HMRC approach to compliance means public purse is missing out on billions in lost revenue

11 January 2023

- ‘Tax gap’ running at 5.1% of annual liabilities; £42 billion total in unpaid tax

- Unacceptable customer service levels unlikely to improve quickly

- HMRC aims to recover only a quarter of fraud losses in Covid support like furlough

HMRC collected £731.1 billion in taxes and duties in 2021-22, the highest on record, reflecting the end of the acute phase of the pandemic. But in a report today the Public Accounts Committee says HMRC is still not deploying the resources required to maximise the tax revenues it collects or provide an acceptable level of customer service. At a time of huge strain for the public finances £42 billion is owed in unpaid tax, and HMRC is failing to collect around 5% of the tax it is owed each year.

In an historic cost of living crisis, HMRC must target scarce resources to ensure businesses and individuals who are able to pay, do. For every £1 HMRC spends on compliance activities, it recovers £18 in additional tax revenue. The failure to better resource compliance means Government is missing the opportunity to recover billions in lost revenue.

The Committee is unconvinced plans to address HMRC’s ‘unacceptable’ customer service will sustainably reduce demand or deal with the poor level of service quickly enough.

HMRC also lacks ambition to tackle fraud and error and recover losses. It only expects to recover around a quarter of the estimated £4.5 billion lost to fraud and error in its COVID-19 support schemes. Fraud and error are also high for research and development tax reliefs, which are ‘costly, prone to abuse and provide questionable benefit to the UK economy’. Problems with VAT’s susceptibility to fraud appear to be better managed in other European jurisdictions.

Chair's comments

Dame Meg Hillier MP, Chair of the Committee, said:

“The eye-watering £42 billion now owed to HMRC in unpaid taxes would have filled a lot of this year’s infamous public spending black hole. But the public purse will continue missing out on billions of desperately needed revenues as HMRC will only employ more staff to tackle compliance over the next few years – that’s not fast enough to dent the tax gap at a time of huge public sector spending pressures. Meanwhile taxpayers battle customer services that need improvement.

The PAC has reported on the many problems in the Covid support schemes that made an open goal for fraudsters, but HMRC is settling for trying to recover less than a quarter of estimated losses in schemes such as furlough. We recognise the problems HMRC faces - due to poor controls, the horse has bolted - but we believe there is a moral duty to pursue fraud. HMRC must ensure dishonesty is not seen to create advantage.”

Further information

Image: PA