a number of trainees but have been asked to take their trainees out on reviews, as there aren t sufficient staff. 36. ISBC SME staff (especially VAT staff) are one of the main sources for cases for FIS, as they come across false invoices, false claims for VAT staff. 37. Another concern is the type of Employer Compliance case that Campaigns and Projects have taken up. Some of them involve London-based cases - with expatriate directors linked to multinational companies - where there are likely to be complex financial packages demanding that we deal with one of the big four accountancy firms. 38. For example, ISBC has been dealing with a financial company who have offices in London and apparently sits within SME. However its parent company is US financial company which is a major enterprise. The directors are all US citizens and it has many expatriates working for it, with most of the employees receiving very high level of expenses. The company accounts show discretionary bonuses running into millions. As most of the employees are US nationals working in finance, they are likely to have very complex personal payment packages involving accommodation costs, flights, schooling etc. Many of them would be likely to have grossed up remuneration packages. The accountants for this company is one of the big four accountants and it is likely that many

6 P a g e 6 of the employees would have residency issues and their personal tax affairs should be dealt with by Specialist Personal Tax (Charities, Savings and International). This is the type of case where great care would be required even if handled on a face-to-face basis, but this case is to be undertaken as a desk-based EC review by ISBC Campaigns and Projects; and undertaken by staff most of whom are new to the department. It is suspected that there will be problems once this review is underway. There are also whole raft of issues around possible escalation routes for dealing with any likely problems that arise in the course of any intervention for example, what happens if there are any Corporation Tax Issues? 39. Often in Compliance work the problem is not what is contained within returns, it is what is not contained within those returns. It is only by going out and doing face-to-face interventions, can you find out what has been omitted. 40. The department seems to think that much of this work can be picked up by Compliance Centres (now Campaigns & Projects) but the hit rate is very low - on VAT it is about 4%. 41. Staff tell PCS that areas where lack of ISBC staff means that business are unlikely to be checked include: North Wales, South West England, Oxfordshire and The Cotswolds, and around the Wash. Employer Duties - Wealthy and Mid-Sized Business (MSB) 42. When the Peterborough office closes the work and staff are supposed to go to Stratford, 120 miles away. A few staff may travel to Nottingham but most will simply leave HMRC. 43. Peterborough currently has two full teams doing ED work and a unit that does risk assessing. 44. There are two pilots running on risk working to inform how work can be done under BOF. 45. In the first pilot, staff who are willing to travel will be asked to go anywhere, based on the highest risk cases. Often it will involve a 2 or 3 day visit because of the travel time. The current staff like the work and the travel, but the future of that work is entirely dependent on the goodwill of future employees. 46. The second pilot is for desk-based working - this really only covers single issues rather than a full enquiry. 47. There are no official evaluations of the pilots yet. 48. Mid-Sized Business (MSB) ED is still trying to allocate resources to the highest risk. However in practice, the staff shortages now means that only the biggest 3,000 of the 60,000 cases in MSB are getting any attention. Most are in London and the bigger cities. There are Campaigns in other areas but even now black holes have developed. The South West has been mentioned as an example, as it can't be covered from Bristol. 49. Bristol WMBC covers the largest geographical area in the country. Many of the areas are practically inaccessible for transport reasons Dorset, North Devon and parts of Cornwall. 50. The department are trialling undertaking VAT work remotely. It isn't working well. In the trial HMRC staff would phone traders and ask them to send their records in electronically. In MSB the traders did generally reply, but a proper investigation often required looking at the actual invoices and a great deal of them. It also helped to talk to the trader face-to-face and sell them the idea that an assessment was needed. A two

7 P a g e 7 day face-to-face visit would be: Day One looking at the records, and then if there were problems, Day Two would be explaining the assessment to the trader. Remotely, there were far more appeals and the process took months. 51. RIS is not allocating cases to the South West at the moment. That was because there has been a large number of unworked cases in London, which Bristol staff have been expected to do first. However a London visit could be was a three hour trip each way for some staff. Additionally it is expensive the Bristol to London fares are some of the most expensive in the country. 52. Task Force work has also a problem with the cutbacks in staff, and longer distances travelled. This work often needs to be done outside normal office hours - visiting business in the evening or at weekends. There has been a drop in yield and HMRC are often only picking the low hanging fruit. 53. In Cornwall there is a growing perception that tax is a free for all. There is a significant cash economy in the South West, especially in the summer months (for example little car parks spring up near beaches). 54. To visit Cornwall a member of staff in Bristol would have to catch a train at 5:00am. Staff tend to use the train as the road network is poor and there is a lot of holiday traffic in the summer months. It won t be practical to do compliance work in the South West from Bristol. 55. Staff in Bristol do not believe the current BOF model is deliverable. There was a lot of surprise when Bristol was chosen as the Regional Centre. Recruitment and retention is difficult as HMRC simply does not pay enough and there are nearly 200 vacancies in Bristol. It is hard to recruit and retain staff. 56. MSB generally are losing experienced staff as a result of the age profile and office closures. They are trying to recruit into the areas where there will be a regional centre such as Birmingham and Nottingham - but it will be very hard to maintain adequate national coverage as the offices close. Employer Duties - Income Tax and Corporation Tax 57. The ED team in Oxford are spending much of their time training new recruits who are based in Birmingham. The office is facing closure in 2017/18, with the majority of the ED team planning to take Voluntary Redundancy and leave HMRC this August. 58. A Corporation Tax Compliance caseworker with some knowledge of Electronic Cash Register (ECR) work, has advised us that if nothing is done about manufacturers (and the law of supply and demand indicates that cash registers will still be misused well into the future) it would be foolish to remove a local presence. By local it is meant within the kind of distance that allows a few HMRC officers to reach and inspect a Small and Medium-Sized Enterprise (SME) business out-of-hours to make an unannounced visit. Potentially, such a visit would be at 11pm after a busy Friday evening's trade, for example. Such visits have been enormously successful in identifying Cash Register fraud, and productive in terms of shutting non-compliant businesses down. In short, no visit means no result and with only a handful of regional compliance centres, there will be areas of the country totally unvisited because of the travel and subsistence cost constraints HMRC works under.

8 P a g e The department seems to be relying on flawed surveys which estimate too high a proportion of taxpayers as willing to comply, when in terms of the tax gap, we already know that it is phenomenally high - too high to be accounted for by the small proportion that surveys think the non-compliant taxpayer comprises. SME and MSB noncompliance is probably driven by our collective failure to address the off-shore evasion loopholes used by the rich and multinationals; but at a local level, a presence will still always be necessary to catch envious small-fry as well. It is difficult to envisage employers voluntarily giving up ECR fraud just because HMRC stops some of the offshore evasion by major companies, some of the time. 60. Another example is a VAT Hidden Economy (HE) office which is due to close in 2019/20. All the work is project or Task Force led. RIS use various data, including Merchant Acquirer (payments using cards) and risk profiling ; for example, guest houses and chip shops. RIS build a case and send it to the HE teams. 61. A turnover of 83,000 is needed before VAT registration becomes necessary. ISBC deal with cases up to 2m turnover. So ISBC is individuals and small - but a lot of the cases are not small in most people's view. 62. The cases nearly always have no records - so the issue of electronic records is irrelevant; they are cash only businesses (they don't take credit or debit cards) so Merchant Acquirer data was irrelevant as well. The whole digital by default and remote examination of records agenda does not apply here. 63. The team used to self-serve, using local knowledge. That doesn't happen now and RIS and task force cases sometimes suffer from a lack of basic knowledge. For example, guest houses in Dover with only a few rooms serving ferry passengers and asylum seekers at 50 a night could never be liable for VAT. 64. Travel is already a problem. If the office closes, visits to some areas will become very difficult. Even if local staff transferred to Stratford, that was 2 hours away. Unless they were home-based, they would have to travel to the office, pick up a pool car, drive back again, and then do the same at the end of the day. 65. VAT visiting officers could effectively make the law by their rulings and so regular discussions are needed to ensure consistency. The VAT officers also pick-up Income tax and PAYE/NIC failings. Sometimes colleagues dealing with various taxes went out together. All that is likely to be lost if the local network closes. 66. Even now, in the early stages of the office-closure programme, black holes have appeared across the UK where necessary compliance cannot be delivered. 67. Basic VAT compliance often requires a visit to check that a business actually exists, that it is carrying out the business that it claims it is, that it is a trade not a hobby, and that it has actually purchased the goods or assets on which a VAT repayment is being claimed. If there are no VAT visiting staff available for an area, the checks cannot be made and the repayment will go ahead. 68. HMRC claim that they have a resource to risk strategy, allocating scarce staff resource where it is most needed. Staff tell PCS that the opposite is true. HMRC staff input where resource is available. The staff picking cases to look at, in RIS, then only allocate cases where there is resource to do them.

9 P a g e Staff dealing with Income tax investigations tell PCS that even if RIS allocate them a case a long way from the office, it is likely that some reason will be found to classify it as insufficient risk. It isn't possible to hit the targets if staff spend a lot of time travelling. And the travel budget is limited. 70. The strike force strategy of sending teams into more distant areas doesn't seem to be working well either. Staff claim that there is insufficient connection between those staff and the staff who would normally do that work, or who have to follow it up. The right questions are often not asked. 71. As offices close and skilled staff leave under BOF, the situation is going to get much worse. Already in some areas staff report that senior management have seriously miscalculated the number of staff who are willing to travel longer distances to stay in HMRC. In one area all the Employer Duty staff (checking on PAYE and NIC payments by employers) have refused to go to a new office and there will be no-one there at all to do that work. In another area with good job opportunities, large numbers of staff have told management that they will transfer, but are quietly applying for work nearer home, and outside HMRC. As soon as those jobs come through they will leave. Conclusion 72. The PCS solution would be for the department to increase the number of proposed sites; including filling-in the still huge gaps with smaller compliance offices near ports and airports, where FIS and other staff could be based; along with homebased mobile contracts for appropriate staff in some areas. This would allow a more flexible approach to the problems that could be created. Similarly a deferment of closure of offices close to strategic points of entry until the post- Brexit landscape is more clearly defined would allow HMRC more latitude to developing a more pragmatic strategy. 73. PCS look forward to discussing the issues raised in this submission at our forthcoming meeting. Yours sincerely, MARTIN KELSEY Group Secretary cc J Granger