HMRC does not yet have a full understanding of how the pandemic and its response to it have affected levels of non-compliance, according to a new report, Managing tax compliance following the pandemic, published by the Public Accounts Committee (PAC). The report suggests that there is a risk that fewer compliance investigations and prosecutions, which HMRC does not expect to return to pre-pandemic levels, will weaken the deterrent effect of HMRC’s work. It therefore seems likely that many more non-compliant taxpayers will now escape paying their fair share of tax – potentially undermining the sense of fairness on which the tax system relies.
The report acknowledges that HMRC made changes in response to the Covid pandemic by quickly reprioritising its work and staffing, which entailed initially redeploying more than four thousand experienced compliance staff to its new Covid support schemes. However, these changes resulted in less capacity to check whether people and businesses are complying with tax rules. As a consequence, HMRC opened fewer tax enquiries and prosecuted far fewer people for tax evasion during the pandemic.
The report found that:
Tax revenue directly attributable to HMRC compliance work (compliance yield) fell as a proportion of tax revenue from an average of 5.2% before the pandemic to 4.2% in 2021/22, the lowest level since 2011/12. This equates to a loss of £9bn of compliance yield collected over the two years (2020/21 and 2021/22) compared to pre-pandemic.
Staff working on tax compliance generated £1.1m of compliance yield a year per staff member, compared with £1.3m before the pandemic.
HMRC opened 114,000 (32%) fewer cases in 2020/21 than the previous year and paused many ongoing ones.
As well as prosecuting fewer people for non-compliance, HMRC is not doing enough to help those who want to pay their taxes correctly.
HMRC does not have the resilience to deal with expected growth in the tax gap (the difference between the amount of tax that should, in theory, be paid to HMRC to fund vital public services, and what is actually paid).
PAC chair Dame Meg Hillier MP said: ‘HMRC’s ability and efforts to draw in the tax that is so desperately needed to pay for public services were seriously compromised by the pandemic. That alone is bad enough in the current economic crisis but we need to see more effort from HMRC to get this back. It is simply not doing enough to deter and punish cheats, even at very high levels. It also needs to help people who want to do the right thing. We cannot and must not arrive at a situation in the UK where it is easier to cheat the tax system than it is to comply with it.’
The PAC’s report contains a number of recommendations to government, namely that it should:
learn from the experience of staffing challenges in the pandemic and specifying how it can respond more quickly where it looks likely compliance work will not keep pace with levels of non-compliance;
develop a better understanding of the deterrent effect of its compliance work and utilise the expertise of academics, if necessary (for example, using the HMRC datalab);
set a clear target of the compliance yield required to make up the shortfall during the pandemic, and specify a rolling target for compliance yield as a percentage of tax revenues;
ensure it is providing sufficient support to taxpayers, big and small, who want to pay their tax;
develop statistically robust estimates of the level of error in its compliance yield measure and how far taxpayers are overcharged;
demonstrate it has taken all proportionate steps to identify and correct overcharges, and make clear what compensation is available if taxpayers are overcharged; and
build in more resilience to the tax system, with the tax gap at risk of growing and high returns available from compliance work there is a strong value for money case for increasing resources.
The government has two months to respond to the report’s findings.
HMRC does not yet have a full understanding of how the pandemic and its response to it have affected levels of non-compliance, according to a new report, Managing tax compliance following the pandemic, published by the Public Accounts Committee (PAC). The report suggests that there is a risk that fewer compliance investigations and prosecutions, which HMRC does not expect to return to pre-pandemic levels, will weaken the deterrent effect of HMRC’s work. It therefore seems likely that many more non-compliant taxpayers will now escape paying their fair share of tax – potentially undermining the sense of fairness on which the tax system relies.
The report acknowledges that HMRC made changes in response to the Covid pandemic by quickly reprioritising its work and staffing, which entailed initially redeploying more than four thousand experienced compliance staff to its new Covid support schemes. However, these changes resulted in less capacity to check whether people and businesses are complying with tax rules. As a consequence, HMRC opened fewer tax enquiries and prosecuted far fewer people for tax evasion during the pandemic.
The report found that:
Tax revenue directly attributable to HMRC compliance work (compliance yield) fell as a proportion of tax revenue from an average of 5.2% before the pandemic to 4.2% in 2021/22, the lowest level since 2011/12. This equates to a loss of £9bn of compliance yield collected over the two years (2020/21 and 2021/22) compared to pre-pandemic.
Staff working on tax compliance generated £1.1m of compliance yield a year per staff member, compared with £1.3m before the pandemic.
HMRC opened 114,000 (32%) fewer cases in 2020/21 than the previous year and paused many ongoing ones.
As well as prosecuting fewer people for non-compliance, HMRC is not doing enough to help those who want to pay their taxes correctly.
HMRC does not have the resilience to deal with expected growth in the tax gap (the difference between the amount of tax that should, in theory, be paid to HMRC to fund vital public services, and what is actually paid).
PAC chair Dame Meg Hillier MP said: ‘HMRC’s ability and efforts to draw in the tax that is so desperately needed to pay for public services were seriously compromised by the pandemic. That alone is bad enough in the current economic crisis but we need to see more effort from HMRC to get this back. It is simply not doing enough to deter and punish cheats, even at very high levels. It also needs to help people who want to do the right thing. We cannot and must not arrive at a situation in the UK where it is easier to cheat the tax system than it is to comply with it.’
The PAC’s report contains a number of recommendations to government, namely that it should:
learn from the experience of staffing challenges in the pandemic and specifying how it can respond more quickly where it looks likely compliance work will not keep pace with levels of non-compliance;
develop a better understanding of the deterrent effect of its compliance work and utilise the expertise of academics, if necessary (for example, using the HMRC datalab);
set a clear target of the compliance yield required to make up the shortfall during the pandemic, and specify a rolling target for compliance yield as a percentage of tax revenues;
ensure it is providing sufficient support to taxpayers, big and small, who want to pay their tax;
develop statistically robust estimates of the level of error in its compliance yield measure and how far taxpayers are overcharged;
demonstrate it has taken all proportionate steps to identify and correct overcharges, and make clear what compensation is available if taxpayers are overcharged; and
build in more resilience to the tax system, with the tax gap at risk of growing and high returns available from compliance work there is a strong value for money case for increasing resources.
The government has two months to respond to the report’s findings.
