Failures in tax investigations cost HMRC £9bn, watchdog finds

HM Revenue & Customs is under pressure to quickly claw back tax revenue after Parliament’s spending watchdog revealed a sharp drop in its investigation into the pandemic had cost the government as much as £9 billion.

HMRC investigated around 30 per cent fewer compliance cases in 2020-21 compared to the previous year. Criminal prosecutions fell from 700 to 163 during the same time period, according to a report from the National Audit Office published on Friday.

Around 12 per cent of HMRC staff, or 1,350 staff, who normally focus on collecting tax, were moved to administer the government’s flagship Covid-19 support schemes, the NAO found.

Gareth Davies, head of the NAO, said: “HMRC had to move quickly to reallocate resources to Covid-19 schemes, as the circumstances of the pandemic required. However, this directly affected the ability to investigate cases of people and businesses not paying the correct tax.

“There is now a risk that more people will eventually not pay the correct tax or escape investigation or prosecution. It is worrying that HMRC’s planning indicates that non-compliance could increase after the pandemic, he added.

Dame Meg Hillier, chair of the Commons’ public accounts committee, said: “HMRC must step up its work on tax compliance, by allocating adequate resources and better understanding the effectiveness of its work. With significant pressure on public finances, there is no time to lose.”

The total amount of tax collected by HMRC in 2021-22 was £731.1 billion. The NAO estimated that £7.5 billion less was brought in in tax revenue during the last financial year compared to pre-pandemic levels, and £1.5 billion less in 2020-21 – equivalent to a reduction of £9 billion.

The Chartered Institute of Taxation, an industry body, said the reduction in the collection of unpaid tax was “clearly a concern”, but noted that HMRC still expected to recover a “large proportion” of money.

In the Autumn Statement, Chancellor Jeremy Hunt announced that the Government would spend £79m over five years to enable HMRC to allocate extra staff to tackle more cases of serious tax fraud, forecast to collect an extra £725m over that time period .

HMRC estimated that the tax gap – the difference between tax owed and tax paid – was 5.1 per cent, equivalent to £32 billion, in the last financial year.

The agency said it expects to have around 2,500 more compliance staff in 2022-23. However, the NAO report points out that new staff typically need up to four years to be fully effective.

HMRC said the NAO report “recognises the efforts of our compliance staff to recover unpaid tax provide good value for money”. It added: “Much of this will be collected in the future through our normal risk-based compliance activity.”

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