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

HM Revenue & Customs is under pressure to urgently recoup tax revenue after the parliament spending watchdog revealed that a sharp fall in investigations over the pandemic had cost the government as much as £9bn.

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

Around 12 per cent of HMRC staff, or 1,350 employees, who usually focus on recovering taxes 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 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,” he added.

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

The total amount of tax collected by HMRC in 2021-22 was £731.1bn. The NAO estimated that £7.5bn less was recouped in tax revenue over the past financial year compared to pre-pandemic levels, and £1.5bn less in 2020-21 — adding up to a £9bn reduction.

The Chartered Institute of Taxation, an industry body, said the reduction in the collection of unpaid taxes was “clearly a concern” but noted that HMRC still expects to recover a “big chunk” of money owed.

In the Autumn Statement, chancellor Jeremy Hunt announced that the government would spend £79mn over five years to enable HMRC to allocate additional staff to tackle more cases of serious tax fraud, forecast to raise an extra £725mn over that time period.

HMRC estimated that its tax gap — the difference between taxes owed and paid — was 5.1 per cent, equivalent to £32bn, in the past fiscal 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 in recovering unpaid tax is good value for money”. It added: “Much of this will be collected in the future through our usual risk-based compliance activity.”

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