HM Revenue and Customs (HMRC): Definition, Functions, History

What Is HM Revenue and Customs (HMRC)?

The term Her Majesty's Revenue and Customs (HMRC) refers to the tax authority of the U.K. government. The agency, also known as Her Majesty's Revenue Services, 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 following the merger of the Inland Revenue and the Board of Customs and Excise, the agencies which formerly handled internal taxes and customs collection respectively. 

Understanding HM Revenue and Customs (HMRC)

HRMC collects all 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.

The HMRC ensures that the taxation system is implemented and adhered to in the most effective way possible. It oversees the efficient collection of taxes and the transfer of funds to the Treasury. It also ensures 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.

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

Other divisions within the agency include:

• The Benefits and Credits division. This unit is responsible for the administration and payment of tax credits, child benefits, and statutory payments, including statutory sick pay and maternity pay.
• Enforcement and Compliance, which 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 a taxable entity purposely withholds information in its income disclosure, it may proceed with a criminal investigation.
• The Customs arm of HMRC. This section 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.

Special Considerations

One of the critical functions of HMRC is to ensure that the flow of money to the Chancellor of 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.

History of HM Revenue and Customs (HMRC)

Under the 2005 Commissioners for Revenue and Customs Act, commissioners appointed by the Queen to take responsibility for the nation's taxation system established HRMC as a non-ministerial department. As such, the agency 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.

Before 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 in 2004 that organizational change offered "potential improvements in customer service, effectiveness, and efficiency." The merging of direct and indirect revenue departments was 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 better 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, a 1999 report by the Treasury Committee suggested a merger, citing the potential savings in public expenditure and compliance costs.

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.