HMRC's strategy to cut tax fraud

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It’s worth at least £16bn and includes “ghosts”, “moonlighters”, criminal gangs and small businesses. HMRC says technology, criminal prosecutions and campaigns will help it reduce tax fraud but MPs are sceptical.

In December, the Public Accounts Committee (PAC) started an inquiry into HMRC’s effort to tackle the estimated £16bn lost to tax fraud each year. Although HMRC recently achieved its targets to raise more tax revenue in the short-term, its success at tackling tax fraud (which is estimated to account for about half of the UK’s estimated £34bn tax gap − the difference between how much tax HMRC should collect and the amount it actually does), is less impressive.

It’s not clear how much of the tax collected by HMRC comes from its compliance work to counter tax fraud (evasion, undeclared income, the “hidden economy” and organised criminal gangs).

“HMRC has only partial data on how much of the total yield is derived from its work to counter tax fraud,” said a report by the National Audit Office (NAO) published last December. It recommended that HMRC improves the use of data and analysis when trying to tackle tax fraud.

Smaller businesses and criminals are responsible for a lot of the tax fraud; “17 of the 21 biggest risks” relating to tax fraud, the NAO said.

One example of tax fraud is when a small business does not register for VAT when its turnover exceeds the threshold for registration.

“HMRC believes that these businesses are responsible for tax losses of £17bn, almost half of its estimate of the total tax gap, but it does not consider its internal estimate of how much of this is the result of tax fraud robust enough for publication,” the NAO report said.

One day after the NAO report, MPs on the PAC questioned HMRC executives about tackling different types of tax fraud: HMRC's use of prosecutions, how it assesses risk and uses data, and trying to “prevent losses rather than relying so much on investigating them afterwards.

HMRC chief executive Lin Homer, who has said that she will resign in April, told MPs on the committee that it was focusing more on the “hidden economy” because it “can see a growth in microbusinesses and we can see a growth in online trading, and we want to ensure that that does not become an area that grows in the tax gap”.

Reducing VAT evasion (when companies close and then open again the next day under a different name) is another priority for HMRC.

Jennie Granger, director, general enforcement and compliance, at HMRC, said “phoenixism” was a “scourge” and was hard to track.

“Deliberately shutting down quickly and moving on makes it difficult for us to catch up with people. We have specialist insolvency expert teams in Simon’s area; it is their job to detect this and tackle it. We are getting better at tracing through directors. The challenge there, of course, is that they often use straw people.”

HMRC usually makes civil prosecutions for tax fraud, such as fines. The number of criminal prosecutions for tax fraud has increased since 2010 to more than 1000 criminal prosecutions for tax fraud in 2014-2015. One of the main reasons for criminal prosecutions is to deter other people from evading tax.

Calculating the financial value of this deterrence is tricky, though. Stephen Phillips, an MP and member of the PAC, said that the target for 1000 criminal prosecutions seemed to have been “plucked out of the air” and that HMRC was unable to say whether an increase in criminal prosecutions of mass market tax fraud (also called “volume crime”) had deterred other people from engaging in the same offences.

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i do wish they would stop banging on about the tax gap

its an imaginary figure that does not stand up to real scrutiny and we are the only country who produces a figure, there are 2 ways to close the tax gap ban cash transactions over £20 and a turnover tax that I have long mooted. that said if they do close it I dread to think how the hand wringers  would spend the money, perhaps they could dig down under UK and create a new subterranean world  

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Do a proper job

Whenever I hear of new fearless initiatives from HMRC I am reminded of how in 2003 they waived payment of £589,000 of PAYE that had already been deducted from the staff of kidscompany because the charity's pals in the then Labour government (2003) told them to.

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VAT

Most business reach the VAT threshold by doing business with VAT registered companies (that's where the real money is) so HMRC do not lose out if they go over the threshold.

Some smaller business will purposely keep just under the threshold as it could dramtaically affect their profit. So again no loss to HMRC. What are we left with - the fraudsters that will defraud whatever you do. So, HMRC stop chasing mythical figures that you cannot get and go for the real villains and don't tell me you don't know who they are.

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