Welcome to the Treasury Select Committee on Tuesday 13 January 2026. Today we are examining the work of His Majesty’s Revenue and Customs, otherwise known as HMRC, which is a regular session. We are pleased to invite back for his second outing in front of us John-Paul Marks, the First Permanent Secretary and chief executive, who has been in the post not quite a year yet. He is joined by Cerys McDonald, who is the director of individuals policy. Perhaps you could explain, Ms McDonald, what individuals policy is. That is a new term for us on the Committee.

There are a range of policy directors within HMRC who lead our policy and technical functions. I have responsibility for income tax, national insurance and the taxation of pensions, savings and charities, and I also oversee our work on child benefit and tax-free childcare.

Thank you very much and welcome to your first Treasury Select Committee meeting. They are joined by Jonathan Russell, who is the chief executive of the Valuation Office Agency, which is now incorporated within HMRC. Has that incorporation fully taken place, Mr Russell?

No, it starts on 1 April. We are working hard to make sure the transition is smooth, but it will start on 1 April. It is fair to say that it is a process rather than an event, but we will be formally part of HMRC on 1 April.

It is always wise not to have a deadline that can be missed in front of a Committee. Thank you very much. They are joined by Jonathan Athow, who is the director general for customer strategy and tax design. A few of the technical questions may be coming towards you, Mr Athow. I just wanted to kick off with you, Mr Marks. You have been Permanent Secretary for nine months now. How has it been?

It is broadly going well. Underlying service standards are improving. We are answering more phone calls more quickly than we were this time last year. We reported in our annual report and accounts a record yield last year of about £48 billion. We think we are on track to exceed that again this year, but we will wait and see. We are into quarter four, which is peak demand on self-assessments. We are ahead of schedule from where we were last year, but this is a busy quarter for us. We will see where we are on our service standards at the end of this quarter, but we are aiming to hit them. We published a debt strategy alongside the Budget. Debt has come down by about £1 billion. We are aiming to bring that down as a percentage of receipts year on year over the next few years as well. We stepped through a significant Budget. That is three fiscal events now with this Government. If we look at the tax gap, the OBR shows an illustrative scenario in its publication of that falling over the next forecast period. Taken together, the tax gap packages make up about £10 billion of additional tax revenue on what it would otherwise been. It is mainly more capacity but also transformation and policy change, which we can get into.

You have been out in public talking about nurturing a kinder environment at HMRC. Did you inherit an environment that was not kind? Is it kindness to staff or kindness to customers?

It needs to be both. We care deeply about our charter because we are required to operate according to our charter under the law, and quite right too. There are important standards in there around fairness and keeping customer data secure. We want to live up to that standard. I have been talking a lot with the team about working in the open. I am sure we will talk about some of the things that we have had challenges with this year, such as child benefits and national insurance. We have had some bumps in the road. We try to respond as rapidly as we can to those, be open about the problem, fix it quickly and then learn well from it. I have been talking a lot about that. I have been working a lot on engagement with the team. It is very important to think about purpose within the organisation. We have seen engagement improve this year, which is great. The data will be published shortly from the Cabinet Office, so I will not pre-empt that, but, for HMRC, we are very pleased with the progress that we have made with our engagement. Of course, there is more to do. Leading with kindness is a thing that we thought a lot about in the Scottish Government. It is important, particularly in an environment that is contentious, challenging and moving at pace. There will be bumps in the road. Our job is to create an environment where we look after our customers, engage well with our partners, and look after our teams so that we learn from those moments and continue to improve outcomes.

Can I just take you back to the tax gap, the progress that you expect to make and the profile of the reduction?

It is very ambitious.

It seems to be—I suspect all Governments have a tendency to do this—optimistic at the end of the period. How do you feel about that? What is the conversation with the OBR around verifying whether that is realistic? It is easy for any Government to say, “We are going to put in these measures and we are going to have a massive increase in revenues at the end of the period”.

It is a very steep curve.

It is very steep. How do you feel about that? Do you reference what has been said in previous fiscal events by previous Governments when thinking about how likely it is that we will get to that point?

I will bring in Jonathan, if I could, on the point around the conversation with the OBR, realistic assumptions and where there will be certain measures that will have a higher degree of uncertainty, if I may. On your underlying point, in HMRC we are clear that we have a very stretching transformation ahead of us. We have made a good start and I am pleased with the progress of the first year, but you are quite right about the scale of ambition in these three fiscal events now, in terms of the level of onboarding of new capacity that we are doing, the consolidation of that capability, the increase in things such as the amount of chargeable decisions and investigations, and the work we have to do on transformation with third-party data and risking. It is significant. We have the Making Tax Digital roll-out through this period as well to commence from the spring. Having said all of that, all those assumptions have been stress-tested carefully. The OBR will look at what it thinks is prudent and underpinned by evidence and data. They are not just hopeful assumptions; they are underpinned by the data and evidence that we have. You are quite right. Each year we will publish progress and be transparent on how we are moving through it. If we need to make adjustments because we are not quite on track, we will be open about that.

The OBR is looking at the money side, but you have an awful lot of change. Some of the things we are going to talk about today that have come out of the Budget are pensions, the Valuation Office Agency coming in, business rate changes and ISA changes. There are an awful lot of complications because of the nature of the Budget, with smaller decisions rather than one big tax change. That is about your people and the complex processes that you are going to have to introduce. Is HMRC able to cope?

Yes, we are. We work very hard on doing feasibility assessments of those measures.

That is for advice to Ministers.

Yes, as part of our advice to Ministers, so we can be confident that the Budget is indeed feasible. The last thing that anyone wants is that to not be the case. Cerys can talk about the changes that we are making on ISAs. We have taken an additional year to give ourselves time for monthly mandatory reporting of ISA data, which we think will help industry.

Some of those deadlines announced in the Budget are because of that technical advice that you were giving Ministers about what was feasible.

That is right. If I take low-value imports, we have deliberately given ourselves time to properly consult, to understand industry feedback and to look at what is going on in the States and what Europe does. There are calls for us to move more quickly, but we recognise that we should take care.

We are going to come into some of the detail on those individual things, but sitting at the top of this large organisation—it seems to be growing by the minute; more things keep coming into HMRC—what are the areas that worry you most or keep you awake at night? What are the things that you think you still have a bit of work to do to be sure you can really deliver on?

You are right that, when you look at any individual measure, you can do a feasibility assessment and convince yourself it is all fine. When you take the whole thing together and you look at the dependencies, that is where sometimes the rubber hits the road. We think we have phased all these measures over the next five years in a way that manages all those dependencies. There is no doubt that this year we onboard a new contact centre system and case management system; we start this exiting of our legacy data centres; and we have Making Tax Digital. There are quite a lot of key dependencies into, for example, our core ETMP system or with our CESA system. Our change portfolio leads are constantly managing the dependencies to make sure that the plans align. At the moment, we are rating our portfolio as amber and on a good track. We had some amber-red ratings because of getting some of our procurements and approvals away, and some uncertainty there, but that is now done. Finally, on your point about what keeps us awake at night, it is the underlying resilience and security threat. The last time that we were here we talked about PAYE and organised crime. It does feel to me that we are operating in an environment where the threat environment is high and constantly changing. Our plans could always be disrupted by some sort of malicious attack that we have to handle. As I say, we are improving our underlying resilience to respond to those, but it is always a concern.

There are huge digital challenges. Finally, you have had another change of Minister. You personally have been through two Ministers. Minister Tomlinson is still chair of the HMRC board. Can you give an example of what different or better decisions have been made because there is a Minister chairing the board at HMRC?

If I think back to the spending review, when I first came into my role, we were going through the zero-based review and using that to inform assumptions around the spending settlement. It goes back to the conversation that we have just had about us being able to be with Ministers and talk about the hard reality of delivering transformation and the need for time to phase complex measures into delivery. We have had this conversation before. It is not that those conversations could not happen under previous Governments. Of course, there are close relationships between HMRC officials and Government Ministers. Yes, the Exchequer Secretary chairs the board. That is an opportunity for him to hear the totality of the portfolio and to hear our portfolio team talk about portfolio risk and dependencies, as an example. Because of that good policy partnership, we are able to ensure our feasibility assessments inform Budget advice and we can be confident that our message is being heard when we think we need more time to deliver a complex measure.

It seems that you are suggesting that Ministers have a better understanding of what problems might be caused by a policy before they have formulated the policy. Is that a fair summary of what you have said?

The opportunity of chairing the board is the opportunity to hear the totality on a regular basis from the team with the non-executives. That does not mean it could not have been done before. It was just done in a different forum in a different way.

Indeed. We are looking forward to having the Exchequer Secretary in front of us regularly as he chairs the board.

Your predecessor used to like to shut down the phone lines for the public with little notice and try to force everyone to use the app and digital paths. I presume that is still part of the strategic direction that you want to take things. Can you update us on how that is going?

We want to achieve a digital-first organisation. Around 80% of our customer interactions are now digital. That was around 75% this time last year. The objective is to get to 90% by 2030, so we are on the right track. We want to create a digital service offer that is compelling and that people want to use. We see good traffic on the app. People are taking it up and using it a lot. We are putting more features online all the time.

What are the numbers on that?

I will just grab them for you. To your point on phone lines, we do not have any plans to shut any phone lines down to drive the channel shift. On the app, the average speed of answer was 13 minutes at the end of quarter two relative to 22 minutes the previous year. Where can I find the latest take-up on the app?

I do not think I have it here.

I will get it back to you in one second.

There is someone behind you, I am sure, who will be able to furnish you with that figure.

Here we are. Forgive me. There were 7.3 million unique users of the app in 2025. That is up 2.1 million on 2024. There is good growth.

Thank you. That is helpful. We will continue to watch the phone lines. Have you put in any provision, because of the changes in the Budget, for extra staff on the phone line?

Overall, the Budget gives us about 1,000 additional headcount. That is mainly for low-value imports and, in the Valuation Office Agency, high-value council tax surcharge.

That is in addition to the other staff you were recruiting, the 5,500 or so that you are partway through. Where are you through that first recruitment? What is the timetable for the recruitment of the additional staff from the Budget?

Our headcount went up just over 2,000 this year. We are ahead of our compliance capacity build, which is the message to the compliance team. That goes back to the point around optimism in the forecast and whether we can get ahead of it. We have established a compliance academy for all the training. The onboarding has been going well, but—I have to be honest—we are having to work hard across all regions of the UK to fill our recruitment. We are managing to do it, but we are not doing it by a big margin, if I can be transparent about that.

What are the issues there?

It is quite high volume. It is a commitment to come in and take on tax training and go through our training process. We have to keep making sure that we are looking at our recruitment process, that we are reaching all corners of the labour market, that we are an attractive employer and that we are giving people the opportunities they want.

There is a risk. Although you are ahead of it, there is a risk that you are worrying about.

Yes. Whenever you have to climb a mountain on a capacity build—it is the same with 13,500 work coaches—you have to keep up.

Yes, we have covered those figures before, so you have the rest to come. Then you have this 1,000 from the Budget. How long is that going to take? We are going to come to property and the Valuation Office Agency later, but how long is it going to take to get those people on board? That is on top of the existing 3,000.

I know 1,000 sounds a lot, but that is over the SR period. It peaks in 2027-28 and 2028-29. Those are the two peak years. It is particularly about council tax surcharge, which Jonathan can talk a bit about the plan for, and low value imports, which is back-end loaded towards later in the period.

That is quite a lot of people. Are they graduate trainees?

I will let Jonathan talk about the nature of the workforce of the Valuation Office Agency, if I may. For customs and exercise, for low-value imports, yes, it will be AO/EO grade to do the administration around customer service support as that system goes live.

Is AI having an impact? When we talk to people in the banking sector, they say that a lot of those junior jobs will go because of AI. Is that something that HMRC is looking at?

We are using AI already, of course. It is embedded into our risking tools and our data to enable us to spot compliance risks and to make sure that we are targeting our compliance resources effectively. We think we can use AI to augment our agent experience and improve outcomes. An example that we have been testing at the moment is around telephony summarisation. As I am taking the call, the system is summarising for me the call outcome and the next best step. It is still led by the agent but augmented by AI. As an organisation overall, we are broadly the same size in 2030 as we are today. We onboard a lot into our frontline for compliance and debt with a bit more now for customs and valuation. At the same time, we have quite stretching efficiency targets to reduce the size of our core operation to balance the books. There will be both onboarding of new resources and moving or retraining of capacity within the organisation. Of course, AI offers efficiency, but, for those colleagues working in the organisation, we think it augments their experience rather than replaces them.

We will get into some of those things in more detail in relation to the specific issues of the Budget. I want to move on to the taxation of the state pension. The Chancellor made a very firm commitment on television saying that no one who is just on the state pension would be taxed. First of all, how many people are just on the state pension? How many people just receive the state pension? What is the figure for that?

If I may, I might ask Cerys to come in.

First, if you do not mind, I will explain how the state pension is currently taxed. The state pension is currently taxable.

Yes, it is. This is people who only receive it, who are under the personal allowance. It is going to cross over in 2027. How many state pensioners are there, first of all?

Forgive me. It is quite difficult to estimate because, as you will appreciate, the state pension is quite complicated. Even though we talk about people on the basic state pension or the new state pension, the actual value of pension that they receive can vary. I do not have an official figure to share.

Do you have a ballpark figure?

I would say we are talking about between 800,000 and 1 million. Would you like me to explain a little bit more about what the Chancellor has announced and how we are responding as an organisation?

Perhaps I will ask the questions and then we will see whether you need to add anything. We can work out that there are at least three different types of pensioners. You will have people on the old state pension, people on the new state pension, and people who have deferred their pension, who, therefore, by 2027, will potentially be getting quite a bit more than the annual tax-free allowance. Will they all not have to pay tax?

The Chancellor has been really clear that, at the moment, the only mechanism we have within HMRC to recover tax from those who are only in receipt of a state pension, have no other form of income and do not complete a self-assessment is called a simple assessment. We send a tax bill after the end of the tax year, often unexpectedly. We currently use that mechanism for about 1.3 million taxpayers. It is an administrative tool that we have and that we currently do use, but not for a large population. The Chancellor has been very clear that she does not want people who are currently only in receipt of a state pension to receive that tax bill after the end of the tax year.

That is everyone in receipt of only a state pension, even if you have deferred your pension and you are getting a much higher state pension or a significantly higher amount.

What the Chancellor has said publicly is a high-level policy intent. She has referred to individuals in receipt of the new state pension and the basic state pension. There is clearly a lot of detail to still work through. She has said that that detail will be set out in due course. I can reassure the Committee that we are working hand in glove with the Treasury on these options to make sure that the final decision is operable from April 27.

It is quite complex, is it not? If you are a state pensioner now, you are going to cross over in 2027. That is going to be everybody on a state pension. Some of those people will have a different arrangement because they opted out with SERPS. You cannot tell us at this point whether those people will have to pay tax. You are saying that the Chancellor’s wording was this basic state pension and the new state pension. They are the ones in scope.

The full policy detail was not announced at the Budget. The Chancellor signalled what her policy intent was and said that further detail will be set out in due course.

She was very clear in the interview. “Nobody just receiving the state pension will pay tax”. She repeated it, I think.

That is absolutely her policy intent. What I am just trying to be careful of is that there is a lot of detail underpinning that.

What are the key challenges for you, then, in trying to implement that policy so that it works?

Any policy decision here will require legislation. We will be working with the Treasury and Ministers to bring forward legislation to support that policy intent in the next Finance Bill. We have mobilised a project team already in anticipation of this change. Yes, there is detail to work through, but, in effect, we will need a statutory basis to amend the tax calculation engine to remove the tax liability for that cohort. There are plenty of other features of the tax system where we reduce the liability.

Sorry, I am just a bit confused. If the threshold does not change and the triple lock progressively accelerates each year and increases the amount of basic state pension that somebody receives, there is a difference between those two amounts, which is taxable. It gets bigger over time. If we take, which we will, the Chancellor’s words to mean that, what she must essentially be saying is either that she is going to increase the threshold to take people out of tax or that there is going to be a special measure to stop pensioners who receive only the basic state pension from paying tax. Is that a reasonable conclusion?

It is the latter that we are talking about here. There are lots of examples in the tax system whereby we reduce someone’s tax liability based on either their personal circumstances or the characteristics of their income. This will just be another one of those features.

That is another complexity for you to deal with.

You could argue that it is a complexity. It will, though, remove the tax liability from, let us say, 1 million pensioners, which will avoid them and us having to go through a simple assessment process. It is a simplification for those low-income pensioners.

You said at the beginning that you could not give us a figure for people just receiving the state pension. Will people have to make a declaration that they only receive the state pension?

HMRC and DWP have a regular data exchange on those receiving the state pension to inform our wider work on collecting the tax from those higher up the income scale. I do not expect there to be any customer requirement here or to apply for this. We should be able to automate it. I do not want to pre-empt too much of the detail here because, as I indicated, the Chancellor did say she would set out the full detail later this year. We are working through those options with her now.

If you are receiving a small occupational pension that just takes you over, you could be treated differently.

We have existing mechanisms in place to recover tax on the state pension via occupational pensions because pension schemes do operate PAYE at the moment.

They could be treated differently from people who are just in receipt of the state pension. If pensioners are receiving a small occupational pension, they could end up in a differential position.

They could, but, as I said, the Chancellor will set out more detail. The work that we will be doing with the Treasury at the moment is to make sure we can define the population and look at interactions with other customers in different but similar circumstances.

Basically, this is a question that we will need to put to the Minister, then, when he is next in front of us or maybe the next time that we have the Pensions Minister in front of us. The policy will be honed and defined in the Finance Bill.

Yes.

The policy intent is high level. The devil will be in the detail, but it will not be in this Finance Bill.

We are working really closely with Ministers to support that and provide advice.

In terms of timeframe, when does this have to go through Parliament for you to be able to implement it at HMRC?

We would expect this to go through the next Finance Bill in the autumn, but we have mobilised a project team already in anticipation of needing to make this change. The mechanism that we would normally use without a mitigation to recover this tax is simple assessment. Normally, we would not be processing that for 2027-28 until after the end of the 2028 tax year. We have a decent run-in here. I am not worried about delivery timescales.

We will no doubt be coming back to this because there is an awful lot still to be done.

I know public interest is high.

I will deal with how we do the valuation first and then the appeals process, if that is okay. They are two quite different things. In terms of the high-value council tax surcharge, it is worth putting it in context. Currently, we value something in the region of 28 million properties for council tax banding. That will include properties that could well be included in the high-value council tax surcharge because we have property attribute data on 28 million properties. That will include bedrooms, plot size, type of house—i.e. whether it is a bungalow or detached, et cetera—whether it has a garage or whether it has parking. We already have the basic valuation that we use to value properties for council tax banding, which was done in 1991. We are looking at the data we hold already to make sure that it is up to date and accurate. We will also be looking at open-source data from the Office for National Statistics and the Land Registry, sales data and stamp duty land tax data. We will be looking at those properties that are in the higher element of current banding because of property data and then seeing how that translates to other data, matching the two and coming up with a valuation. We have already done some work on that. We are thinking about how we can do some risking around the valuation because in the boundaries of where the tax may be applied there is going to be more contention. We need to apply a lot more attention to those areas to make sure we get the valuation correct and accurate. When we are doing the valuations, we will make sure that we are public about it. We will go out and tell people how we are doing the valuation and the criteria that we are using. At the end of the day, we want people to have confidence in the valuations that we produce. We do not want there to be appeals because that is in no one’s interest. We want to make sure we are open, transparent and clear about the data that we are using, how we have applied it and how we have come to the valuation.

We will make sure we have the property attribute data on our system. We make sure that property attribute data is still relevant. Has the house been extended? Has it been changed? Has a big house been split into two? We look at that type of data. It is looking at the valuation, rather than in 1991, probably at a date this year, which has yet to be set because it requires legislation.

That is a very good point. At the moment, we deal with around about 400,000 council tax valuations a year because people say their property has changed. As a result of the introduction of the high-value council tax surcharge, the estimate is that there will be about 150,000 to 200,000 properties in scope. The banding starts at £2 million. To your point about where we will look to make sure that we are including properties that should be included, we have not finalised it yet, but we will probably look at houses that may have an indicative valuation of £1.5 million to make sure we are not missing anything. If houses are clearly above the upper level, which is £5 million, we will not spend too much time looking at those either. We will be looking at the ones in between those two levels to make sure we get the banding absolutely accurate. It is what we do. For example, every year we will value somewhere in the region of 200,000 houses that have been newly built. We do that anyway. We are valuing those built today at 1991. Within that 200,000, there will be some houses that meet the criteria for the high-value council tax surcharge.

No. We look at the property attribute data, location, bedroom number, size and type of house, so detached or semi-detached. That is how we do the valuation. It is what we do. We do valuations. We have been doing it for a long time. On the appeals process, it is probably worth pointing out that the process for the high-value council tax surcharge will require legislation and consultation. I know there are plans to do the consultation in the next few months. That consultation will look at, for example, reliefs, appeals, how you might challenge your council tax banding, the scope and complex areas around ownership because the billing will not be on the occupier; it will be on the owner of the property. Again, there will be consultation around that. That will include how you might appeal it. Again, that has not been set out yet. That is still a work in process.

Are there any exemptions? There have been exemptions on second council tax, which I know is not your area of work. Are there any exemptions for things such as charities or convents? I do not know.

That is still to be worked through, Chair, because there could be old people’s homes, convents and that type of thing. Is it included or not? That is going to be part of the consultation. We are not leading on that consultation, but, if there is an opportunity, we want to be very clear about how we will do the valuation. As I said, we want people to trust it and have faith in it. It is a valuation to us, but it is their home. We need to make sure we are doing it properly and robustly.

It is the legal owner.

On the second point, that has just been the practice over years. The Valuation Office Agency makes the valuation; councils send out the bills and collect the tax.

I take your point about a small council that has a small number of properties. Given the measures that have just been announced, that is a concern that can be raised as part of the consultation on the process around appeals and exemptions. We want this measure to work well. Of course, there will be more properties in certain parts of the country than others. If we need to work with MHCLG and with councils to understand the challenges of administration, and to make sure they have what they need, we will be happy to do that.

It is not really in the scope of the consultation, but, as part of developing the legislation required to make sure this tax is delivered, there will be government discussions with local authorities about how we make it work effectively and efficiently. Yes, there will be some local authorities that may not have any within scope. There will be some that have quite a large number because most of the properties in scope are going to be in London, the south-east and the east. They already have mechanisms for collecting council tax. In a sense it exists already because at the moment local authorities are the main beneficiaries of council tax. The vast majority of their funding comes from business rates or council tax. That is where they have the systems set up. It just seems a logical progression to use a similar system for this tax as they have for council tax. It will still be looked at.

I am concerned about the complexity of the operations that you currently have to deal with and the challenge of trying to absorb quite a new responsibility. I understand that the VOA routinely takes nine to 12 months to process applications from owners seeking to move from, say, self-catering properties from council tax to business rates. They are quite narrow evidence-based determinations. How can you convince us and the public that your existing workload of valuations, which is already challenging, can be accommodated and ideally improved alongside this new significant responsibility? It will be very contentious for some people, but the Government’s policy rests on this. Mr Marks talked to us about the stress-testing of all the different changes and processes, and you being essentially fused into HMRC. How do you reassure us?

Yes, there is certainly a lot of work on in the Valuation Office Agency, but we have a strong track record of delivering. For example, we have just delivered a revaluation of 2.1 million non-domestic properties. In Wales we have done a council tax valuation of 1.5 million properties. We have done work for DfE on valuing schools or measuring schools so that they can determine how best to use them. As I said, we deal with roughly 400,000 council tax valuations a year, 200,000 of which are for new build. To put it in scale, we are talking about something in the region of 150,000 to 200,000 properties being in scope of the high-value council tax surcharge. We will be able to deliver that. I am very confident in that. There have been issues, it is fair to say, with council tax over the last 12 months. A year ago we introduced a new technology system because the old system was on its knees, basically. We introduced a new system. When that was introduced, there was a blip in performance as it bedded in and as people got used to it. Because we have made some resets to that technology and people are now getting more familiar with it, we are delivering something in the region of three times more per week in terms of council tax valuations.

With respect, most agencies of all Government Departments make those plans—you are an experienced civil servant—and these unforeseen problems arise. Chair: It is the real world.

On the balance of probabilities, it is likely that, across all the new things that you have to do—we have already discussed several of them this morning—one of them is going to go wrong. How do you use your experience to justify that degree of optimism going forward, Mr Russell?

It is very helpful that we introduced the system last year, not this year. That is luck of timing. Over the last few years, it has been very clear that we need a very flexible workforce. A while ago, it was quite rigid. You did one business line or another. That is not the way that we can cope now. We need to make sure people can multitask and are multiskilled. We have developed that over the last few years. In the priority work, as I mentioned, around the Welsh council tax revaluation, we hit all the targets for that. That was green. The non-domestic rating revaluation, with 2.1 million properties revalued, was all green. In terms of the large-scale delivery, we can certainly deliver on that. I have no doubt about that at all.

Good luck.

I wanted to ask about the owners versus the renters being liable for this measure. Is this something new for the Department to be grappling with? Some open sources have suggested that understanding who the owner of a property is can sometimes be quite hard. Have you taken that into calculation in terms of the scheme?

You are absolutely right. It is not what we do with council tax. Council tax is on the occupier, not the owner. It is a change. Our role is very specific. We do the valuation. Once we have done the valuation, the billing, as we discussed earlier, is going to be for others. It is not something that we have been directly involved in, but it is something, I understand, that will be done as part of the consultation. As you say, some of the ownership mechanisms are complex and we want it to work efficiently and effectively. That will be part of the consultation and it will be included in the legislation when it goes through the House.

My understanding, Chair, is that there are some circumstances where local authorities do not know who owns properties in their own jurisdiction. With the liability being on the owner of the asset rather than the occupier, is there an impression that this might grow in popularity in terms of the way it is administered? I cannot ask you the policy question, of course, but in other jurisdictions it is quite normal for an owner of an asset to be liable as opposed to somebody who is renting the property, for example.

I really cannot answer that.

It is a question for Ministers.

I had another very quick one. Is there a scheme whereby there could be a charge on the property over time, in order to give time to find out who the owner of that property is? How will that mechanism work? I suspect it could take quite some time to establish ownership of some of these properties. Is there a proposal to make that accrue? Has that thinking been done?

There is quite a lot of thinking to be done through the legislative process and the consultation process. For example, what is the valuation date? When the bills land—I think it is 2028—I am sure that there will be some element or package about whether we have found the ownership yet or not. Again, that is not for me to answer, but I am sure it will be included in the consultation.

You are envisaging legislation in the next Finance Bill as well or is it going to be separate?

That is still being discussed. At the moment, some of the regulation is with MHCLG. It may well be in the Finance Bill. Again, that is one of the points to be discussed.

It could be across different Departments. There is lots more that we could go into there, but I am sure we will come back to that at a future session.

I would like to ask Mr Russell about business rates because there are two things going on that have given pubs and hospitality businesses a nasty shock at the Budget. One is the policy decision about the withdrawal and tapering of the covid support, but the other is around the valuation of those premises, which, Mr Russell, I understand that your area is responsible for. Can you talk us through whether there was anything unusual about this valuation? It does seem to have led to a lot of shock from many businesses, not just pubs and hospitality businesses, due to the sharp increase in valuations that they have seen.

There is nothing unusual about how we carried out the valuation for the 2026 list as opposed to the 2023 list or indeed the 2017 list. Particularly with pubs, we have been doing it in a similar way for over 20 years now. We have a Pubs Rating Forum, which includes industry representatives such as the British Beer and Pub Association, UKHospitality and the British Institute of Innkeeping. We have been engaging with those business representatives throughout the process. We use what we call rental evidence. At the outset of the valuation process we do a callout for businesses to send us their rental evidence. There are about 36,000 or 37,000 pubs in the list. That has been roughly the same from 2017 to now. Of those 38,000 pubs, we had 20,000 forms returned from the pubs saying, “This is the rentable evidence that we have”. Rateable value is based on rent, basically. We have that rentable evidence. We then take that rentable evidence and we work with trade association representatives. We say, “This is the rentable evidence that we have”. We categorise the pubs into location because that has a big impact on what the rent may be. For example, a city centre or town pub per square foot probably turns over more than a rural pub, so we classify the pubs into those three areas: city centre and town, urban and urban fringe, and rural. We then look at something called fair maintainable turnover. We are trying to make sure we are valuing the property and not the business. The fair maintainable turnover looks at what a pub in one of those categories reasonably could expect to turn over with a reasonable landlord. We take that and we say, “As part of that, what of that fair maintainable turnover do we think could be allocated to rent?” For a city centre or town pub, we allocate a percentage of that fair maintainable turnover in the region of 7% to 13%. For a rural pub—as I said, square footage is not a true indicator of profitability—we look at something like 2.5% to 7.5%. We put those pubs in the categories, apply that broad range and look at the individual circumstances, and that comes up with a rateable value. That has been the process that we have used for at least 20 years.

This time it seems to have taken people hugely by surprise. The pub association is saying that vast amounts of additional beer needs to be sold in order to make this economic. This time around did you find that more pubs and hospitality businesses were seeing a sharp increase than in a normal revaluation and, if so, how many?

We were working closely with the industry and trade associations because we do not want there to be surprises. That is not what we want. We did work closely with them. To give you an indication of how many, we apply quite a scalpel-like approach to the valuations. It is not a broad-brush or blanket approach. Yes, over the whole revaluation from the 2023 list to the 2026 list, on average the rateable value has gone up by 32%.

Thirty‑two per cent?

Within that range, 15% of pubs or around 5,400 have seen their rateable value decrease. Some would have seen it going up by zero to 29%, and some 30% or more. Yes, there has been an increase. If you then go back to the 2017 list, the whole sector had a rateable value of £1.4 billion. The rating 2026 list had an overall rateable value of £1.5 billion. The actual rateable change between the 2017 list and the 2026 list is about 8%. There was a blip because of covid. If you think about how the industry has been affected by covid, there was not much of a turnover; there was not much fair maintainable trade. That had an impact on the rentable evidence. At the end of the day, that is what we do. We follow the rentable evidence.

Did you flag to your Minister in advance of the Budget that 32% was a big hike compared to previous hikes and that therefore there might be a political issue coming out of this valuation when you combine that with withdrawing the covid-era support? Did you flag that?

We are part of a wider ecosystem for business rates. We are very clear about what our role is. We do the valuations. We do it in a fair, open and transparent way. We want them to be trusted. We know that that work then goes into central Government to ensure that local authorities are funded properly and that decisions around tax are made. There is a process for sharing data throughout the valuation, and we follow that process.

Was part of that process saying, “By the way, Chancellor, you are looking at a political problem here because this is a huge increase for this sector”?

The process includes a series of what we call data drops, basically. We do the valuation. We do those data drops over a period of 12 months. That data will include pretty much every classification of the sectors in England. We cannot show individual businesses because we are not allowed to do that, but it will show at a sectoral level what the impact of the revaluation is.

Do you know what was the highest increase in value for a pub?

Let me think about it. Some will have doubled. That will be a small number. Around about 13% would have seen their valuation doubled.

How many were over 40%? You said that 32% is the average. That is quite a lot.

About 5,100 pubs have seen their rateable value doubled.

Is there any pattern as to why those valuations went up so much? That is a lot.

It is based on evidence, Chair. As I said, we look at the rentable evidence that we get from the request to send data into us. We then look at the fair maintainable turnover. That will take into account things such as wet sales, dry sales, accommodation.

Just to be clear, wet sales is drinks and dry sales is food.

Yes.

Mr Russell, you are the person responsible for the overall organisation. You sent a great big data file somehow to Ministers for them to work out what the impact would be in terms of the Budget. Did you at any point flag that this was a huge increase by historic standards and they might want to take it into account? Did you do that?

Over the whole list, we make it very clear that there are changes in rateable value because of the work that we are doing.

As you know, Ministers announced a £4.3 billion package of reliefs.

That additional relief was because they had been told that this could be a problem.

They had the data from those various data drops. The policy teams have that across the partnership with Treasury and MHCLG such that you can make a judgment about multipliers and reliefs. As you say, start with what is the rateable value and how that has changed relative to the previous lists. Then what does that mean for the—

The Chancellor said yesterday that she did not appreciate what the impact would be. I just wondered whether her officials had given her—

Just to be clear, I want to make sure I have not misheard you, Mr Russell, just before I bring Dame Harriett back. Did you say that 5,100 pubs had a more than 14% increase in rateable value.

That was doubling.

That was doubling.

There were 5,100 where the rateable value doubled and 5,400 had a decrease.

There are quite a lot of other things that are not related to this particular sector. I have been told by Eurotunnel that its rateable value went up from £40 million in 2023 to £118 million in 2026. These just seem to be enormous changes. The other thing that has been flagged to me by a range of different sources is that the Valuation Office Agency has started to take a different approach to shared office space. Previously, each individual business was charged the rate. Because they are small businesses, they often benefited from that exemption. You are now doing the valuation at building level, which is causing a huge increase in rates for these small businesses. Was that a policy decision that was taken by a Minister or was that something that the Valuation Office Agency chose to do differently?

With regard to the first question, I cannot comment about individual ratepayers.

It does seem like a huge increase, does it not?

We have a legal duty to maintain accurate rating lists and to make sure we do the valuation in accordance with approved standards, Royal Institution of Chartered Surveyors standards, which are recognised both internationally and nationally. We need to make sure that the valuations that we do are robust because they could well be legally challenged in a land tribunal or upper tribunal chamber. We are very clear and open about the process that we follow and, indeed, the industry follows the same standards when it is doing valuations. On the serviced offices point, as I say, we have a legal duty to maintain lists accurately. Sometimes the case law will change and we need to reflect that change of case law. In particular with serviced offices, it is around what we call the unit of assessment. There is some case law indicating that the unit of assessment is different. When you have a large block and individual office spaces within that, case law now is indicating that, rather than do the individual spaces as the unit of assessment, it is indeed, as you say, the whole block that is assessed. In most cases, small serviced offices within that block will benefit from small business rates relief. It is worth pointing out that there are something like 700,000 small businesses in this country that do not pay business rates because they benefit from small business rates relief, and something like 750,000 will benefit from the lower multipliers for retail, hospitality and leisure. A lot of the offices in shared serviced office space will not pay business rates because they will benefit from small business rates relief, but the occupier of the overall property may well have a business rates liability.

If you could kindly follow up by writing to the Committee about the details on that case, that would be helpful.

It came up in covid as well.

I am happy to do that.

Very briefly, recording studios are saying that they are now being viewed as offices and, therefore, their rates have gone up and they will have to close because of this increased cost. I just wanted to ask about that because the creative sector is often a little bit anomalous. Why has that decision been made at a technical level? Recording studios in the creative sector, which is key to my London constituency, are being considered as offices and, therefore, their rates have shot right up. They are saying that they will have to close.

There is no specific industry sector to say, “This is how we do recording studios”. A recording studio could be in a warehouse or an office. We will do the valuation on what we think the prime purpose of that premises is. For example, film studios are still benefiting from relief. Recording studios are not. It is a bit like music venues. A music venue could be a village hall, a pub or an arena. There is not an actual sector-specific approach to it. We look at the circumstances pertaining at the time. If it is within scope of valuation and it takes it above small business rates relief, that is the valuation that we have done.

There may be a campaign from Ms West with Ministers.

It is done on rentable evidence.

I have a quick question about timing. When did the Government receive the information for the first time that business rates looked set to go up by 32%?

The first data drop was about a year ago. About 50% of the valuations had been completed at that stage. It was still sector-specific and broken down by sectors. It gave an indication: “Having done 50% of the valuations, this is the indication in terms of rateable value increase”.

They knew the direction of travel about a year ago.

That is when the first data drop was.

It went through a lot of technical things.

Chair, I may be being a bit slow here, but where is the dividing line between technical and policy? While it is the Treasury’s duty to decide what the rules are in the Budget and all the rest of it, what responsibility would the Valuation Office Agency have to put an interpretation to Ministers about their proposed increases?

Would that be for Treasury officials number crunching?

Yes. You drop a lot of data. What responsibility would you have, Mr Russell, to say, “This is the data. Please be aware”?

We are very aware of our role in the business rates and council tax ecosystem. There is no point us doing our job if no one else knows about it.

No, that is not my point.

We are constantly engaging at official level about what is happening in certain sectors. We know that as a result of our work people will make decisions around reliefs and local authority funding. We are constantly engaging at official level, daily and weekly, with what the valuations are showing us.

Do you just show what is happening or do you say to people who are dealing with a million things every day, not just valuations, “Be very conscious of this”?

Yes.

You would give that interpretation.

At official level, absolutely, yes.

Thank you very much, Mr Russell. That was very clear.

Mr Russell, just on that point, I have many pubs in my constituency going bust as a result of this. Are you not slightly shooting yourself in the foot, if you are causing businesses to go bust and therefore raising less tax?

Our job is to carry out valuations. That is what we do. We work very closely with industry representatives in pubs and elsewhere, with the agents representing those businesses too and, indeed, directly with businesses. We are aware of the circumstances and the challenges, but we have a legal duty to make sure our valuations are accurate and legally compliant. We cannot do anything else.

We are very clear about your legal responsibilities.

I am very interested in cash ISAs and the changes to that. Could you explain to me, please, how you will implement both the charge on any interest in a stocks and shares ISA, the test to determine whether an investment should be either a cash-like investment or whether it is a stocks and shares ISA, how you will collect the extra data you need from ISA providers and the general complexity of this? How will you manage that challenge?

If it is okay, Cerys can answer this question.

The Chancellor has set out a very clear set of policy changes to support the ISA rules at the moment. Those changes will require regulations. We will be laying regulations in Parliament with the framework of rules that we will need to support that policy change. You are absolutely right to highlight some of the live issues that are currently working through with industry, which include what the definition of cash-like products that can be held under stocks and shares ISAs might look like. My team are today holding a three-hour meeting with industry representatives to work through all of that. Some of these rules were in place in the pre-2014 regime. That has been our pushing-off point to think about the new framework, but we absolutely accept that the savings market looks very different today than it did back in 2014. We are not wedded to a lift-and-shift of those regulations, which some people have been arguing for. We are working through all of that detail as we speak. As I said, the regulations will be laid in Parliament in due course.

Why was 65 chosen as the cut-off age for maintaining the existing cash ISA? Did you take legal advice on that? It does not match the state pension age.

The Chancellor was really mindful of the fact that people of pensionable age have different risk-reward appetites and are more conscious of liquidity than people who are not of pension age. That informed the decision to restrict the cash limits for those under 65 as opposed to those over 65. Of course, we always take legal advice when we advise Ministers on policy changes. We have really good data to support that liquidity argument. We know that those with ISA holdings over 65 hold more of their savings in cash ISAs. I am confident that it is a legally robust policy decision.

This all sounds quite complicated to me. Will you need extra resources to manage this?

No, I do not envisage needing more resources to support these ISA changes. A couple of years ago now, before these changes were announced, we had secured funding to modernise the way that we administer ISAs. Currently, the only data that we receive from an ISA provider is at the end of the tax year. It is quite a manual data uplift and it supports our current ISA audit programme. Reflecting the many changes in the ISA policy framework that we have seen over multiple years—the compliance risks around ISAs now are greater; we are talking about a tax relief worth £9 billion—we are moving to a system where we will get monthly, real-time reporting from ISA providers. That will enable us to then match people’s subscription levels to investors, spot if someone has oversubscribed, and then signal to the ISA provider that some steps will need to be taken to correct that. I am really confident that we will have a much more modern, responsive and automated process to support customers to get it right. That change is not coming in until April 2028. We are very alive to the fact that industry has a lot of change to grapple with, and so, at the Budget, we did confirm that we would delay that by a year to give us and industry more time. I think that that is the right decision.

You just said that you are moving from receiving yearly reporting to monthly reporting, but that you do not need extra resources. How does that work? Are you saying that the automation offsets that?

First, in terms of overall compliance, what we will be looking at is people oversubscribing above the limits. Most people do not reach anywhere near their ISA limits, so we are not talking about a significant compliance risk here, but, of course, there are people who inadvertently breach. Our monthly reporting system will automatically recognise if someone has breached one of those limits, automatically notify the ISA provider that someone might have breached the £20,000 limit—or the £12,000 in due course—and ask the ISA provider to take steps to allow the customer to self-correct. That is a much more modern system to be administering this regime rather than HMRC doing more intense downstream compliance work. It is a really good, novel upstream compliance intervention.

Going back to that borderline between implementation, advice, technical and opinion, ISAs generate about £1.45 in revenue for every £1 spent. When you get changes to these models, do you look at how that is impacted by changes in the system, or would you just think, “We just need to introduce these?”

Could you just unpack that first point of your question?

Yes. If you look at proposed changes in the lifetime ISA, they already make significant money for the Revenue and for the country; I am not suggesting that it is for you personally. Has HMRC deemed it more effective in terms of future tax revenue to introduce a new product and forfeit what you already make from LISAs, or would you just think, “Well, that is not our business”?

No. On all aspects of tax policy, and on savings especially, we work hand in glove with the Treasury to advise Ministers on those decisions, so I do see those things as matters for us as well as Treasury and Treasury Ministers. On the lifetime ISA specifically—and I really welcome the work that this Committee did on that last year—we know that the current model of having a hybrid product either for people to use it for pension or later-life purposes, or for first-time buyers, does cause quite a lot of confusion and can mean that people inadvertently end up with the withdrawal charge, which can be seen as punitive. The position that Ministers came to, supported by advice from us, was that a new product that was much more focused on the first-time buyer market would be preferable, but Ministers have been clear that the existing LISA product will continue for those holders. I think that that strikes the right balance.

That is for those who have it, just to be clear.

Yes.

They will not lose out.

I have a couple of questions on changes to the loan charge. I have a small number of constituents among the 37,000 or so households nationally affected by the loan charge, and the view taken by HMRC since about 2017 on how that should be repaid. I know that a number of those constituents will be relieved to see that the Treasury has accepted the great majority of the recommendations of the McCann review, including not charging interest for late payment and making deductions to some of the liabilities. That is all good for them. However, can I ask where this and the better settlement opportunity now on offer will leave those who have already settled on less advantageous terms?

Thank you for your question, and I am pleased that your constituents have been able to recognise the revised settlement offer following the McCann review. My message to anyone who has not yet settled under the loan charge is to be in touch with HMRC. We have a dedicated case manager ready to work with customers. There are around 37,000 outstanding liabilities to settle. Most could see reductions of 50%. Around a third may now not have to pay anything at all, but, because of the complexity of each case, we need them to contact us and work through us to sort that out. The team is ready to do that. I hope that our customers will be able to take advantage of the revised settlement that Ministers announced in the Budget. Ultimately, the scope of the McCann review was to try to provide that pragmatic settlement for those who had not settled. That was always its intent. We think we can deliver it, of course, the most important thing being to establish contact to work it through, but those who have already settled were outside of the scope of the review.

Should those who have already settled at less advantageous terms than are now on offer approach HMRC to discuss that, or is that just history, finished? “Sorry, you settled at the wrong time on the wrong terms”.

Customers who have settled have settled those tax affairs under previous legislation, and that is complete. As I say, the McCann review and the revised settlement focused on those who were remaining. The intent and the hope was to provide a pragmatic route to settling and bringing the loan charge to a conclusion. If there are customers of HMRC who are struggling with a large historic tax liability, we recognise that that creates anxiety. It can be a struggle. We have time-to-pay arrangements and an extra support team in place. If anybody wants to access additional support, they are always welcome to contact us.

One thing that you are seeking to do as a result of the McCann review is often to ensure that there are payment terms stretching into the future over a longer period, which, clearly, makes it easier for those attempting to settle. Those who have already settled but still have outstanding payments might be able to have a conversation, for instance, about the length of the period of settlement.

That is right, in terms of their time to pay arrangements. We spoke earlier about our approach under our charter. We have worked hard and there are recommendations in the review that reflect on the importance of co-design of our material and how we engage this customer caseload, learning from the past and applying that to our additional support model. I spend a lot of time with the team. They want to take a lot of care because we recognise the complexity of it all. As is true for any taxpayer who might have a historic tax liability or a tax debt, they can access additional support and time-to-pay arrangements, and, according to their means, spread those payments over time.

Thank you very much. We have covered quite a lot of the Budget stuff, so I want to get to some of the core processes that you are responsible for. Customer service is always a very important issue. We touched on some of this at the beginning, but I just want to delve into a couple of points. You are trying to make people go down the digital channels and you have this plan to move from 80% to 90% engagement. How is that going and what do you need to do to make sure that you keep on track?

So far, we are on track and slightly ahead of schedule. The last data that we published was something like 79.8%, so not quite 80%, but nearly. We are climbing the mountain as we go, with the objective to get to 90%. There is not one big thing, sadly, that makes the leap. It is lots of marginal change, but that is also a healthy thing. We have a number of programmes that are geared towards enabling that digital-first strategy. This year, we will onboard a new contact centre system, which will enhance our telephony service.

What will that look like for a taxpayer ringing up?

We have talked before about some of the challenges of call waiting, cutoffs and abandoned calls, and how that feels. We know that that is not modern. It is not good enough. It is not what we want to see. The CCaaS system will give us more modern features around real-time call waiting times and more capacity. We hope that we will see a much significantly reduced number of calls that would ever be cut off. That would hopefully happen only if it was some sort of contingency event or whatever. We have a programme ultimately to try to reduce the amount of outbound mail that we send. We send a high volume of correspondence every year. Where we have customers who are using the app and their digital tax accounts, we want to make sure that we have the capability to engage with them digitally, with their correspondence through that channel. That reduces some costs, but also shifts some of that activity online. There are lots of changes in the PAYE system around reporting on expenses and around benefits in kind. We have Making Tax Digital going live in the spring, which Jonathan can talk to. We will just keep reporting progress.

Getting from 80% to 90% is going to be a steeper curve, is it not?

We were at about 75% or 76% this time last year, so we have gone up by about four percentage points in 12 months. From 2026 to 2030, if we carried on at that rate, we would be okay.

I feel duty-bound to ask about vulnerable customers and people who are anxious. They will hear this and think, “There’s no time for me. I’m very uncomfortable adjusting to this digital world”. How can you reassure those customers who are not in that place of comfort, for whatever reason, perhaps typically because they are older? What can you say to reassure them, given the trajectory that you have set out?

It is really important that we also improve our extra support service for those customers. This is not meant to be an either/or. It is possible to improve both at the same time, so that you have a better digital offer that people want to use on their phone at their convenience and, at the same time, increase and improve additional support. We just talked about a case manager model for more complex compliance cases as an example. We are working with around 11 voluntary sector partners across the UK for additional advocacy support, which we are keen to do more of as well for those customers who do not want to engage HMRC but have a tax problem.

Do you have a metric for how you are improving the way that you deal with that group of people?

It is partly volume. Are we supporting more customers through those partnerships, for example, with the voluntary sector, so that we can see that they are being supported and not lost in the system, if you like, with nowhere to go? We track the metrics around that. We are increasing the size of our extra support teams as well, with more headcount going into those. Ultimately, we have a set of indicators, such as complaints, adjudicator, investigations and serious cases, to give us confidence that services are improving. If I am really honest, digital customer interactions are but one of those. Ultimately, we want people to be supported, whatever the channel, once and done at the point of contact, in a timely way, with the professionalism that they should expect from us. We publish that data every quarter, so you can see it all, on multichannel customer satisfaction, for example. The intent is to go on that journey and improve service every year.

We touched briefly on AI at the beginning. Is AI going to help make this easier for the customer? You talked about AI at your end summarising calls and so on. Is there anything that will benefit the customer other than that?

Colleagues will be used to using AI tools where you ask a question and it gives you the breakdown. We have Ask HMRC, which is one of our web-enabled assistant tools. We will be looking at how we can use AI to support customers to find the next best piece of advice.

So your chatbots will be better.

Yes, exactly.

You talked earlier about how one thing that keeps you awake is overall security of the system. A wrong bit of information in an AI model could cause quite a lot of havoc in the tax system. Are you putting in any special measures around AI in that respect?

We have quite a lot of special measures around it. Jonathan might say a bit about the professional standards committee, which he chairs, around ethics and control. We also have an AI board, which is chaired by another of our DGs. All our AI use cases are subject to a lot of scrutiny and testing. As you say, we use a lot of advanced technology already, of course. Secure data and keeping our data within our parameter with regular monitoring is core business. We want to exploit the opportunities of AI, but we absolutely want to do it in a safe and secure way.

As well as the security threat, there is the challenge of people writing in using AI-generated letters. We have talked about this before, Mr Athow. How are you dealing with that? That must be a huge resource issue at a time when you are having to reduce headcount and increase the numbers of people in compliance and valuation.

There are a couple of things to say. First, people who are trying to abuse the system in one way will use a variety of tools. I do not want to get into the details here of the tools that we are seeing, but we are seeing those sorts of developments. We have extensive capabilities to look at, understand and counter those sorts of challenges. We are very alive to the use of AI to abuse the tax system. We are not the only player in this space. Increasingly, we are seeing a lot of software services that people are using to file tax returns. We are developing, with the software industry, a set of AI principles that we expect providers of accounting or tax software to abide by. We are working on that at the moment and hoping to publish that quite soon.

Will that be kitemarked so that people know that they are using legitimate software?

That will be the long-term aim. This is a very new and evolving process, so we want to put out some standards. We want people to engage with them. We then want businesses to sign up to them so that they can say, “Yes, we abide by the principles” and give people confidence. This is a very fast-moving area, and the technology is moving very quickly, so I do not want to overpromise on how quickly we can get there, but we do want people, using either our tools or other people’s, to have some transparency around how AI is used and to have some confidence in that. That is something that we are working with and, as I said, the industry is also very engaged in, because the industry knows that this is a challenge for it.

You are one of the biggest customer-facing organisations across Whitehall, so you are at the forefront on some of this, with DWP.

Yes, indeed. As I said, the challenge for us is not just our own AI, but the AI of others who interact with us. That is why we want the guidelines for software providers.

It is certainly an interesting area across the committee corridor, with different Committees looking at how AI is used, so we may want to come back to that at some point. Making Tax Digital is going live in April. Is that going to happen? Are you confident?

Yes. There is nothing that I know of at the moment that means that there is any doubt about that.

That is very carefully worded.

We are on track. We have our own programme governance. It is very important that we continue to monitor the risks as we get closer to implementation.

Are customers fully aware? You could be talking about it endlessly in-house, but there is a large cohort of people. It is landlords and the self-employed coming in in April.

Within the group coming in in April, many of them—around 60%—are already using agents. For those people, we really need to talk to the accountants and bookkeepers. From the evidence that we are seeing, I am confident that there are really high levels of understanding in the accounting industry about this and what needs to happen. Whether it is quite 100%, I do not know, but we are seeing good take-up there. The challenge for us and the area that we are focused on at the moment is what we call the unrepresented group, so those without an accountant. We have already written to them once, but we know that, as we talked about, our correspondence is sometimes not scrutinised with the level of diligence that we would like, so we are going to be writing to them again. We know a lot about the sectors that those people are working in, construction being a really big one, so we are also targeting those sectors either through targeted communications or through their sector bodies. We are writing to them. I was at an event hosted here last week by Sage and Checkatrade, looking at how digital tools could help small businesses. There is a lot of awareness, and a lot of the players in that space are helping us, but it is a challenge. We announced last year that, in the first year, there would be no penalties for those missed quarterly updates. It is a penalty point rather than a financial penalty, but you will not even accrue penalties during that first year, because we know that this is the first year that we are doing it and there will be some people who come to this late.

How does the penalty point system work? How many do you have to accrue?

It depends on your reporting requirements, but, essentially, it is four.

What happens if you get four penalty points?

You then get a financial penalty, but you will have been told that you have had a penalty point before we do that. That is a fairer system than the current one. We are coming to 31 January. The current system has no penalty points but goes straight to a financial penalty. A penalty point system is fairer.

It is a new approach.

It will be rolled out for other taxes as well. Again, the number of penalty points depends on the reporting requirements. You can accrue more penalty points under Making Tax Digital because we have the quarterly updates. It is a slightly lower bar for those who remain on the traditional self-assessment.

Just finally, in terms of tax take, one of the things about Making Tax Digital is it being more real-time. There will, presumably, be an uptick in tax in‑year. There will be a blip where you are not collecting tax on the old basis but on the new basis. How are you managing to smooth that?

At the moment, Making Tax Digital as it is does not change the payment dates. It is only the reporting information. That reporting information is very valid because we see problems within this cohort where people do not keep good records. Keeping records in software and updating them on a quarterly basis will encourage people to have that near real-time record keeping, which will increase compliance and bring in additional yield.

What is the figure on that?

In a year’s time, by the end of the roll-out, it is just under £1 billion. Again, that varies as we update information on the assumptions, but it is just under £1 billion. Separately, we announced in the Budget some proposed changes coming in later in the decade about how payments on account work for those in pay as you earn, but that is not Making Tax Digital. It changes the timing of payments, but it is a different measure. Making Tax Digital on its own is only about reporting.

I will try to set this in context. What we will have is a lot of administrative data. That can be data from HMRC systems. We can also bring that together with Companies House data, and sometimes data from other sources. Broadly speaking, that will tell us what has happened, so how much tax we are getting from particular taxpayers or whether a tax change raised the money we were expecting. Although I am not familiar with this particular piece of research, we sometimes need to understand why things have happened, and that does not come automatically from the data. As I said, the data tells us what has happened, but not why, so we will sometimes commission external research agencies such as Ipsos MORI to do what we call qualitative research to understand, as I said, the thinking behind decision making or why company owner-managers are making decisions in particular ways. We try to bring together all the data so that we can answer ministerial questions and make certain that our forecasts are up to date.

We will link it to a number of sources. We will have lots of data sharing. Some of that data sharing is very modern and very up-to-date. Some of our data sharing is a bit old and requires annual updates. That data sharing is sometimes not as modern as we would like it to be.

A good example, one that we are modernising at the moment that also has an effect on our service, is how we get data from banks and building societies. We ask banks and building societies to provide us information on how much interest has been paid. Going back to the simple assessment, we can give some people a tax bill without them providing any information. At the moment, that is done on an annual basis after the end of the year. It is not always done through APIs and those sorts of approaches. We are modernising those things because they will both have a benefit directly for our customers and give us more analytical insight.

We have something called the Datalab, which allows researchers to ask for our data.

This is not data that we can publish because it could be disclosive, so we put it in an environment. We provide lots of datasets to those researchers. There is a gateway for them to ask for additional data. There is no principled reason why we would treat any data that we hold differently. There are security issues, but, with that example, I would not see any challenges around how we would share that data. If there are concerns from researchers, please ask them to get in contact. The Datalab is a physical environment. There are only a certain number of desks available; we have only a certain amount of computing capacity for this, so there are sometimes constraints on what we can do, but there is no in-principle decision about different treatment.

No, we want to do the same. We often get huge benefit from the Datalab, because that is work that we are not paying for but that sometimes sheds light on really important questions.

A big change that happened, although not in the Budget, just before Christmas was, of course, a change to the inheritance tax and business property relief for farms. Mr Marks, were you working on the changes that were announced before Christmas as an option prior to the Budget?

I do not think so.

My point is that they were announced after, not at, the Budget, so was HMRC involved in discussions about that prior to the Budget? You are saying no.

If I deal with this, a change was announced in the Budget with the £1 million limit. That was a parameter change within the existing system. Ministers then decided in December that they wanted to make further changes to those parameters. In some ways, when it is a change of a parameter, it is relatively straightforward. It was not a complete change to the architecture of the policy.

So you are saying that it is not as unusual as it might have seemed. It is unusual to have that sort of announcement made not just outside a Budget but after and very close to a Budget.

Again, it was an extension of an existing policy. In the budget, the limit went to £1 million. In December, it went to £2.5 million, so it was an extension of an existing policy rather than an entirely different structure.

It is relatively easy to administer, you are saying, from your perspective.

It is relatively straightforward for us to administer and to model. For example, we provided a tax impact and information note. That was published on Friday, because this was being discussed in the Committee of the whole House yesterday or today. We provided that information and, again, that was easy for us to do because it was a change in parameter to an existing policy.

Between 2024 and that announcement before Christmas, there has been quite a change in this policy. In the press release announcing the change, the Government talked about it stopping large inheritance tax reliefs to owners of large agricultural and business estates while continuing to recognise that small farms had a role. Mr Marks, was it a bit confusing in terms of what policy was being set out? Was it to stop the richest getting away without paying any inheritance tax and to protect small farms from the beginning?

Why I was trying to clarify my answer to the previous question is that Ministers have been listening and talking to sector representatives ever since the original announcements were made around changes on inheritance tax. As you say, they came to that decision in December and made that announcement on the 23rd, and so we have now published that impact assessment.

The revenue that comes in has reduced a bit, but it was not a massively significant number in the context of the overall Budget. Presumably, you were being asked to give figures for what would happen if the parameters changed.

Yes.

So you were providing that technical advice.

Yes.

When were you first asked to provide that advice?

Advice on options around inheritance tax has been provided over the last year or two.

Back to before the 2024 budget.

Indeed. As Ministers got to the point of wanting to announce the change on the 23rd, as Jonathan said, we have just published the impact note, which was informed by our impact assessment.

Unless anyone has anything else on that, I am going to move on to child benefit. There are a number of issues here. Could we touch on the figures first of all? You wrote to me, on behalf of the Committee, a four-page letter with data up to 31 October. You told us that 3,673 out of 23,794 customers had had their eligibility subsequently confirmed. Just to perhaps put it in context for anyone who is tuning in, this is when you matched people’s travel plans with whether they should be claiming child benefit. You assumed that people who flew somewhere and did not return had left the country and, therefore, were not qualifying. In the pilot, you had included a check against PAYE systems. Perhaps I should backtrack a bit. Why did you remove the check against PAYE systems after the pilot?

We have put the PAYE check back into the process now. The PAYE check that was originally in the up-front risk rule was moved to the end of the customer journey, at the point of whether there was a considerative decision, rather than up front. That was done to streamline the process at an operational level, because of the view that that was a legitimate change that could be made. It meant that you could do that check later rather than up front. Clearly, the effect of that was not what was intended, and we have put it back and corrected the cases.

Just to be clear, the PAYE check would take some time, so you would have to keep paying child benefit to someone. I am a bit puzzled as to what, when moving it from one end of the process to the other, the benefit of that was.

You could make it as part of the considerative decision rather than up front.

If you had done it up front, you would not have made these errors, presumably.

Indeed, so it has been put back. The cases that were affected when the PAYE check was not in place have now all been checked and the payment reinstated. We have apologised for making that error. I can go through the numbers, if you like, on the latest impacts.

Yes, you could do that. Dan Tomlinson, as Exchequer Secretary, wrote to Andrew Snowden MP and, in that written answer, gave figures as of 30 November, which were exponentially higher than the figures that you gave this Committee. I am a bit concerned because, as a Committee, one of the many things that we expect from you is that we get accurate numbers, so could you talk us through those numbers, please?

I wrote to you with accurate data at the end of October. As you say, in the PQ response in November, those numbers had changed. The number of those who had been confirmed eligible in my letter was 3,673. That number in the November data was 14,994. The latest data for the end of December, which is not yet in the public domain but for the Committee, is 17,048, so it has gone up from 63% to 71% of that cohort of the 23,000 where we made the error on the PAYE check. Of the residual cases that are there, there are those we have determined non-compliant. That is currently at about 1,109, which is just under 5%. The number of those where an inquiry is still open is 5,600, but that is where the customer has not responded to phone calls, letters or anything, so is deemed to have left the country.

Of the cohort you checked, 5% were, basically, fraudulent claims. That is a lot of pain to have gone through.

Yes, it is currently confirmed at 5%, but we would assume that a large proportion of the cohort with inquires still open will also—

In terms of the overall cohort, what is the range—from 5% to what?

It is more likely to settle down at between 30% and 50%. OBR scored at 50% the effectiveness of this risk tool, which targets a very small number of child benefit customers who leave the country for more than eight weeks, so that we are then confirming their eligibility. In terms of the cohort of 23,000, the reason that we need to take care and not compare it to the pilot is that this is where we made the error and removed the PAYE check, which we should not have done. I do apologise for that. It has disadvantaged customers. We have been in touch with them. We took a very high-trust model for them, reinstating their claims based on a phone call or any contact that we could get with them. We have made other changes to the journey, so not just put the PAYE check back in, but also put an additional month in. We have also removed any claims for any cases that might have been moving within the island of Ireland and put additional support in around the governance of the process.

I am glad that you mentioned the island of Ireland, because one thing that appalled me about this is that you are one of the Government Departments that cover the entire UK. Other Departments might have a mild excuse that they cover only England, for example, but you cover all of the UK. Why did no one pick up the issues around the common travel area or the border between Northern Ireland and the Republic? This just seems to me to be an egregious error from a UK Government Department.

We piloted this and did it with 200,000 cases. Within those, we found 5,000 cases where we thought there was non-compliance. Those numbers sound quite high, but, if you look at it across the UK, there were probably only 140 cases in Northern Ireland that we looked at. There may not have been enough cases for that to become apparent to us in that testing. While we did the pilot, there is a question for me about why the pilot did not flush out some of the issues that we then found in the scale-up. For Northern Ireland, it might have been that we simply did not have enough cases to be picked up of people who were travelling through the Republic.

It is not just from Northern Ireland to the Republic. You could come from England on the ferry. You are now checked at the ferry port, but there is no record of that movement, and people do sometimes make those journeys. I just really want some reassurance that you understand the common travel area and that you will, in the future, make sure that something this embarrassing does not happen.

We do understand it. I pick out the Northern Ireland cases because they are the most likely. Dublin airport is very convenient for people in Northern Ireland, so it would be most pronounced there, but we did not pick it up in that issue. More generally, we know that the data that we get from the Home Office on exits and entries is imperfect. We were very clear of that all the way through. It should only be the start of an inquiry and should not determine whether somebody is eligible. As JP has said, we have made changes to the process now.

You had the pilot. You had the checks in place. Then you removed them. I still do not quite understand why you removed that check or moved it to a different part of the process, Mr Marks.

The decision made was related to trying to streamline the scaling of the operation. The judgment, which was the wrong one, was that it would not have a material effect and that they could do the PAYE check at the end of the process as part of a considerative decision, rather than up front.

You keep using the phrase “considerative decision”. Could you just unpack that?

It is just when a decision maker will look at all the elements, what the customer has said, any correspondence, any other inquiry check that we might have, and any other data. We would have the PAYE check as part of the decision-making process, rather than up front.

You said that it was the wrong judgment. Did anyone not think that there might be unintended consequences and model that?

I am afraid that the effect was inadvertent. Clearly, we did not want this to happen in this way, and we have apologised. I am also, of course, very happy to write with the latest data for you if you would like me to.

You did not do an impact assessment on the change from the pilot to what you actually did.

Part of the learning is about strengthening the governance from pilot to business as usual, so that that error is not repeated. To reinforce, we have, of course, reinstated the PAYE check. We retrospectively checked all of those 23,000 cases. We then reinstated and backdated all the payments so that the customer is not worse off, and apologised. The important thing now is making all the changes to the customer journey, as you quite rightly say: Northern Ireland cases out, PAYE check in, more time in the journey and simplified customer communications. We will take it very slowly this new year to get it right, because we do have a fraud and error exposure that is £250 million a year.

We have no problem with you pursuing fraud and error. We are clear about that as a Committee.

We need to do it with more care.

We take the apology.

Very briefly, when you write back to the Committee, could you outline your assessment of the effort that it has taken and the lessons that have been learned in relation to other, as we might call them, targets of HMRC in terms of other fraud? For example, I note, in other reading for this Committee, that some of the white collar fraud, for example, has dropped in terms of the amount that the Department is able to claim back these days. How much effort went into this particular group and how much did you get out of it relative to, say, what we would understand as fraud in the City or other elements of fraud? I do not know whether that can be quantified, but it would be useful for this Committee to know, because we need to be fair and these families need to know that we are also taking quite a tough approach to other sorts of fraud.

We will certainly be able to do that. We did a full evaluation and will be able to look at the money that we will no longer be paying out compared to the resources that we are investing. We will be able to do that for you.

It is always very difficult to look at post covid. There have been lots of changes in the economy since covid. We talked about the issues in terms of business rates and those sorts of things. We do monitor reliefs more generally, and I would widen this to look at all reliefs. We do evaluate reliefs. We have done evaluations of R&D tax credits and the patent box, which suggest that they have a good return for the UK economy, so we take those into account. We do monitor the growth in those reliefs and, where necessary, take action. This is not in the corporation tax space, but, for example, in employee ownership trusts, where changes were made in the Budget, that responded to a significant growth—many times—in the value of that relief. Likewise, we saw strong growth in the use of salary sacrifice with regard to pension contributions, and there are those issues. I know that this Committee has encouraged us to look very carefully at the changes in reliefs and their take-up, and to take action accordingly. That relief sometimes comes from the underlying activity, but sometimes reliefs are used in ways that were not fully intended, or to the extent intended when established, and then we will take action.

We need to be across all risks to the tax system. As I said, reliefs can start quite small and then grow over time as people think of new ways in which they can access them. The key thing there is to have good monitoring and evaluation, and then the feedback of that monitoring and evaluation into policy development.

We will look at the largest reliefs, or sometimes ones that are expecting to have large behavioural effects, and do evaluations of them.

I would not be able to give you an estimate off the top of my head.

Yes. We do more regular updates on the largest reliefs, and we can set out how we do that.

The two that I talked about were ones where we had seen growth. If I was here a couple of years ago, we were seeing really steep increases in research and development tax credit issues. There have been a variety of policy and operational responses to that, but we keep an eye on those reliefs. Those reliefs sometimes have very good value for money and very strong rationales. Getting more into the structural reliefs, they sometimes reduce the burden either on taxpayers or on HMRC, so we need to look at them in the round, recognising that they have a number of objectives.

I am not certain that we have seen any particular elements where we have identified low value for money. We have responded, as I said, where we have seen particular growth or particular issues. As this Committee knows, we saw a high level of non-compliance in research and development tax credits, and we took policy and operational action to deal with that. The challenge with these is that R&D, as I said, often has a very good return on investment, but, at the same time, needs to be well targeted in order to make certain that there is little scope for abuse.

You mentioned in your answer there the patent box, and you said that you had had a good return on investment. You have probably seen TaxWatch’s analysis of patent box tax relief. It points to facts such as 41% of the relief having been claimed by just five companies, and a large chunk of that by GSK alone. It then goes on to criticise the fact that it seems like, a lot of the time, rather than genuinely new innovations coming about, they are applying these reliefs to existing intellectual property in other jurisdictions. That, to me, does not seem to be following the intent of the relief. How do you calculate that it has a good return for the taxpayer?

I can provide the evaluation that we have done on that; I can point you in that direction. The other thing to say about the patent box is that it is not there for primary research. It is there for the exploitation of intellectual property. In many ways, research and development tax credits are there for the establishment of intellectual property; that is there for the exploitation. If the exploitation happens within the UK, that becomes eligible for the patent box.

So you do not think that it is a particular concern if there seems to be a concentration of who applies and gets access to this relief. That huge volume of relief going to just five companies, for example, does not flag any concerns to you. That would be normal because these are the implementers in those industries.

There are two things. First, there are a lot of small and medium-sized enterprises that do benefit. Roughly 60% goes to small and medium-sized enterprises. It will, in turn, reflect who owns that intellectual property. There is some going to small and medium-sized enterprises, but this reflects who owns that intellectual property and how much of that is in the UK.

Does it come back to how these reliefs are articulated in the first place? Speaking to one of the concerns that Yuan Yang MP was raising, it sometimes feels like the take-up of reliefs is much more strongly correlated with the size of your finance department and how clever you can be at accessing the relief, rather than necessarily a genuine intent from the Government to spark particular economic activity.

In some of these areas, if you are a large multinational, you will have a large tax department that is able to access this. Then there are many agents who will also specialise in helping small companies access those reliefs. Simply because you do not have a large tax department yourself, it does not mean that you cannot access those. As I said, what we have seen both in research and development, and in patent box, is a sizable number of small and medium-sized enterprises accessing the system, so I do not think that there is anything like that. There is a wider point, and it has been particularly clear on research and development, that there have been a group of advisers who have sometimes put in what we would call speculative claims and, in some ways, brought the system into disrepute in that way. I do not want to say that there are no issues with people trying to exploit the system. Research and development is a good example of that, and it is well documented. I do not want to sound overly blasé about the risks here, but we are seeing good take-up of research and development tax credits and patent box among small and medium-sized businesses.

I can see that Mr Marks wants to come in, but can I just add something before you respond? These reliefs have been stacked up over time. They have been created by different Chancellors over many decades. Companies are able to exploit them in a stackable way. Is there a coherence problem with the volume of reliefs that we have out there? Does it need to be rationalised at some point?

Certainly on research and development, successive Governments have rationalised the frameworks and merged different systems, but it is a very valid point that, where you have more reliefs, you need to think about not just the individual reliefs but the interactions between them. It is a very good point. We try to stay on top of the issues and the risks, and try to make certain that we are delivering what we want to achieve with those reliefs. We saw very steep growth in the use of employee ownership trusts. Keeping the relief but making it less generous, we think, is the right way of still encouraging employee ownership trusts but a different way of doing it. You need to be constantly thinking about, “If we are seeing increased use of these, is it for good reasons? Is this what we want? Is there a different way of doing it?”, and keeping them under review. It is a very good point, but it is quite difficult to provide a definitive answer of, “These are all the trigger points at which we would consider them”.

Just to add briefly, I agree totally with Jonathan’s point about keeping all reliefs under review to try to make sure that we are optimising their outcomes. Just to correct what I passed across, 1,600 companies of all sizes and in various sectors benefit from the patent box; 70% are small and medium enterprises. Your point is well made around the top end; none the less, there is also a sizeable proportion for small and medium enterprises. I take your point generally about reliefs and complexity, which is why we have a programme of simplification, making sure that we are improving them where we can.

HMRC has told the Public Accounts Committee that you have no estimate for the offshore tax gap. TaxWatch has claimed in its recent report in 2025 on the state of tax administration that HMRC has an estimate of what it calls offshore tax at risk, but you are refusing to publish it. Could you confirm whether you have an estimate for offshore tax at risk, how it might differ from the offshore tax gap, and whether you would be willing to publish it?

We do publish some information on offshore non-compliance. We have looked at, for example, where we get data under the common reporting standard and comparable exchanges of data, and how much of that is reported to us. We have done that, but we do not have an overall freestanding estimate of the offshore tax gap. It is implicitly included within our overall estimate of the tax gap, but is not separated out. We internally hold documents and evidence on the nature of particular risks. We have something called the strategic picture of risk, which sets out our best understanding of different ways in which people might exploit the system and, with that, some indicative numbers as to what is going on in terms of the incidence or extent of that risk, but it is not necessarily an estimate of the tax gap. That is the first thing that I should say. It is what might be at stake. We are very careful about what we put in the public domain in terms of the nature of these risks. We do not want to particularly identify areas that we think people might be exploiting. We do not want to create a series where people say, “HMRC thinks this is a vulnerability in the system”. In areas such as this, we do not want to put that in the public domain because we believe that there are risks to the good maintenance of the tax system if we share what we think is risk in terms of copycats or people trying to exploit weaknesses.

If necessary, this Committee could have a private briefing.

We are always happy to do private briefings on security issues, but it is sometimes very difficult for us to put it into the public domain.

We absolutely understand that.

The TaxWatch report claims that you are behind your target on compliance and debt management recruitment. It said that, as of September 2025, you have recruited only 744 of the 5,500 new compliance staff promised.

We covered that earlier. We have had some figures higher than that.

We would be very happy to give you the latest numbers.

Could you write to us with the details?

We can write to you and set them all out. In terms of headcount, we are 200 to 300 ahead of our compliance onboarding, and well ahead on debt, so we are not worried about that at this stage.

Could you write to us with the details?

We can put it in writing.

We may want to get a regular letter. We can take that offline.

Yes, sure.

I understand that you do not want to publish the ways in which people could get around the system, but, on the offshore tax risk, you mentioned that there was an indicative figure. Is that something that you would consider publishing?

As I said, what we have are particular actions or estimates of risk with numbers attached to them. Again, this would not be consistent with the tax gap. To get into a bit of the methodology here, it is the gross exposure before we have taken any action. To get to a tax gap, you need to understand what your exposure is, but also how well you are mitigating it. It is the combination of those two that gives you the tax gap. We are always thinking about how we can provide better information on the tax gap. If we could find ways of estimating and carving up the tax gap that would identify the offshore tax gap, there is nothing in principle that stops us doing it. It is merely the challenge. With a common reporting standard, we have international data that says that UK citizens have this many assets and this much income overseas, and we can compare that with what we have. For other areas, we do not have that data. We would like to push with international partners to have more data, and more data exchange, that would allow us to have a richer picture. There is nothing in principle here. It is merely a practical point of what we can deduce from the data that we have.

Thank you very much, Mr Murphy. We can take some of that offline and pursue it that way.

Mr Athow, just going back to the patent box regime, I have seen academic research suggesting that it does not have that much impact. In your most recent customer survey, the majority of firms qualifying said that it had not stimulated any new innovation and had not impacted their overall business or investment decisions. Would it be possible to write to the Committee and outline your evidence that it does have an economic benefit to the UK, and how that compares with academic research out there? Have you evaluated that versus other policy proposals, such as allowing full expensing of patent purchases, which The Times reported would cost the Treasury £1 billion and lead to £6 billion to £10 billion in productivity benefits?

We can certainly write with the evaluation evidence that we have. As I said, one thing that has been very clear about patent box is that it is about exploiting intellectual property, not necessarily the creation of new intellectual property, so we just need to be very clear about exactly what we are looking at, but I can certainly write to you on that.

On the R&D tax credits, I fully understand the compliance issues, but I have also had constituents complain to me that they have had vital reliefs delayed as a result of concerns around compliance. How on top of this issue are you?

I am pretty confident that we are within our SLAs at the moment on this. To take you back, when we first had the problems with R&D tax credits, we changed the policy but also increased our operational work in this space. We were looking through more cases. At the time, we had some new people who we were bringing in and who had to be brought up to speed. Some of the delays that we saw there were down to simply having to flex our resourcing in new ways. We do recognise that timeliness in payments and repayments more generally is very important to the cash flow of businesses and to individuals. We are very alive to that as a risk, but I am not aware of anything that is causing me concern at the moment in the administration of R&D tax credits.

Just to confirm Jonathan’s point in terms of the SLA, we continue to exceed the R&D service standard of processing 85% of claims within 40 days. For 2024-25, we are at 90%. That timeliness point is really important. Going back to the point on reform, the fraud and error rate was at 9.9%. It fell to 6.5% for 2023-24. For 2024-25, it is now estimated to come down to 5.9%. It is still material, but the trajectory is in the right direction.

Thank you very much. It is an important issue.

I just have a final question on the offshore tax gap. I know that you got new powers after the Panama papers in 2017 to issue penalties to enablers. Is it correct that those penalties have never been applied since you have had the opportunity to do that?

I will need to check and confirm with you on this. We now have one case where that is close to being used and several in the pipeline.

One case in 10 years?

Yes.

Is that a surprise? These enablers were recognised as being a problem and the UK is home to quite a big industry of enablers.

Offshore cases can often take 10 years or so to work through. If you look at some of the high-profile cases that there have been in the recent past, it is not unusual for a case to take 10 years to work. We can start charging the penalties only from when the legislation was enacted. Some of this is merely the complex nature—I would not want to underestimate the complexity of offshore cases—and the long time that it will take us to work those.

Thank you for clarifying that. I am going to move on to scams, frauds and cyber-attacks, which we have already talked a bit about. John-Paul Marks, you said that that is the thing that keeps you up at night. In the last oral evidence session, we heard about some cyber-attacks. Can you give us any updates on what has happened and what action you have taken since?

There has been a lot of action around the PAYE organised criminal attack. We wrote to the Committee and, as we have said, we would always be very happy to come and do a private briefing with our chief security officer to talk about the nature of the security threat, how it is changing and what we are doing about it. Our underlying technical Gartner score for resilience continues to improve. We have a whole programme of work to take that to a healthy tolerance in this spending review. On that PAYE organised attack, we wrote to all 100,000 affected customers. The loss when we last saw you was just under £49 million. We disclosed that in our accounts. We remediated all the cases, and the final outturn was £57 million, so it was marginally higher than what we knew at the time. Arrests were made. We worked with Romanian authorities and with authorities in the UK. We have now established the fraud prevention centre that we committed to in our correspondence. We have also just recruited a new disaster recovery director and, stepping through excom, are exercising various attacks. We then just have the underlying challenge of phishing of identity and scams. It feels like that is a constant threat. We do not have anything of the same financial loss that PAYE was in terms of organised criminal attack, but we have an underlying focus on improving identity credentials. We will be rolling out One Login this year for new claims into the tax system as an example. Improving our two-factor authentication and further security resilience is core to our delivery. If you would like us to bring the team along for a private briefing on the nature of the threat, we would be happy to do that.

Yes, let us have a discussion offline.

Quite a lot of this is going to be originating elsewhere, outside of your platforms. We have heard evidence from the FCA and others in other hearings about the co-operation of larger tech companies. Do you have any issues with your relationship with tech companies? I know that, for instance, HMRC was affected by one of the cloud outages recently. Are you fully aware of all the vulnerabilities of those cloud-based services? Do you understand their security controls? Is that stuff that is all within your remit, or is it some kind of good-faith arrangement?

No, it is absolutely core. You are quite right to call it.

It would be cynical to have a good-faith arrangement.

Yes. You are quite right. It is absolutely fundamental. Daljit Rehal, my CDIO, is spending a lot of time working with our big suppliers, particularly with regard to data security and resilience. I am meeting the chief executives of a number of those suppliers in the next few months as well, pertaining to one of our key procurements. Clearly, sovereign cloud, data security, the fall-over arrangements and resilience are fundamental to our long-term confidence level in our operating model.

Can I just clarify that? You ultimately want to have sovereign cloud capacity without having to be reliant on third-party contractors such as AWS. A lot of people were quite shocked, when they heard about the outage, that HMRC data has been held in West Virginia and not here in the UK.

It is exactly the point around where the data is held, the back‑ups, and the fall-over arrangements, and working through all of those with, as you say, AWS in regard to that provider, but also doing so with Capgemini, Microsoft and our other big strategic suppliers. We are always having that conversation. Our security team is all the time testing that we have the most modern security arrangements in place. We will keep having that conversation to make sure that we, of course, keep customer data secure, but also have strong, robust contingency arrangements in the event that we need to fall over to a contingency.

Just to be very clear, the data is held in the UK. It was a particular bit of the IT infrastructure that was in the United States. The data is held in the UK.

The data is here, but a bit of the system fell over.

Yes, a bit of the system, just to be very clear on that point.

I know that the Government should be publishing their fraud strategy soon. Has HMRC had input into that? What have been your demands of the Government? What do you want to see in that strategy?

We input a lot into all cross-government strategies, such as the cyber strategy recently and the fraud strategy. Our fraud investigation service collaborates a lot with the National Crime Agency. We mentioned today the Insolvency Service, Companies House and others. If I think about our fraud investigation, we are making sure that we have the best capabilities from case management through to recruitment and training. We did a joint session with the NCA the other day, looking at operations on the high street around Machinize 1 and 2, where we are collaborating too. We need to keep building the fraud profession and the capability, and making sure that we have cutting-edge data insight and techniques available to us, and that the collaboration across the agencies is strong. Everything that I have seen so far is very reassuring in that regard.

Another fraud that the Public Accounts Committee has highlighted is in online marketplaces and people setting up fake UK companies for VAT purposes. I know that you have done a consultation on that. Can you update the Committee on where that has got to?

Jonathan can talk on marketplaces, but in terms of phoenixism, where companies are created, then the institution not there and the tax is not collectible, there is now a phoenixism taskforce. There were announcements in the Budget in terms of additional headcount to investigate that for the Insolvency Service. There is good data exchange and collaboration going on between the Insolvency Service, Companies House and HMRC to tackle it. I wrote to the PAC recently, but I would be very happy to provide more detail on what that is and what it is expected to deliver by when, if you would like.

That would be helpful.

There are online marketplaces that offer to help you collect that VAT. Can you update us on where you have got to on that?

Under the current rules, it is for the online marketplace to identify whether the company is UK-resident. That is a better way of doing it than relying on HMRC, because the online marketplace has a relationship with that company. That is the proposal where we are at. People have put forward different options and models for how you could do this. Should online marketplaces, basically, charge VAT for everyone? Those are some ideas that have been put forward. Essentially, if you go down that route, there are challenges, in that people who are under the VAT threshold would potentially have VAT levied on their sales. There are a number of options here, but finding the right balance, with something that protects the Exchequer and makes certain that people are paying the right amount of VAT, but also does not inconvenience sellers who are, broadly, normally compliant, is a bit of a challenge.

So you are not proposing any changes at the moment.

This will be an ongoing development, because it is not a static picture. Online marketplaces are changing. The nature of that risk will potentially change. This is something that the Government will want to keep very close to, but I am not expecting a big change imminently in terms of that direction.

I have one final question for Mr Marks, if I may, on the small consignments changes that you are bringing in. You said that, because of operational reasons, you are making that quite a long implementation lead time. You will be aware that the EU is bringing in the changes a year earlier. We raised Northern Ireland earlier and I wondered what your concerns are about how that might affect things in Northern Ireland.

You are quite right. We need to look at what the European system is going to do and its timeframe, and then work carefully to achieve alignment, being very thoughtful of the Windsor framework arrangements and making sure that that is managed well. We have agreed to consult on exactly the arrangement for this. As you say, the measure scored in the Budget takes us out to 2029 in terms of implementation for low-value imports in the UK. If the conclusion was that, to align with the EU, it would be better to be April 2028, we would look at the feasibility of that. Going back to our initial question, it is a big, high-volume change and we do not want to rush the fence. Taking time to learn from what Europe does and then do it well in the UK, consulting with industry and listening to its feedback, is smart, but I do recognise that there would then be a year of divergence across the Windsor framework arrangement in Northern Ireland, where we would need to be very thoughtful to manage it well. That is the best that we have at the moment.

We know that it is an issue.

We know that it is an issue and are conscious that we have to get it right.

It is one of the many things on the Permanent Secretary’s plate. Can I thank our witnesses very much indeed for their time? There were quite a lot of detailed issues to get into, but we felt we needed to cover the ground. We had, in summary, a very useful discussion, including the mechanisms that might need to be put in place to ensure that individuals with only a state pension do not pay tax on it. We recognise now that there is quite a lot of complexity to that. We heard from Mr Russell at the Valuation Office Agency, who gave a precise figure, that the rateable value of 5,100 pubs has doubled. We discussed changes to the cash ISA, including how HMRC will administer compliance. Again, there are some complexities there. Mr Marks, we accept your apology on child benefit, and that lessons have been learned, but we will be closely watching other compliance issues to check that that is, indeed, the case. Can I thank our witnesses very much indeed for their time? Thanks to our colleagues at Hansard, who will ensure that the transcript is available on the website, uncorrected, in the next couple of days. Thank you to our colleagues at Bow Tie for the broadcasting.