HM Revenue & Customs has launched an urgent review of its processes for compiling tax statistics after it discovered a double counting error in reporting corporation tax receipts since 2011.
In an analysis of tax receipts published on September 24, HMRC revealed that it has updated corporation tax data for the period since April 2011 to remove an accounting error. The published corporation tax total was reduced by £3.9 billion to £53.2 billion for 2018-2019, and by £2.3 billion to £52.1 billion for 2017-2018.
“We very much regret this error. It remains the case that onshore corporation tax and bank surcharge receipts have risen significantly in recent years, with growth of 50 percent since 2011-2012,” an HMRC spokesperson said. “This is a statistical reporting error. It does not affect the amount of tax paid by companies and received by HMRC, or the figures reported in HMRC’s accounts. We have launched an urgent review into the analytical and quality assurance processes used to generate HMRC’s published statistics.”
HMRC said it discovered that some company tax returns with research and development tax credit claims were omitted in its compilation of statistics on corporation tax credits. Further investigations into the method for dealing with credits identified a separate, double counting error in the process for reporting corporation tax receipts.
“This has resulted in a reduction in reported corporation tax receipts (gross of company tax credits) covering the period April 2011 through to the present,” HMRC added.
HMRC’s analysis pointed out that the public sector finances release, published at the same time by HM Treasury and the Office of National Statistics (ONS), uses the “national accounts basis.” The cash data are “time-adjusted” in order to be consistent with that framework, HMRC said.
“Therefore, while the revisions affect the (HMRC) cash data from the financial year ending March 2011 onwards, the impact within the monthly public sector finances release is over a longer time period, with revisions beginning from the financial year ending March 2008,” HMRC added.
The ONS release said corporation tax data updates following method and data changes “increased borrowing by £2.6 billion but had had no impact on net debt.” Corporation tax credits have generally increased since 2011, so the impact of the correction is larger in recent years, the ONS said. “For example, for the latest full financial year ending March 2019, total corporation tax receipts have been reduced by £2.6 billion and public sector net borrowing has been increased by the same amount,” it said.
The ONS noted that HMRC’s error “mainly relates to the treatment of corporation tax credits, which are included within total corporation tax receipts as well as within total central government expenditure.” The error was one of “several determinants of revisions to borrowing” in the period since 2008.
The Office for Budget Responsibility (OBR) noted in its public finances release for August, published later on September 24, that public sector net borrowing in 2018-2019 was revised up by £17.8 billion this month to £41.4 billion, thanks largely to statistical changes including “a substantial correction to corporation tax data.”
The OBR said its next forecast will reflect on “several methodology and data changes” incorporated in the ONS release. In the meantime, the OBR gave an initial assessment of the changes for corporation tax, as well as student loans, capital stock and depreciation data, and pension schemes.
“First, HMRC identified a problem with the algorithm that split corporation tax data between larger quarterly payers and smaller annual payers,” the OBR said. “Correcting this adds £4.7 billion to payments from smaller payers in 2018-2019 and lowers payments from larger installment payers by the same amount. This has very little effect on cash receipts, but affects accrued [corporation tax] receipts as recorded in the public finances due to the different accruals methods used for quarterly and annual payers. Second, HMRC identified double-counting of the directly payable tax credits element of [corporation tax] receipts. This lowers accrued receipts by £2.6 billion in 2018-2019. Both changes will affect our next forecast and are likely to persist over the medium term,” it added.
Liberal Democrat Shadow Chancellor Ed Davey said HMRC had revealed “a concerning black hole” in the public finances. “Since this Conservative government took office, an astounding £12.86 billion was mistakenly accounted for in the exchequer’s books — money that was never actually there. This is a potentially dangerous oversight for which the Conservative chancellor is responsible,” he said in a statement.