What Is HM Revenue and Customs (HMRC)?

Her Majesty's Revenue and Customs (HMRC), also known as Her Majesty's Revenue Services, is the tax authority of the U.K. government. The agency is responsible for collecting taxes, paying child benefits, enforcing tax and customs laws, and enforcing the payment of minimum wage by employers.

HMRC was formed in 2005 when the Inland Revenue and the Board of Customs and Excise, the agencies which formerly handled internal taxes and customs collection respectively, merged. 

Key Takeaways

  • HRMC is the national taxing authority of the U.K. and administers all national direct and indirect taxes.
  • In addition to enforcing tax laws and collecting revenues, HRMC administers certain benefit and tax credit payments to U.K. residents.
  • HRMC was formed in 2005 through the merger of Inland Revenue and the Board of Customs and Excise.

Understanding HM Revenue and Customs (HMRC)

Under the 2005 Commissioners for Revenue and Customs Act (CRCA), commissioners appointed by the Queen to take responsibility for the nation's taxation system established Her Majesty's Revenue and Customs (HMRC) as a non-ministerial department. As such, HMRC reports directly to Parliament through the Treasury, which is under the leadership of the Chancellor of the Exchequer. The Treasury, in turn, supervises spending by HMRC.

One of the critical functions of HMRC is to ensure that the flow of money to the Exchequer is seamless via its tax collection, compliance, and enforcement programs. The collection of taxes and the enforcement of tax laws in cases of non-payment ensures the continual movement of funds into the Treasury. The payment of benefits and tax credits provides practical support to families and individuals entitled to this assistance. The enforcement of customs and the pursuit of smugglers protects the nation's interests and encourages above-board international trade.

HRMC collects all national direct and indirect taxes in the U.K., including income tax, corporation tax, capital gains tax, inheritance tax, value added tax (VAT), excise duties, stamp duty land tax, air passenger duty, and the climate change levy.

Functions of HM Revenue and Customs

HMRC comprises four primary operational groups, each of which is managed by a director general.

  • Personal tax group
  • Business tax group
  • Payment and administration of benefits and credits group
  • Compliance and enforcement duties group

The functions of the taxation groups within HMRC are primarily tasked to ensure that the taxation system is implemented and adhered to in the most effective way possible. They oversee the efficient collection of taxes and the transfer of funds to the Treasury. Also, they ensure that revenue for the funding of public services is readily available. Another role of the tax-related sector of HMRC is to educate and inform the public about their tax-paying duties.

The Benefits and Credits division of HMRC is responsible for the administration and payment of tax credits, child benefits, and statutory payments, including statutory sick pay and maternity pay.

The Enforcement and Compliance operational group handles diverse areas, such as taking action against the non-payment of taxes, recovering unpaid student loans, implementing systems to reduce tax avoidance (such as DOTAS), and enforcing the payment of minimum wage. HMRC can investigate individuals and businesses suspected of evading taxes or committing fraud. If the tax authority believes the entity purposely withheld information in its income disclosure, it would proceed with a criminal investigation.

The Customs arm of HMRC is focused on the enforcement of customs payments and regulations for international trade to collect revenue and suppress smuggling and illicit trade in tobacco, alcohol, petroleum, and other goods. Other duties encompass the facilitation of legitimate international trade as well as the collection of trade statistics for the U.K.

HMRC also administers the Government Banking Service, which provides reports to the HM Treasury to facilitate an accurate cash management system.

A Recent Merger with a Long History

In 2004, prior to the merger of Customs and Excise and the Inland Revenue, a case was presented by Permanent Secretary of the Treasury Gus O'Donnell's report that organizational change offered "potential improvements in customer service, effectiveness, and efficiency." The merging of direct and indirect revenue departments had been considered and even implemented before, as far back as 1849, when the Board of Stamps and Taxes was merged with the Board of Excise, creating the Board of Inland Revenue. 

In 1862, a committee was appointed to investigate whether it would be advantageous to combine the duties of the Inland Revenue with those of Customs and Excise. The proposal was overturned at the instigation of the Inland Revenue.  

In 1909, the excise duties were removed from the administration of the Inland Revenue and were combined with the Board of Customs to form the Board of Customs and Excise.

Once again, the suggestion was made in a 1999 report by the Treasury Committee, citing the potential savings in public expenditure and compliance costs that a merger could engender.

The decision, announced in March 2004, to merge the Inland Revenue and the Board of Customs and Excise was met with some skepticism as the two departments had such different historical and cultural foundations and legal structures. There was also the question of job losses, which in fact were substantial and occurred in spates over a period of years.

Revenue and Customs in 2020 and Beyond

Having made it through the post-merger era, HMRC has weathered adjustment issues ranging from public difficulty in accepting this new entity to complex restructuring phases and large-scale job losses.

Streamlining their processes and offering clear and accessible information about the services and responsibilities of their department, HM Revenue and Customs continues to grow and evolve, innovating ways to make its processes more effective and technologically up-to-date.