HMRC's Compliance Yield: How HMRC reports Future Revenue Benefit – an update for 2021 to 2022
Published 18 July 2022
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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 five classifications, these are:
- Cash Expected
- Revenue Loss Prevented
- Future Revenue Benefit
- Upstream Product and Process
- Upstream Operational
These classifications are explained further in HMRC’s Annual Report and Accounts 2021 to 2022. 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) best 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 (Future Revenue Benefit).
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.
Changes to our FRB reporting methodology
From financial year 2011 to 2012, to financial year 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 (financial year 2016 to 2017, to financial year 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.
Total amounts of FRB generated between 2011 to 2012 and 2021 to 2022 can be found in the data file Figure 1: Estimated year of impact of Future Revenue Benefit (FRB) generated between 2011-12 and 2021-22. The rows in Figure 1 show the total FRB generated by the previous reporting method (scoring in year of activity) and the columns show how FRB impacts on the Exchequer in each year under the current reporting methodology (scoring in year of impact).
FRB in 2021 to 2022: Impact of COVID-19
When estimating the impact of our compliance checks on future years’ liabilities, we estimate how much additional tax the taxpayer will pay in each future year as a result of the corrected tax position. This FRB estimate assumes that overall tax receipts in those future years are relatively stable and the taxpayer’s circumstances remain similar. However, tax receipts were impacted by the pandemic in a way we could not have foreseen at the time we calculated the future revenue benefit, meaning we would have overestimated the impact of our investigations. To take account of this, we made an adjustment to the FRB brought forward from previous years to 2020 to 2021, in line with the reduction in tax receipts compared to the Office for Budget Responsibility’s (OBR) pre-COVID-19 forecasts. The 9% adjustment reduced FRB assessed in previous years impacting in 2020 to 2021 from £5,517 million to £5,020 million.
In 2021 to 2022 tax receipts were broadly in line with the OBR’s pre-COVID 19 forecasts and we have assessed that this will not have had a material impact on FRB brought forward from previous years. As such no adjustment has been made to FRB assessed in previous years impacting in 2021 to 2022.
The value of FRB scored as a result of our compliance activity in 2020 to 2021 and 2021 to 2022 has also fallen when compared to previous years. This is partly due to lower economic activity and partly because our compliance officers have less certainty over future liabilities and taxpayer circumstances, so are more cautious in their estimates. This impact will be evident in our compliance yield delivery in future years as we report FRB by year of impact on the Exchequer.