Don’t reward HMRC’s massive failure

Allister Heath
THERE is nothing worse than rewards for failure – somebody should have made that clear to Her Majesty’s Revenue and Customs (HMRC), the UK’s woefully underperforming tax body. Rather than displaying some much-needed humility after disastrously miscalculating the pay-as-you-earn (PAYE) income taxes of millions of people, and failing in many other ways over the years, the organisation is now lobbying for a gigantic power grab which could entirely redefine the relationship between the state, employees and their employers.

If you think I’m exaggerating, take a look at HMRC’s proposals, outlined in a discussion document. At present, PAYE income taxes are deducted by employers from their employees’ wages on a monthly basis. Under the most extreme of the proposals, companies would start handing over their entire salaries to the government, in the shape of a “central calculator” run by HMRC. The taxes would then be deducted by HMRC and the remaining amount would be paid by the taxman to employees. Incredibly, HMRC would suddenly become the largest payroll organisation in the world – it, rather than employers, would pay wages.

This would be a nightmare for many reasons. The set-up costs would be massive, with the need to hire thousands of consultants, developers and others; these sorts of IT projects are notoriously expensive, invariably go over budget and end up not working properly at all. Once set up, massive numbers of errors would lead to money being paid over by employers but not reaching employees on the due day. The track record of large IT projects shows that this is a certainty. Imagine if 1m people suddenly didn’t receive their pay at the end of the month? The authorities would have to hire tens of thousands of staff – jobs currently undertaken by payroll or HR departments in private firms – merely to deal with queries.

While the coalition is espousing decentralisation and localism, centralising payroll under one government institution would be an absurd move in the opposite direction, a 1970s-style nationalisation of a system that must remain private and decentralised. And what about privacy? Will everyone’s salary and taxation level be available online to view, given that all of the data would suddenly be in one place? Hackers would have a field day.

A related HMRC proposal would be to start introducing real-time information on pay so that tax is much more likely to be deducted correctly. This is – in theory – a good idea and would make it easier to reform the welfare system along the radical lines envisaged by Iain Duncan Smith. But there could be huge costs to employers, who would have to invest heavily in staff and computer systems. The real danger, however, is that HMRC is also thinking of forcing firms to hand over extra information to the authorities as part of this shift to real-time data. This is unacceptable for cost and privacy reasons. The Institute of Directors has highlighted some of the issues. Is pay frequency really needed? How can employers be expected to know about all third-party payments, in real time? Does the fact that some pay is for holidays matter for tax purposes? Finally, there is a suggestion that hours worked should be recorded – this would be an odiously authoritarian development. It is almost as if officials are seeking to kill off corporate Britain and to impose Soviet-style controls on taxpayers. The coalition government should tell HMRC where to go.