Managing the Bathtub of Tax Debt UK Chapter of the System Dynamics Society Annual Gathering February 2011 Nick Whitehouse & Nicola Fletcher
Contents 1. Background – what is debt? 2. Analysis issues 3. Interim modelling & need for enhanced debt model 4. Complexity of the problem – “the bathtub of debt” 5. System dynamics modelling approach • Development of process maps • Partial view of simulation model • Example of outputs 6. Next Steps & Future uses of the model KAI Enforcement & Compliance | | 2
Background – What is debt? • What is a tax debt? – It‟s where a taxpayer owes us money by a certain date, and has not paid it • What is not a tax debt? – Where a taxpayer should be paying us some / more money, but we don‟t know about it (avoidance – if it‟s legal, evasion – if it‟s not) • What different types of tax debt are there? – Main types are: • Known debt – have told us how much they owe us (usually in a return), but have not paid it • Estimated debt – we know that they owe us something, but we have to guess how much (based on what they historically owed) • Spurious debt – we think they owe us something, but they do not (e.g. due to our systems allocating payments to the wrong accounts) • Penalties – extra debts for not paying the previous debts (either at all or on time) • How much debt is there? – Headline debt balance is around £20bn, but this can be misleading – especially due to large volumes and values of churn over time (annual clearances are over £50bn) KAI Enforcement & Compliance | | 3
Analysis issues (1) • Following the recession, the level of interest in debt has risen, and so has the analytical resource devoted to it. This has uncovered a few issues…: • Historically, what happened to debts of different values? • High value debt – letters, phone calls, distraint, court action, bankruptcy – active pursuit • Low value debt – letters, often not much else – passive pursuit • In theory, staff would carry out active pursuit on the highest debt values, and keep moving down the values as far as they can • In practice, the value reached differs heavily by tax type. The rules used for entering information on the database differ so much by tax type that staff can not move from one tax to another – e.g.: • Amendment = £100 Does this mean amend the debt up by £100, down by £100, or amend the debt value to £100. Could be any of the above! • Debts across tax types do not get linked up! KAI Enforcement & Compliance | | 4
Analysis issues (2) • What‟s the counter -factual to what Debt Management & Banking (DMB) do? • If we stopped doing anything, what would happen to debts? • „Self - clearance‟ rate – what percentage of debts pay without us needing to do anything? • Impact of debt value on this rate • Need to factor this into benefit / cost calculations • How much debt (& benefit) is up for grabs? Take out: • Self-clearances • Bankruptcies and unavoidable „write - offs‟ • Spurious debts • …and all that‟s left are debts where we could get payment on what would otherwise have become a write-off • HMRC have been doing more recently to make sure we bring those debts in… KAI Enforcement & Compliance | | 5
Analysis issues (3) • What is the value of an FTE working in DMB? • Historic answer = Total DMB receipts / DMB staff • Marginal impact – what difference would one person more / fewer make? • Self-clearance rate – especially for high value debts • When is a debt not a debt? • PAYE CHAPS payments – same-day bank transfers • Payment is made on deadline day, but not posted on our systems until the next day… • …but the transfer to the debt system is done overnight after the deadline – meaning that a spurious debt is created, and then cleared the next day • This was inflating both annual new debt and debt payment figures by… • £36bn! • Also of relevance to first issue… KAI Enforcement & Compliance | | 6
Interim modelling • Model required for transformation programme (DTP) benefits estimates - • DMB have changed the way they pursue debts – moved to a „Campaigns‟ approach (i.e. hit as many debts as possible while they are new), taking advantage of the variation in inflow rates for each tax type across the year • System change combined with expansion of the call centre – if more debts are resolved at an early stage (by letters and phone calls), then there is less demand for later, more costly, stages of pursuit (e.g. court action) • Quick Excel model produced, based on the assumption that the change will allow us to actively work more lower value debts • Benefits estimates flowchart (intentionally cautious estimates): 48 would have 60 = Debt 60 debts paid anyway paid Receipts 100 additional 12 = Additional 12 would not debts worked 40 debts have paid Receipts cleared through non-payment or not cleared KAI Enforcement & Compliance | | 7
Improved debt model – possible uses & results Replacing the interim model with an enhanced model - to improve understanding of inflows & outflows, and provide reliable & consistent results • Possible uses for the model include: • Producing improved and more robust estimates of the benefits / costs of changes, such as change programmes or staff reductions • Producing enhanced debt forecasts • Simulating „what - if‟ scenarios of changes to: • Debt inflow rates • Outsourcing of debts to Debt Collection Agencies (DCAs) • DMB staff deployment, processes and priorities • Optimising the deployment of DMB staff and the use of DCAs • Model results will need to be shown in terms of: • Debt balance • Payments and / or other clearances • Roll-rate (debts cleared within 30 or 90 days) KAI Enforcement & Compliance | | 8
Approach to modelling What type of model to make? • Considered spreadsheet modelling, discrete event simulation & system dynamics • Used SD approach because: • Stocks and flows - debts modelled as stocks that flow between different parts of the system, with flow rates and routes decided by data inputs • Feedback loops – debt inflows next year are affected by what happened this year • Delays – not as simple as a queue building up – e.g. waiting for a debtor to respond to a letter KAI Enforcement & Compliance | | 9
Complexity of the problem - The bathtub of debt • Bath analogy: • Debt is the water, DMB systems are the bathtub, inflow of new debts from the tap, outflow through the plughole • Complications… • Turning the taps – inflow rate can change due to: • Economy • Policy changes (e.g. new penalties) – both ways • Preventing spurious debts • Deterrent effect of successful pursuit (feedback loop from plughole) • Changing the size of the plughole – outflow rate can change due to: • Economy • Pursuit by DMB KAI Enforcement & Compliance | | 10
The bathtub of debt • More complications… • Need more than one plughole, with different flow rates for each: 1. Payments 2. Write-offs & remissions Sent to DCAs (which may come back to the bath later…) 3. • Need more than one bath – one for each kind of debt • Need more than one kind of liquid – debts of different values will behave, and be pursued, very differently • The liquid changes over time – the longer it stays in the bath, the lower the chance we‟ll receive payment, therefore more likely to end up going down the write- off plughole… but, in the meantime, it might self -clear • Some of the liquid is not real – e.g. spurious debts. Does this go down a plughole, or just evaporate?! KAI Enforcement & Compliance | | 11
System dynamics modelling of debts • Model framework using system dynamics • Link behaviour of three basic stocks and flows – staff resources, debt items & debt values • Each type of debt modelled separately • New debts flow in to model (e.g. outstanding returns, incorrect payments) • Debts can be transferred between Debt Management functions • Cleared debts flow out of model (e.g. payments, write offs etc.) • Capture the factors affecting the behaviour of the system • Workshops with DMB colleagues to produce process maps for each type of debt • Simulation model of system • Vensim software – user friendly tool with Excel interface (for both inputs and outputs) KAI Enforcement & Compliance | | 12
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