 I welcome everybody to the fourth meeting of the Public Audit Committee in 2022. The first item on our agenda is to agree to take items 4, 5 and 6 in private. Are we all agreed? Yes, we are all agreed. The second item on our agenda is to agree to take any subsequent draft reports on the 2020-21 audit of the Crofting Commission in private. Do members agree to that? The principal item of our session this morning is to take evidence on the administration of Scottish income tax 2020-21 report. I am pleased to welcome, once again, with us in the committee room, the Auditor General of Scotland, Stephen Boyle. Stephen will be joined online by the Audit Director of Audit Scotland, Mark Taylor. I am pleased to welcome to the Scottish Parliament Public Audit Committee, Gareth Davies, who is the Comptroller and Auditor General of the National Audit Office, and Gareth Davies, who is joined this morning by Darren Stewart, who is the Audit Director of the NAO. I think that this is the first time that Mr Davies has given evidence to this public audit committee. It is unfortunate that we are only able to take your evidence, Mr Davies, online this morning, but I do hope that sometime in the not-too-distant future we will be able to welcome you into the Scottish Parliament and to be able to meet the Public Audit Committee in person. I want to begin by inviting Stephen Boyle to give a short opening statement after which I will come to the Comptroller and Auditor General from the NAO to then give an opening statement too, but Auditor General, over to you. Many thanks, convener. Good morning, everybody. Scottish income tax remains a key part of the package of new financial powers implemented as a result of the 2012 and 2016 Scotland Acts. The purpose of today's session is to look at the administration of Scottish income tax. The reports that the committee has before it relate to 2020-2021, and this was the fourth year in which the full amounts of non-savings, non-dividend tax collected by HMRC is payable to the Scottish Government. It is also the third year that HMRC has published Scottish income tax out-turns in its accounts. Those out-turn figures relate to 2019-20 and the difference between actual UK and Scottish tax out-turns and the amounts forecast at the time are then adjusted to the 2022-23 budgets known as a budget reconciliation. The reconciliation for the 2019-20 out-turns will result in our budget reduction in 2022-23 of £34 million. HMRC's annual accounts also include an estimate of Scottish income tax for 2021, but that does not yet affect the Scottish budget. HMRC collects and administers Scottish income tax as part of the overall UK tax income tax system and the NAO audits HMRC's accounts, and the Comptroller and Auditor General is responsible for reporting to the Scottish Parliament on HMRC's administration. I report to the committee as part of an additional assurance process on the NAO's work in line with a recommendation dating back to 2014 that the previous public audit committee made. I also explained some of the impacts that it has on the Scottish budget. In summary, my report says that I am satisfied that the NAO's audit approach was reasonable and covered the key audit risks. I am also satisfied that the findings and conclusions of the Comptroller and Auditor General's report are reasonably based. The CNAG has concluded that the out-turn to the Scottish on Scottish income tax was fairly stated and this therefore provides the Scottish Parliament with valuable assurance over this aspect of the Scottish budget. As ever, convener, we look forward to answering the committee's questions this morning, but as you outlined, I will hand now briefly to Gareth. Thank you. Thank you, convener and members. I will explain my role in this process briefly. As the Auditor General has just said, I am required to report to the Scottish Parliament on the out-turn for, in this case, 2019-20, and HMRC's estimates of the revenue from income tax in Scotland for 2021. We have also examined the HMRC's administration of the system as it applies to Scottish income tax and the cost to recharge by HMRC to the Scottish Government under the service level agreement. As the Auditor General has just said, in terms of the out-turn and estimate, the methodologies have remained broadly similar to previous year, and I have concluded that both of those are reasonable. That is the seventh annual report that we have produced, with HMRC's administration of Scottish income tax now having reached, essentially, an implementation of business as usual. Those rules and processes are well embedded and the picture painted by my report is one of consolidation on progress that was made in previous years. Clearly, HMRC's focus now has to be on refining the processes that it has in place to maintain an accurate and complete record of the Scottish taxpayer population, as well as continuing to monitor the risk of non-compliance that may or may not arise as a result of divergence between UK and Scottish tax rates. I am sure that the committee will be interested in the impact of Covid-19 on the figures set out in the report and in subsequent years. I think that it is fair to say in summary that Covid-19 has had less of an impact on the collection of income tax in the UK as a whole and in Scotland than might have been expected at the start of the pandemic. In fact, the out-turn is slightly higher than the estimate for 1920 and represents an increase on the previous year. The estimate for 2021 also represents a further increase. In the context of a pandemic, that is maybe slightly surprising but also very welcome in terms of tax collection. As I say, this is consistent with what we have seen in our audience of HMRC for the UK as a whole, where Covid support schemes have stabilised employment. Clearly, with those schemes now having ended, there will be a lot of attention as HMRC on the impact on tax payment rates, the level of taxpayer debt to HMRC and the impact of all that on the amount that is finally collected. My team and I have worked closely with the Auditor General for Scotland and colleagues at Audit Scotland throughout our audits on this matter. I am very grateful for the collaboration on the work. I am looking forward to answering your questions. Thank you very much indeed, Mr Davis and Auditor General, for your opening statements. We have, as you would expect, got quite a significant number of questions. I just want to begin, Mr Davis, where you left off. It does seem a little bit counter-intuitive, that, at a time when there was a huge collapse in the economy, GDP and GVA and all the measures of economic performance, the estimates suggest an increase in the tax take over the period when the pandemic was at its height. That, again, is based on the words that we keep coming across our estimates and samples and assumptions. Can we rely on those estimates being accurate? You are right to be cautious, because the full impact of the pandemic is not so much on the assessment of tax liabilities, because there is more clarity on the amount of tax that is owed by taxpayers through the self-assessment scheme and the PAYE scheme. It is more the impact on the collection of tax due. Bear in mind that the outturn that we are reporting on here—the most accurate figure, if you like, in this set of figures—is for 2019-20, which most of that was pre-pandemic. The first full year of the pandemic's impact is 2021. The estimate is robust, as we have seen, and it is showing a healthy level of tax collection, but just at a note of caution that the risk of higher levels of non-collection, higher levels of non-compliance, is not completely eliminated yet. Now, HMRC has, as I am sure, gone on to discuss, made some reasonable estimates, the impact of those factors. They are taken into account in coming up with this estimate, but I would say that there is a higher level of risk than normal, just because of the—until we have seen exactly how much tax is collected rather than assessed as due, we will not know the full picture. So, I am sure that we will get into some more of the detail on how those estimates have been constructed. On your broader point about the impact of the pandemic on the economy, the total tax take for the UK has reduced, but it is not income tax. Other taxes have suffered the brunt of that, particularly VAT, the biggest single fall in the tax take for the UK. It is on VAT, where 15 billion reduction is anticipated. Reduction is also in hydrocarbon duties, another significant amount, and some other business taxes, but income tax on individuals has held up. The answer to why that is is the Covid support schemes that were put in place, both the furlough scheme and the self-employed income scheme, and the heavily protected levels of income through the worst phases of the pandemic, and has therefore resulted in higher levels of income tax than might have been expected. Is it the case then that, in both pay-AYE receipts and self-assessment receipts, they have grown according to the figures that are presented in this report? Is that correct? That is correct, yes. And there was, if I remember rightly, a postponement of the deadline for self-assessment tax returns. Do we know whether that has had any impact on collection rates? Well, it certainly had an impact on the amount owed by taxpayers to HMRC. At this point, I am talking UK-wide because we have not done a separate analysis of tax collection as regards Scottish taxpayers, but we have no reason to think that the picture is different in the various parts of the UK at this stage. We reported separately, as part of our audit of HMRC, on the very large growth in tax debt owed by individuals to HMRC through the course of the pandemic. As you say, payments were allowed to be deferred, and not surprisingly, that led to a significant increase in the total amount owed peaking in the late summer of 2020. Since then, it has been falling as people realised that they could actually pay their tax due, again partly because of the economic support schemes in place at the time. However, the amount still outstanding relating to 1920 and 2021 is higher than it had been pre-pandemic. HMRC still has a major job in collecting the outstanding amounts. Of course, the longer they remain due, the harder they are to collect in general, because people have to keep up with their current tax bills that have loan paid arrears from previous years. Your equivalent committee in Westminster held a specific hearing on the collection of outstanding tax debt by HMRC and is reporting on that shortly. I want to turn now to an area that I will ask Stephen Boyle about. One of the things that concerns the committee a little bit is the extent to which we are still reliant on estimates, samples and assumptions, rather than hard data. The question that we have is after the Scottish Income Tax arrangement has been in place for three years, why is it that we are still so reliant on samples, estimates and assumptions rather than relying on three years' worth of Scottish Income Tax's out-turn information? Mr Davies, first and now we will come to Stephen Boyle's second. Yes, I think that some element of estimation is inevitable in a system of this kind, but the challenge is to make that as small as possible. The reason I think that some elements is always likely to be included is just because of timing, essentially. The bulk of the figures in the out-turn for 2019 are certain and are known, so the vast majority is based on accurate data, but because the final tax take depends on the effectiveness of recovery action, tackling non-compliance, pursuing difficult cases, sometimes through the tribunals and so on, all of that takes a long time and is not complete by the date that these estimates have to be reached for the purposes of reporting to the Scottish Parliament. It is those areas where there is still recovery action outstanding, where you have to estimate the likelihood of success and the amount that will be collected through those cases. That is the prime area that will always be difficult to resolve in the time available before the figures have to be reached. I assure the committee that the vast majority of the numbers here are based on actual tax returns, money that is received and collected. Mr Boll, you raised that in your commentary on the NAO report, so I wonder whether you want to give us your views on that. Many thanks, convener. The headline from our perspective and work is that we are satisfied and with the approach that the NAO has taken. Through our own work, we are content with the judgments that our NAO colleagues have made. By way of the circumstances around the estimate, a couple of points that I would make—actually, I am going to touch on one of those already—is that there is undoubted volatility by virtue of the pandemic. Although the estimates are reasonable, we do not yet know with sufficient accuracy what might come down the line by further challenges to the estimate of the tax take. Individuals' behaviours are touched on in aspects of the report, convener, that there are still risks to the tax take in the future. For a couple of factors, one is the divergence that we are seeing already through the different tax regimes in Scotland and elsewhere in the UK. That might yet lead to changes in behaviour, which I am sure the committee might want to come back to. Another aspect of assurance that is perhaps helpful is that looking at the estimate and comparing it to the Scottish Fiscal Commission, they are relatively close. There is an element of additional validation there that you can see that, although there is uncertainty that the three HMRCs own estimates, those of the Fiscal Commission and then the associated assurance activity that our annual colleagues have undertaken, I think that there is as much confidence as is available, convener, that the estimate is reasonably based. Okay, thank you. Just one final question from me before I openly go up to the rest of the committee. Do you get any sense that, as this is quite a new arrangement and is evolving, we are learning to some extent as we go along? Do you know, Gareth Davis, whether the HMRC does have any plans to change its approach in the future, based on the extent to which it is relying on estimates for the reports that we get as a Scottish Parliament on the position of income tax take in Scotland? Well, I think that from our work with HMRC on this, it's clear that they do keep the entire calculation under review with particular focus on those areas where they have to include adjustments and estimates. Most of these adjustments and estimates are small compared to the overall figure, but because they require judgment to be applied by HMRC, they do review those. I think that it's fair to say that we do see a mindset of continuous improvement. They are very keen to make sure that the estimates use the best available information. They challenge whether previous approaches have been accurate enough and will come forward with suggested changes where they think that that will improve the quality. We've seen that over the recent years. We think that that's a healthy approach. Clearly, HMRC doesn't do that on its own. There's governance between HMRC and the Scottish Government to test whether the approach is sound and to sign off on any methodology changes that are proposed. That requires the agreement of both parties before those are approved and implemented. Again, I think that that's a good control over the development of the methodology here, but I think that we do see evidence that HMRC is keen to improve it over time and takes quite a lot of pride in the accuracy of its estimates. It's keen to understand anything that departs from assumptions that they've made and will look to make proposed changes as a result. I'm now going to invite Colin Beattie to ask a series of questions. I've been involved in this committee since the Scottish tax was introduced several years ago. I'll ask you a very simple question first, and I'd like to focus more on the actual report. One of the things that jumps out is the increase in the number of missing Scottish postcodes, which has increased by 70 per cent. It's a small proportion of the taxpayer population, but it could be, for example, if there's a large number of high net worth individuals in there, it could have a significant effect on the collection of tax. What is it that's actually behind that increase? What's driving that error? I'll bring in my colleague Darren Stewart, if I may, who oversaw the detailed work on this, who might be a better place to know any further detail on that. We posed the question to HMRC in conducting our work. I don't think that there is clarity on HMRC's part about exactly what is driving the increase in missing postcodes. I think that the thing that I would point back to, and I think that we do reflect that in the report, is that it does casework around those missing postcodes. As a result of that, where the missing postcodes relate to tax-paying Scottish individuals, such as those in employment or pension arrangements and things of that nature, it does update its records to make sure that the correct amount of tax is being collected. I think that the trend is something that we observed and played back to the department, but I think that the assurance is that for those where there is an impact on the tax collection that some remediating action has been taken. Do you have any idea at all about the impact on the actual revenues that are being collected? I think that from a revenue perspective, from the work that we have done with HMRC, we have a relative degree of comfort that those missing postcodes aren't driving significant understatement, I guess, is what we are particularly interested in in the revenue collected, but we have suggested that some analysis should be done to identify the recourses as part of the continuous improvement that Gareth referred to earlier. You are satisfied that HMRC is taking steps to deal with this? I think so, based on the work that we undertook. Do we know—is this going to be a recurring incident? This is going to be a key focus of our forthcoming report for 2021-22. It is an area that we have pointed out to HMRC, and we will be investigating with them in preparing that report. It must indicate a flaw in the process, surely? I think that the key thing here is to identify the root cause and take steps to address that, and that something will be taking a keen interest in for our 2021-22 report. Since it has been happening every year now, since the institution of this system, it must be something endemic to the system. It is difficult to say without that analysis having been undertaken, but I think that it is something clearly we are keenly interested in and will be taking on. If it happens every year, clearly it is a flaw in the system, surely? I guess what we point to in the report is, as you said, that this is in relative terms a small number of individuals compared to the overall £2.5 million Scottish taxpayer population. In the context of a system that is maturing, as you said, those are the marginal gains that we would expect HMRC to be looking at to see what continuous improvement can be taking forward. If I could add from our work on similar systems elsewhere in Government, that is a data quality issue at heart. Those large data collection systems require continual effort to maintain data quality. You might think that once you have a postcode correct, you can be assured that it stays correct, but that is not always the case with those systems, because records might be updated for other changes and inadvertently errors made on the postcode field. The important thing is that HMRC has sufficient checks in place to identify where those errors arise and then a robust system for correcting them. Data quality issues will arise always in systems of those kinds, so the question is how good your system is for detecting those things and then correcting them quickly. That is what we will focus on in our work. Coming to the broad report itself, the convener has already highlighted the multiplicity of references to estimates and so forth. That is not terribly encouraging when you are trying to plan expenditure against the likely income that you are going to get from taxation. What disappoints me is that, when the system first came in, or when the Scottish Rate of Income Tax came in, it was a bit of a shambles, to be honest, to the first year or two, but we kind of expected that. What I do not see is the improvements and the elimination of recurring problems since then. I would have thought that, as the system refines itself, as HMRC identifies the weak points and the variables that it would work to eliminate that. I do not see that happening. I am seeing the same stuff again and again. You might think that it is still relatively early years, but I would have hoped that some of those anomalies would have been eliminated by now. I think that my overall view is that the system for establishing the outturns is now robust and is giving you reliable data. We have tried to explain the report why it will never be 100 per cent predictable or accurate. In answer to the convener's questions earlier, I was explaining why there will always be a need for estimates in this process and, by definition, estimates will have a margin of error built into them. The question is, is this giving a meaningful outturn figure that can be relied on for budgeting purposes, as you say? I think that, in the last few years, we have seen a reduction in the variance of the outturn to the original estimates. We do point out in the report that, in comparison to equivalent outturns, the level of accuracy here has been reasonably high in recent years. The 2018-19 outturn—the year before the one that we were looking at—was 0.9 per cent lower than the estimated amount. The final outturn for 2020 is 1.1 per cent higher than the equivalent estimate, so around about 1 per cent in a different direction over those two years. Given the inevitability of some level of estimation in this, I do not think that that is surprising or an unreasonable level of variation. Clearly, the challenge is to make that as small as possible, but I do not think that we are dealing with a system that is giving figures that cannot be relied on. I think that the system is as good as its current approach can make it. Bearing in mind the need for annual improvement every year to spot trends and to deal with them. 1 per cent equate to approximately the same as the UK figure? Of course, we do not have that calculation here, because that is not used for the same purpose in the UK budget. I will ask Darren if he has any better data than that for the UK as a whole. The relative quality? Yes, because the same system is being used by the same organisation. I would not expect to see any significant difference in the quality of the estimate for tax take for the UK as a whole, but you may want to answer that. As Gareth says, there is not an equivalent model, an estimate, in the context of UK tax revenues, but there are other estimates that are fundamental to preparation of the UK-wide trust statement, which records all of the tax revenues for the UK as a whole, where HMRC is required to, among other things, estimate the amount of revenue that is receivable at the end of the year. That is for activity that has been undertaken, but tax returns have not yet been submitted. It is certainly not inconsistent. We would have to go and have a look on an estimate by estimate basis, but the 1 per cent that we are talking about here is certainly not an outlier. Looking specifically at the report, there is one or two areas that I would just ask for a bit of clarification on. As I said, right the way through the report, anybody who is reading this would have a concern at the level of estimations and so on. I know that you consider a system in places is robust, but that is dependent on having a system to produce those estimates. It is very difficult to get a grip of the facts in this. Let me ask one or two questions. On page 6, paragraph 4 of your report summary, you talked about the HMRC producing a provisional estimate of Scottish income tax revenue for that year. Is that in line with what you do for the UK? Well, I think that this refers to our previous answer that there isn't an equivalent process for the UK where we audit how close HMRC's calculation of income tax is to a prior estimate, because clearly we are auditing the entire tax take for the purposes of the HMRC accounts. Our audit there is focused on the accuracy of the figures being disclosed in each year's annual accounts. Clearly we pay a lot of attention to all the same issues around accurate identification of the income tax due, performance of the HMRC in collecting tax due and the level of debt built up by taxpayers. We do look at all of that, but as we have tried to explain, there isn't an equivalent process for estimating and then comparing out-term in the UK-wide accounts as the one that we are discussing today. However, what we observe is that the same systems are being used consistently for UK tax, Scottish tax and, of course, now Wales income tax as well. Looking again at your report, page 8, I am looking at paragraph 12 here, I find it astonishing that taxpayers don't have to bother advising a change of address. How can a system possibly be robust if people could just willy-nilly change addresses and vanish off the system? I realise that that's not something within your powers, but… It's a feature of the UK wide tax system that will be up to Parliament if it wanted to legislate to make this a requirement on taxpayers, but it's clearly chosen not to. Most taxpayers have probably regarded in their interests to make sure that they have accurate information going to and fro with HMRC, but, as you say, it's something that HMRC needs to work around. They have this address cleansing process that we've described in the report and have covered in previous years, which is well established now. The database of addresses is a key part of that cleansing process. As we've already discussed, it throws up data quality issues every year. Would making taxpayers responsible for updating HMRC with their address help? I think that it's still people who are determined to evaluate the system would still attempt to do that, but it's not our role as auditors to recommend policy changes. We're here to observe how the system is operating in practice and where the outstanding issues appear to lie. Looking at paragraph 15, you state here that HMRC estimates Scotland's share of net losses is £800 million, which is based on a proportion of the UK figure rather than Scotland-specific data. How exactly do they calculate that share of the net losses? Is it a percentage according to the number of the volume of taxpayers that we have here, and it's as simple as that? Or is there some other esoteric formula that we bring Darren in on that question? Thanks, Gareth. What you've described, Mr B, is broadly in line with our understanding of how that works. The key thing to note here—we draw this out in the report—is that, in the written evidence that HMRC provided to a predecessor committee, it's signposted that, at present, there isn't a bottom-up assessment of compliance yield or tax-at-risk for Scotland. An assessment is made at the overall UK level of tax-at-risk through the strategic picture of risk, and the elements of that, which are relevant to Scotland, i.e. non-savings, non-dividend aspects of the income tax regime, are calculated based on, broadly speaking, Scotland's share of overall non-savings and non-dividend income compared to the UK's hope. On the report, you say that the dividend and savings are bound up in the income tax figure for the UK, which means that we're taking a proportion of that as part of the loss, which doesn't seem right. It's probably worth clarifying here that this is essentially income foregone, not tax collected and then an amount attributed through the budget, an out-turn, relevant to Scotland. This isn't an adjustment that HMRC makes to Scottish income tax take in calculating the out-turn. This is essentially income foregone. How do you account for that? In very basic terms, from an overall UK HMRC trust statement account perspective, it isn't accounted for in the accounts. Essentially, what the trust statement includes is income that has actually been assessed, the liabilities that have been established and the amounts that have been recovered and reported by HMRC. This is a notional figure. What's the purpose of it? Like the tax gap assessment that HMRC conducts at the overall UK level, the last assessment based on 2019-20 data was a tax gap of around £35 billion. This is HMRC's estimate of what impact abuse and avoidance of the system is having on amounts that HMRC could, in theory, have collected but hasn't, because of non-compliance and evasion and things of that nature. Convener, I could go on, but I'm conscious that other members have questions as well. Perhaps I can come in later if there's time. Yes, absolutely. On that note, I will press on and ask Sharon Dowie to ask a number of questions that she's got. On compliance of Scottish income tax payers, one issue that is endured in the scrutiny in previous NO income tax reports has been whether there's been any emerging evidence of behavioural effects from Scottish income tax rates and bans diverging from those in the rest of the UK. In 2020-21, Scottish tax payers paid more income tax than tax payers south of the border in earnings over £27,000, a difference in excess of £1,500 on those earning over £50,000 per annum. The NO report states that HMRC continues to assess as low the risk of non-compliance a result of divergence between Scottish income tax and the rest of the UK and that HMRC has not identified any significant or widespread instances of tax payers changing their address to obtain a tax advantage. Can I ask what the definition is of significant or widespread in that instance? Well, it's essentially the concept of materiality that we use as audits in other words, anything other than the odd case here or there. In fact, I'm not sure or aware of any cases, but Darren will correct me on this, where there's been a proven abuse through declaring a false address to avoid paying Scottish income tax. We can obviously come back with any further update on that, but in other words, there's no significant impact on the tax take set out in the outturn for Scotland of any of that behaviour. We set out in Para 2.36 of our report the three activities that HMRC undertakes to check that risk and to mitigate it and to pick up any examples should they start occurring. Again, we think that that's a reasonable approach in view of the scale of the risk, but that's why we recommend, as does the Auditor General for Scotland, that this area is kept under particularly close attention because clearly this is quite new, there's divergence in tax rates. If Asian behaviour might take some time to emerge in the system and therefore a lot of attention needs to continue to be paid by this by HMRC. Thanks for that. It's no causing concerns just now, but you're keeping an eye on it. The other one was, HMRC has limited performance data available about its compliance activities in Scotland. Unlike its income tax system, which flags residents as Scottish, HMRC's compliance system cannot readily identify people living in Scotland. HMRC therefore cannot easily track and monitor compliance activity in Scotland, and that affects its ability to collect performance data about the extent of Scottish non-compliance. Why is it the case that there's limited performance data on compliance activities in Scotland and what, if anything, is being done to address it? I will bring Darren in who will have more detail to add. The general point is that the data that identifies Scottish taxpayers for the purposes of self-assessment and PAYE, which we described there, the S prefix on tax codes, isn't available for the compliance systems to use in a routine fashion because of the design of those systems. It would require significant updating and replacement of compliance systems to be able to use the data that identified the country of the taxpayer in an automatic way. That's the central reason to explain why HMRC is not able to do that at the moment. Clearly, if that became a big priority, that investment would be a good argument for prioritising the investment that is required to bring those systems up to date so that they could use that data automatically and efficiently. However, Darren, do you have any further points to add to that? Not much more to add. I think that the key point here, as Gareth has outlined, is that the self-assessment and PAYE systems allow, through the S prefix, a good opportunity to identify the Scottish taxpaying population. The separate compliance systems that HMRC operates do not have an equivalent mechanism for identifying compliance activity undertaken in respect of Scottish taxpayers. In the written evidence that HMRC submitted to one of its predecessor committees, I think that the conclusion that they came to was that, whilst it was possible to undertake that work, it was incredibly resource intensive and it wasn't something that they were intending to do at that point of time. It was feasible and it was technically possible, but not practicable at this time. However, as Gareth says, if there was substantive need, I know that HMRC engages with the Scottish Government around the balance of compliance work and the activity that it undertakes. Clearly, that would come with a cost-benefit consideration attached to it. I think that the HMRC view would be possible, but it's not something that they currently do. Okay, thanks. We are going to come on to questions around the cost of administering the Scottish Income Tax shortly. I'm also going to come to Willie Coffey in a moment about the identification of Scottish S-Code taxpayers and how that all fits together. Before I do that, I want to invite Craig Hoy to ask a series of questions. Craig, thank you. Good morning, Mr Davis. In your report, you look at the impact of Covid-19 on HMRC compliance activities. You note that Covid has continued to have an impact on compliance and debt management. Across the UK, there were 29 per cent fewer civil compliance cases opened and 26 per cent fewer cases closed in 2020-21 than in 2019-20. Just at the outset, it would be interesting to get a snapshot in terms of your view as to why that is. Is that because internal processes in the HMRC have been impacted by Covid, perhaps people working from home and therefore less capacity, or is it because the world outside has become more complex as a result of the pandemic? I think that the answer to that changed over the various phases of the pandemic. I think that additionally—yes, you're right—there was a big operation underway to equip HMRC staff to work from home. However, more important is the diversion of some HMRC staff resource to the furlough scheme set up and delivery. If you remember how quickly that was stood up and delivered, it required the diversion of people who had previously been working on things such as tax compliance to the furlough scheme. It is understandable and probably the correct prioritisation of resources in that situation. As things developed, clearly people could be taken off the furlough schemers as the numbers joining that scheme reduced. Some of the compliance activity was restarted and the home working arrangements were bedding in, so they have been able to return. They are now working—actually, they are not just working at full capacity in recent months on compliance activity but have added to that because of the need to catch up on some of the activity that had to be postponed during those phases of the pandemic. Largely, the resources of HMRC is the answer. Clearly, on tax collection, taxpayer behaviour did change because they were given more time to pay, so tax debts did build up in many cases, as we have already discussed. Do you have any concerns that, much in the same way that people who struggle to pay tax during that period are now paying the present tax and therefore they have almost forgotten about that period? Do you have a concern also that, in capacity terms, HMRC is going to be so busy in the forward-looking work that we may end up not fully delving into that period retrospectively? HMRC gave some detailed evidence on this to the Public Accounts Committee in Westminster recently, based on the report that I mentioned of hours when we looked at the build-up of tax debts during the pandemic. I am sure that we can make that evidence available to the committee if you would find that helpful. What they described there was a recovery plan, essentially, for bringing down the level of tax debt steadily so that they have targets for doing that. They can show how they have deployed their resources to achieve those targets and they are making steady progress. However, the questioning of the committee was, as you would expect, quite challenging on the speed at which that could be recovered, bearing in mind that the longer a debt stays outstanding, the harder it is to collect. That is work in progress. HMRC would say that they are hitting their milestones for bringing the total debt down, but there is a long way to go. However, you would expect that there would be an upscaling of those activities and relations to compliance and debt management as we come out of the pandemic. That has been already. The question is getting that balance between staying on top of current collections and then tackling the backlog. At some point, there will be a question about is there an amount that has to be written off, but we are not close to that point yet. On a separate analysis of Scottish compliance and saying that perhaps the effort would be too great and the cost might be too great, do you have any insight as to whether there are plans for analysis of Scottish income tax debt becoming available? Is that work being undertaken at all? Is it something that the Scottish Government, HMRC or yourself would benefit from? I do not think—Darren will correct me if I am wrong on this, but I do not think that there is any work under way on that that we are aware of. Again, it is back to prioritisation of HMRC's resources, which, as I understand it, is not currently prioritising that kind of analysis. Darren, is that your understanding as well? That is in line with my understanding. I think that this is certainly a topic that has been discussed with our colleagues over at HMRC, and there are benefits to disaggregating debt compliance and other data based on sectors and regions. That would be important and valuable management information, but I am not aware that there are any plans to do that for Scotland at the present time. In your opening remarks, or perhaps just after Mr Davis said that, in relation to income tax debt attributable to Scotland, there was no reason to predict that there would be at any different levels to the rest of the UK? I am just wondering how you could come to that conclusion if there has been no substantive analysis so far that has been conducted. Well, it was not a kind of assertion that that would be an accurate measure. It was more that we are not aware of any—nobody has put to us any reasons why there would be different behaviour on that in Scotland compared to the rest of the UK. I have one quick question of Mr Boyle, if I can. In relation to your report, you noted that further analysis of taxpayer behaviour, along with the relative success of compliance activity in Scotland and Scotland's specific tax gap, would help the Scottish Government to assess whether any Scottish income tax compliance risks are emerging. I was just wondering, Mr Boyle, if you have any concept or could elaborate on what those risks might be and the scale of them, potentially. What we are setting out in our report here along the lines of the conversation that we have had this morning is the tax policy choices of the respective Government's diverge. It is captured in the NEO's report that illustrates by bans some of the percentage differentials of different incomes that taxpayers might have. That might inform some of the behaviour choices that taxpayers make as they identify themselves through their employer or self-identification as Scottish taxpayers. If that increases further the different tax choices of the respective parliaments, there is further risk potential of non-compliance, non-identification and, by extension, a potential threat to the Scottish budget. As we set out in our report, we think that it is important that this is kept under review and that there is an opportunity for non-compliance. It is one of the risks that HMRC will need to manage, along with its interaction with the Scottish Government. A risk could potentially be somebody buying a bull hole in Berwick upon Tweed and registering themselves there, despite working member, for example. That is the classic example, I suppose, but through our own work and supporting the NEO's conclusions that it is not a material risk currently but that the potential remains and potentially that risk will grow if the two parliaments continue to make different choices about what the tax bans and how those are applied. I confirm that there has been no flight of income tax payers from Scotland to England that you have any evidence of, Auditor General. It is perhaps more a question for the same age convener. For our own work, we are not identifying any specific pattern of behaviour but rather a growing risk. If I may refer back to Mr Beattie's earlier question about the postcode element of it and the increasing number without postcodes, although I agree that there is not a significant risk necessarily, there is a point about equity that we touch on in our report that Scottish-based taxpayers ought to be identified, ought to be paying and contributing through to the Scottish budget. We also note in our own report that there is perhaps an opportunity for HMRC to target for a low number of missing Scottish postcodes through its own work, so that is part of our own findings on that work. I will now turn to Willie Coffey, who is joining us virtually this morning. I know that Willie has a number of questions that he wants to put, so I will go over to you. Thank you very much, convener, and good morning, Mr Davis, Mr Stewart and Mr Boyle. Probably the first comment to make is to note that we know that 54 per cent of Scottish taxpayers actually pay less in income tax than they would do if they lived in other parts of the UK. Nevertheless, the issue about identifying Scottish tax payers is an issue for us. We note that in 2020, HMRC identified over 30,000 tax payers' records that were not recorded as Scottish in S-codes, but in March 2021, that rose to 39,000. A couple of questions around that, if I may, to Mr Davis and his colleague. Why is that happening? A simple calculation might show that that could represent a billion pounds in earnings that are being incorrectly taxed. Give us a little flavour of why you think that those numbers are going up so significantly and what is being done to try to reduce that figure. Yes, of course. The first thing to say is on these particular ones, because you are referring to the numbers on the registration of the tax codes with the S-prefix. In June 2019, there were 67,500 cases. That was down by April 2020, so a year later, 67,500 to 31,000. HMRC identified 31,400 tax payer records, which was about 1.3 per cent of cases where employers were not operating a tax code with an S-prefix. By March 2021, the most recent data we have, that was around about 39,000 cases. It came down from a higher level in 2019, but it is still a worryingly significant number that needs to be addressed. I think that I would go back to my previous comment when we were talking about post codes rather than tax codes. The same general point applies here, which is that this is an issue of data quality in a large system. That requires permanent vigilance, so testing the quality of the data to ensure that where there should be an S-prefix there is, identifying any exceptions, trying to understand why they are occurring, and if that shows that there is a weakness in the system, then correcting that weakness. That is a continuous process for good management of any large data system like this. Our approach will be to, first of all, monitor the performance. Is that number going up or down? Secondly, to find out from HMRC, are they identifying any systemic reasons for this level of error system? Thirdly, what are they doing about those if they have identified them? That is our role in this continuous vigilance process. What is being done to ensure that data quality is as high as possible, recognising that there will always be an error rate, and the challenge is to make that error rate as small as possible. Is there any estimate of the loss of revenues as a result of that? We are also reading in our briefing notes that some employers might repeatedly be failing to apply the S-codes correctly, but we do not have any information on that. I could ask you if you have any other employers who are repeatedly not doing this. Fundamentally, that is against the law not to apply the code correctly, is it not? Is there any estimate of the loss of revenue, and what are we doing to encourage employers to apply the code correctly and legally? I do not think that we have a specific estimate on this element of the... I mean, this forms part of that overall, which my colleague Mr Stewart was describing, the overall figure for leakage from this system, if you like, earlier on. I do not think that we have a specific estimate for this particular element of it, but you are right. I think that there is an issue with what action is being taken for persistent offenders, employers that are persistent, that you found to be either not doing this accurately or at all, because we have not been able to get a clear answer on the approach that is being taken to that small number of employers yet, but we are going to follow that up with HMRC in our work on the next year's figures. Okay. You will probably recall as well, Mr Davis, that in the early days of this, even some of our own MSPs in the Scottish Parliament were not coded as Scottish taxpayers. I think that the number was 45 MSPs out of 129. That is a huge number to get wrong. Can you give us an assurance that that problem has now been corrected completely and that the 129 of us and indeed our 59 Scottish MP colleagues are being correctly coded as Scottish taxpayers? We believe that that embarrassing position has been corrected, because it is obviously something that we paid attention to having highlighted it in a report several years ago. There was some focus action taken. In fact, a manual check was applied by HMRC to exactly that group of people that you mentioned to avoid it recurring. Our finding so far is that that has been successful, that exercise, and they have maintained that level of accuracy since then. I think that it is because of the significance of the issue at the time that remains on HMRC's radar. I am glad to say that I was not one of the 45. I was correctly identified initially. Given that we have you in front of us, Mr Davis, I wonder if you could see something or anything about the audit function that might apply to the UK Government's shared prosperity fund when it comes in? As you probably know, the European Union structural funds were completely under the scope and gaze of Audit Scotland and the Scottish Parliament, and we do not have any details about the follow-up arrangements that will apply with respect to either the level or not fund or the shared prosperity fund or whatever it is called for Scotland. Do you have any information from an audit perspective of where that audit function will rest? We think that the value of that money to Scotland and the Scottish Parliament is about more than £1 billion over seven years, and we have no idea if it is going to be the same amount, but it is the audit function that I am asking you specifically about rather than the politics of it. Do you have any information that you can share with the committee? Not in any detail about how that will operate, not yet, no. We will be discussing that with our colleagues in Audit Scotland. We work very closely together, the Auditor General and I, on all of these matters where we have functions that either are but each other or overlap with each other, so I am confident that, between us, we will be able to explain clearly the audit arrangements that are proposed for each of those funds. We are just not clear yet because the Government in Westminster has not got to that level of detail, but I agree that it is a really important issue for clear accountability to the relevant Parliament. Rest assured that we work very closely together with the two Audit officers to input our views on what is practical and feasible from an audit perspective. Clearly, the policy questions are not for us, but the practical administration of an effective audit regime is, so we will be inputting our thoughts into that as we get to that point. Finally, do you have any indication of when we all might know, because we have been asking this question several Audit committees over recent weeks? Is there any indication of when we will be clearer about it? I cannot give you a useful date, I am afraid, but clearly both of those funds are moving through the legislative process that will require answers to that question about the audit arrangements, but I cannot give you a date, I am afraid. Many thanks for those responses. Back to you, convener, thank you. Thanks to Willie. We have a little bit of time on our hands and Colin Beattie wanted to come back in with a couple more questions before we wind up looking at the cost of administering the Scottish income tax system, but I am going to invite Colin Beattie to come back in. Referring back to our previous discussion, I referred you to page 17, paragraph 1.23, where there are four bullet points that I find very telling in terms of the robustness of the figures around Scottish income tax, and they clearly, to me, indicate that there is a real problem in calculating that. If we look at bullet point 3, we were talking before about this 800 million Here it says quite clearly that the figures that are being used here do not exclude tax from savings and dividend income. Using those figures, you cannot possibly get something accurate out of that, because that is not within the Scottish Government's tax authority, if you like. Again, on bullet point 2, the two different proportions of taxpayer north and south of the border are completely distorted, because you have the city of London and so on, which massively is overrepresented in terms of the top income taxpayers. We do not have that in Scotland, so if we are simply using a methodology to calculate that, which is based on that kind of incredible difference, how can the figures possibly be accurate? This is a methodology question at heart, isn't it? I think that this is a question that the governance arrangements between HMRC and the Scottish Government will need to continue to address. You are making perfectly valid points about the limitations that these factors bring into the process. They are all agreed elements of the methodology at the moment, so it is not as if this is being done somehow in a way that is not known visible to both parties here, so Scottish Government and HMRC. I think that this is a matter that the committee would like to take evidence from both Scottish Government and HMRC on this question. Are these factors under consideration in discussion about future methodology improvements? What would be required to be able to address these issues? Again, as we have said on a number of points, it would be for HMRC to answer that question, not me, but I am sure that they would say that this is a question of cost-benefit analysis. What would be the extent of the improvement if we were able to disaggregate data in this way? What is the cost of being able to do that? You are right that this should be continually scrutinised, because this process needs to improve over time. If there is a cost-effective way of eliminating some of the rough elements of the estimation process, then that should be something that the Government's arrangements in place between the two parties consider. I turn to one of two specifics. Page 10, paragraph 1.2, says that the HMRC calculates a final outturn figure from several components. It does not actually mention what those components are. I do not know how length they are responsible to try to explain them if it is short, fine or not. Maybe you can drop us a note on that. Darren, is that straightforward to answer now, or should we write with a bit more detail? I think that we could follow-up in writing, but in the first instance I would point to figure 3 in the reports that this is on page 12. That does signpost the different elements that form the calculations. Extractions from the self-assessment and pay-as-you-won systems and then some of the estimates and adjustments that are made to arrive at the outturn. Page 11, paragraph 1.5, says that in some areas of calculation data are not available in sufficient detail to identify income tax liabilities reliefs of other adjustments relating to individual taxpayers. Again, that is a huge estimate to make. Well, in financial terms, compared to the overall estimate, it is not significant. This is that small number of people for where HMRC does not have access to the data because of various sensitivities, but it is not a material or financial element of the estimate in that case. Again, it is a theme running all the way through here about estimates and assumptions. On page 13, paragraph 1.11, HMRC deducts an estimate of the Scottish share of tax reliefs given against PAYE liabilities. How do they reach that figure? What is it based on? Is it based on some of the flawed data that you highlighted in paragraph 1.23? Again, HMRC would be able to set out the detail of that, but I think that it is in the same category as others that we have just been discussing, which is that to improve it would require more detailed information than they currently hold in their systems. So it is then a trade-off between the cost of collecting that more detailed information and the benefit of a more accurate estimate. Again, on page 14, paragraph 1.16, HMRC calculated both deductions by estimating the Scottish share of each tax relief claimed across the UK using historical data. I don't know what that historical data is. What it means from previous years rather than from the year that we are discussing here. Again, I think that all of those points, it may be that the committee would like to take evidence directly from HMRC, because those are clearly operational issues for HMRC themselves. Essentially, our role as the auditor here is to point out where there are estimates and the limitations on the accuracy of the data. With our overall conclusion, that is a robust point. I accept your point there. I am trying to highlight the issues around the uncertainties around the figures that are being produced. I am just flicking through your report here, which was an excellent bedtime read. According to page 21, paragraph 2.13, HMRC confirmed that the resident status of 92 per cent of Scottish and Welsh pension scheme members and provisionally estimates that 94 per cent have been confirmed following the 2021 tax share. That does not seem a high proportion. I mean, pension scheme members should be easy to pick up, you would think. That seems of quite a low proportion. I do not think that it is out of line with the UK-wide figures on that. Tracing pensioners is a big exercise for pension schemes themselves, of course, because they need to know that pensioners are still alive, apart from everything else, and therefore they should still be paying the pension. That is an area where there may be further developments in data matching between different parts of government who have an interest in accurately locating pensioners. Again, that is another example where there may be available improvements as data becomes easier to match. The question is how much resource would that take and what would the benefit be in financial terms of doing that? On page 23, given that it is known that in Scotland there is a higher proportion of people than in the rest of the UK give to charity, in paragraph 2.14 it says that HMRC does not have systems in place to establish the residency of taxpayers donating to charity. All those anomalies add up. You may say that one of them is a very small impact, but when you look at it in the aggregate, it starts to become a concern. I think that it is a long agenda for the governance arrangements between the Scottish Government and HMRC that considers how this methodology could be improved over time. I think that you are pointing out perfectly valid items for that agenda. Convener, I could go on, but I am conscious of the time. I just want to try to capture the essence of some of the things that we have been saying. I have to say, Mr Davis, that this is not pointed at you or Darren Stewart, either. It is because we are trying to understand where there are gaps and where improvements can be made. We reflect that this is year 4-5 of the distinctive Scottish income tax system, and yet, even at this stage, we do not have Scotland's specific tax gap data about the amount that should be paid versus what is actually paid. We do not have Scotland's specific data on compliance or non-compliance. There is no Scotland's specific data on income tax debt, all of which we have been probing this morning. You are right. It may well be that that is around the arrangement, the service-level agreement that is in place between the Scottish Government and HMRC, and I think that we need to consider whether that will be a useful avenue for us to explore further. Do you get a sense that there would be Scotland—we have heard in previous years and to some extent we are hearing again today—that this is also about the limited resources that HMRC has got? If the service-level agreement was adjusted, would it be possible to get that information—that data—disaggregated to a Scottish-level that would help to inform the decisions that this Parliament needs to make around income tax rates, as well as gaining an understanding of the revenues that will be generated by the rates that are set? I am very keen that you do not think that I am dodging the question, but I think that only HMRC can give you a useful answer to that, because they understand what would be involved in improving the various elements of the data that we have been discussing. They would be able to explain the resource implications of different approaches here, and so I could not give you a useful answer on that. Obviously, as an auditor, I am keen on accurate figures, so the more that some of those estimates can be reduced in variability, the better the database for arriving at the figures, the better from an audit point of view, but clearly I think that you do need HMRC to describe what would be required to deliver the improvements that you have been discussing. Okay, but just to be clear, you say in the report that your assessment is that the 0.7 million pounds administration fee is accurate and fair in the context of the agreement between HMRC and the Scottish Government. For our benefit, can you tell us what you mean by fair? Yes. Our starting point for that is the service-level agreement that has been negotiated between the Scottish Government and HMRC. What we have examined is the information that HMRC has given us for the costs of implementing that service-level agreement, so we can see how they have attributed staff costs and IT costs and so on to carry out the work that is required under the SLA. We think that that calculation is supported by the data that we have seen, and we think that it is a fair estimate of what the time and other costs involved in operating the agreement. Clearly, if you had a more highly specified agreement that got into some of the areas that we have been talking about here, it is likely that HMRC would require more cost to be able to do that. However, on the basis of the agreement as it is currently set out, we think that that is fairly stated. Thank you very much, Steve. On that note, I will conclude the session and thank Stephen Boyle, the Auditor General, who has joined us in person in the committee today. Mark Taylor, who was on hand to answer any questions that we had for him, I do not think that in the event Mark was called upon, but thank you anyway. In particular, thank you to Gareth Davis and to Darren Stewart from the NAO. As I said at the beginning, we do very much hope to see you in person at some point in the future, because I think that that would help us to examine the important role that you have in keeping account of how the HMRC is functioning in this area that is obviously of particular concern and importance to us. Thank you for answering our questions and we look forward to seeing you at some point in the not too distant future. I now draw the public part of this morning's committee to a close.