HMRC’s compliance yield: how HMRC reports future revenue benefit – an update for 2019 to 2020
Published 5 November 2020
© Crown copyright 2020
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Introduction
HM Revenue and Customs (HMRC) annually carries out a significant number of compliance interventions, legislative changes and educational activity which leads to the reporting of an annual amount of compliance yield arising from this work. Compliance yield is recorded under six classifications, these are:
- cash expected
- revenue loss prevented
- future revenue benefit
- upstream product and process
- upstream operational
- accelerated payments
While these classifications are explained further in HMRC’s Annual Report and Accounts 2019 to 2020 this technical paper focuses specifically on future revenue benefit (FRB). FRB quantifies the effects of our compliance interventions on customers’ future behaviour.
Since 2011, and in line with the Organisation for Economic Co-operation and Development (OECD) good practice, we have included FRB across all HMRC’s compliance work as this helps us reflect and understand the full impact of our compliance work and informs how we resource to areas of highest risk.
In their 2014 to 2015 Standard Report, the National Audit Office (NAO) said that there were inconsistencies between how we recorded FRB and Product and Process yield. FRB was reported in the year the compliance intervention concluded, whereas Product and Process yield is reported when the product or process change impacts Exchequer receipts.
A technical paper accompanied our 2015 to 2016 annual report and accounts explaining how HMRC planned to change how it reports FRB and the impact of the change compared to the original method. This technical paper provides an update on that reporting approach for FRB.
Future revenue benefit
Many of our compliance interventions have an effect not just on the particular period that the return relates to, but future years too. For example, if we make changes to the rate at which a business has claimed capital allowances or tax relief for interest payments, then the change will affect both the liabilities under investigation (cash expected) and future years’ liabilities as well (FRB).
FRB can only be recorded by caseworkers where there is sufficient evidence – there is detailed guidance in place which sets out the conditions that must be met to justify recording FRB and there are limits to the number of future years for which FRB can apply.
Based on our guidance, FRB can be claimed for 3 or 5 years where we have Customer Compliance Managers in place and FRB is appropriate to be claimed. For other cases it can be for up to 3 years.
Total amounts of FRB generated between 2011 to 2012 and 2019 to 2020 are set out below in Figure 1.
Changes to our FRB reporting methodology
From 2011 to 2012 to 2015 to 2016 we reported FRB in the year in which we completed each compliance intervention. At the beginning of the Spending Review 2015 period (2016 to 2017 to 2019 to 2020), and responding to the NAO’s recommendation, we started recording FRB for the future year(s) in which it has an impact on Exchequer receipts rather than the year in which we completed the compliance intervention.
For illustrative purposes the total compliance yield results of our previous methodology (up to and including 2015 to 2016) and current methodology (2016 to 2017 onwards), are shown in Figure 1 below. No further changes to FRB have been made this year.
Figure 1 – previous and current FRB reporting methodologies (£m)
| Yield category (£m) | 2015-16 | 2016-17 | 2017-18 | 2018-19 | 2019-20* |
|---|---|---|---|---|---|
| Cash expected | 9,028 | 10,340 | 10,326 | 13,138 | 9,042 |
| Upstream operational yield | - | - | - | - | 4,058 |
| Revenue losses prevented | 6,795 | 7,926 | 9,696 | 9,298 | 10,551 |
| Future revenue benefit | 6,238 | 6,259 | 6,080 | 7,632 | 8,998 |
| Upstream product and process yield | 2,110 | 3,013 | 3,373 | 3,719 | 4,187 |
| Accelerated payments | 2,436 | 1,317 | 817 | 283 | 113 |
| Total | 26,607 | 28,855 | 30,292 | 34,070 | 36,948 |
Note: figures for 2019 to 2020 may not sum due to rounding.
Note: from 2019 to 2020 we are reporting upstream yield as a separate category, previously this was included in cash expected. For more information please refer to the upstream yield note in the 2019 to 2020 annual report and accounts.
For comparative purposes, the rows in Figure 2 show the total FRB generated by the previous reporting method and the columns show how FRB impacts on the Exchequer in each year under the current reporting methodology.
Figure 2 – estimated year of impact of FRB generated between 2011 to 2012 and 2019 to 2020 (£m)
The year of activity is listed in the vertical axis and the year of impact is listed on the horizontal axis in the table that follows.
| 2011-12 | 2012-13 | 2013-14 | 2014-15 | 2015-16 | 2016-17 | 2017-18 | 2018-19 | 2019-20 | 2020-21 | 2021-22 | 2022-23 | 2023-24 | 2024-25 | Total | ||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2011-12 | 197 | 1,458 | 1,837 | 887 | 229 | 69 | 23 | 4,700 | ||||||||
| 2012-13 | 294 | 1,459 | 1,645 | 765 | 197 | 59 | 20 | 4,441 | ||||||||
| 2013-14 | 328 | 1,791 | 2,052 | 967 | 265 | 79 | 28 | 5,508 | ||||||||
| 2014-15 | 348 | 2,273 | 2,535 | 1,192 | 269 | 108 | 19 | 6,745 | ||||||||
| 2015-16 | 400 | 2,137 | 2,349 | 1,061 | 192 | 73 | 13 | 6,226 | ||||||||
| 2016-17 | 354 | 1,733 | 1,985 | 970 | 225 | 88 | 24 | 5,379 | ||||||||
| 2017-18 | 458 | 1,857 | 2,076 | 989 | 417 | 127 | 40 | 5,964 | ||||||||
| 2018-19 | 2,362 | 2,819 | 1,482 | 1,188 | 983 | 379 | 0 | 9,214 | ||||||||
| 2019-20 | 2,804 | 1,916 | 1,543 | 981 | 895 | 366 | 8,505 | |||||||||
| Total | 197 | 1,752 | 3,624 | 4,671 | 5,719 | 6,259 | 6,080 | 7,632 | 8,998 | 4,704 | 3,249 | 2,115 | 1,314 | 366 |
Note: £7 million difference between 2018 to 2019 FRB by year of activity in 2018 to 2019 and 2019 to 2020 due to timing issues as it is included in the end of year carried forward totals from 2018 to 2019
During 2018 to 2019 we improved the quality and coverage of our FRB data and reporting systems. As a result, our understanding of when FRB from our interventions impacts the Exchequer has been updated.
This is evident in the 2018 to 2019 and 2019 to 2020 row of Figure 2, which shows a markedly different profile to previous years. For years up to and including 2017 to 2018, limited data was available on a case-by-case basis to directly show when FRB amounts would impact on the Exchequer.
We therefore used an assumption-based model to allocate aggregate-level FRB to an expected year of impact. This model was based on expected behavioural change for different customer segments and Heads of Duty. From 2018 to 2019 our compliance officers have directly input FRB by year of impact for each case onto our case management systems, allowing a more accurate reflection of impact on the Exchequer.
This improvement to our data has had no impact on the total FRB that we score, only the timing of the year in which we score it and Figure 3 below shows how the allocation of FRB to a year of impact on the Exchequer has changed as a result.
Figure 3 – difference in profiles: How FRB is allocated from year of settlement to year of impact on the Exchequer following data improvements.
| In year (%) | Year 1 (%) | Year 2 (%) | Year 3 (%) | Year 4 (%) | Year 5 (%) | |
|---|---|---|---|---|---|---|
| Up to 2017-18 | 7 | 30 | 34 | 19 | 7 | 2 |
| 2018-19 | 25 | 30 | 18 | 13 | 10 | 4 |
| 2019-20 | 32 | 25 | 17 | 11 | 10 | 4 |
Adjustment to FRB impacting in 2020 to 2021 to reflect the economic effect of COVID-19
The unprecedented economic shock caused by COVID-19 has resulted in a fall in tax receipts in 2020 to 2021. There is a risk that FRB we assessed in past years, which we had expected to impact the Exchequer in 2020 to 2021, will therefore have been overestimated.
For this reason, we will be making a one-off adjustment to the FRB brought forward from previous years to 2020 to 2021, in line with the reduction in tax receipts compared to our pre-COVID-19 forecasts. In our Quarter 1 2020 to 2021 performance publication we have provisionally reduced FRB brought forward from previous years by 15%, which is in line with the Office for Budget Responsibility expectation for tax receipts.
This means that in our 2020 to 2021 annual report and accounts we will only score a proportion of the £5,534 million FRB brought forward from previous years to 2020 to 2021. We will make the final adjustment after the end of the year once we are able to calculate the full impact of COVID-19 on tax receipts. We have not made any adjustment to 2019 to 2020 FRB as COVID-19 will not have had a major impact on tax receipts during 2019 to 2020.