HMRC’s compliance work generated around £9bn less tax revenue than normal during the pandemic as thousands of staff moved to support COVID schemes, according to the National Audit Office, writes David Little, a Partner in our Commercial Law team.
HMRC analysis suggests that the tax gap – the difference between the amount of money owed to and received by HMRC – could even grow in the years ahead.
HMRC uses two main approaches to improve tax compliance. ‘Upstream’ activities include using legislative changes to close tax loopholes and educating taxpayers to get returns right first time. ‘Downstream’ work involves identifying and tackling non-compliance after it has taken place, including investigations and in some cases pursuing people through the courts.
HMRC moved thousands of staff in its Customer Compliance Group (CCG) to COVID-19 support schemes, reducing capacity for tax compliance work. Throughout 2020-2021, an average of 1,356 CCG staff were redeployed to the Covid schemes, peaking at 4,396 in May 2020. Recognising the pressures on taxpayers, HMRC offered them the opportunity to pause enquiries, except in cases where it suspected fraud or criminal activity. HMRC has conducted substantially fewer enquiries into suspected non-compliance since the pandemic began. It closed 29% (103,000) fewer cases in 2020-21 compared with the previous year and opened 32% fewer (114,000).
HMRC raised around £9 billion less in tax revenue from its compliance activity since the pandemic began, compared with historic performance. HMRC’s strategy before the pandemic increasingly focused on improving compliance by making it easier for people to get their tax right the first time, while prioritising investigations on high-impact cases of non-compliance such as fraud or criminal activity. However, in-person visits for individuals and small business were one third lower (36%) in 2022 compared with 2019. HMRC is yet to assess whether these changes have affected detection of non-compliance or the behavioural effect on attitudes to paying tax among those investigated.
Criminal prosecutions for tax-related offences decreased markedly in the COVID-19 pandemic, when many courts were unable to operate.
HMRC’s own testing found that out of 400 tax compliance cases, HMRC overcharged seven taxpayers by a total of £32 million (since corrected). HMRC has not estimated how much its compliance casework has overcharged taxpayers in total or how much non-payment of tax will affect revenue raised through its compliance work, despite the increasing levels of tax debt following the pandemic.
Gareth Davies, the head of the NAO said: “HMRC had to move swiftly to reallocate resources to COVID-19 schemes, as the circumstances of the pandemic demanded. However, this directly affected its ability to investigate cases of people and businesses not paying the right tax.
“There is now a risk that more people ultimately fail to pay the right tax or escape investigation or prosecution. It is concerning that HMRC’s planning indicates that non-compliance may grow following the pandemic. The next two years are critical, and swift action is likely to be needed to stem potential losses.
“There is little doubt that HMRC’s compliance work offers good value for money, but it needs to evaluate its performance more consistently. Improving the effectiveness of HMRC’s compliance work can help maximise the amount of money available for public services in a challenging economic context.”
One can’t help think how much easier Jeremy Hunt’s task might be if the tax take had be £9 billion higher in 2022. The NAO’s full report is here.
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David Little is a Partner at Bishop & Sewell in our expert Corporate & Commercial team. If you would like to contact him please quote Ref CB370 on either 020 7631 4141 or email firstname.lastname@example.org.
The above is accurate as at 16 December 2022. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.