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Predictable but Shocking Report on HMRC | accountingweb

NAO blames pandemic for HMRC’s endemic problems


The National Audit Office has released its latest damning report on HMRC performance. While the pandemic is partially blamed for the £9bn lost due to underperformance, the real problem is endemic.

22nd Dec 2022
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Last Friday, we discovered from a National Audit Office (NAO) report that HMRC’s revenues from compliance work dropped by approximately 20% between 2020 and 2022.

That is unsurprising, given the reduction in volume of work since “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).” In addition, “in-person visits” were 36% lower in 2022 than 2019. 

It wouldn’t be a government if it didn’t blame the pandemic for its own endemic problems.

In cash terms, NAO estimates that this represents a £9bn reduction in the year. That might not be quite enough to pay nurses the 19% that they are currently demanding but it would almost certainly be enough to leave them laughing all the way to the bank.

Depending on whose numbers you believe, this loss has increased the tax gap by something like 20% (HMRC figures) or 10% (Richard Murphy).

A reason given for the diminution in revenues was the redeployment of an average 1,356 workers from tax compliance and presumably investigative work into projects relating to Covid-19 support schemes.

Support schemes

As a quick reminder, these support schemes included projects to buy personal protective equipment (PPE) that protected nobody apart from rich investors, brazen fraudsters who claimed loans with no intention of repaying them, or payments in connection with staff who were supposedly laid off but actually working and, perhaps best of all, the Eat Out to Spread Coronavirus Scheme that not only went way over budget but also contributed to mass illness and loss of productivity for the nation.

In this particular case, the problem is much deeper-rooted and lies in a long line of Chancellors, certainly stretching back to George Osborne, whose understanding of accountancy principles was basic to put it politely. As this column has railed on regular occasions over the past decade and more, Mr Osborne has viewed HMRC purely as a cost centre and successors have followed suit. He would boast at Budget after Budget of the amounts of money that he had saved by laying off staff.

Massive revenue generator

What anyone who has worked in the profession knows, is that if HMRC is operating effectively, it should be a massive revenue generator for the nation – a fact that has been proven yet again by the NAO statistics published last week.

According to NAO, compliance staff currently bring in an average of £1.1m each (a reduction of £200,000 from pre-pandemic days). This presumably represents their salary 20 or 30 times over in recovered taxes. It doesn’t take a genius to work out that investing more rather than less must pay rich dividends.

Taking a parallel with their own profession, it is equivalent to cutting vast swathes of professional staff and then having to turn away work that would bring in their salaries many times over.

It has been suggested by a particularly scurrilous friend that maybe those in power are happy to keep the HMRC dog on a leash, when the most likely victims are the super-rich, who we are so keen to attract to our shores and then ply with generous tax reliefs.

That is probably unfair but you have to wonder why nobody in government ever seems eager to boost HMRC’s investigative powers.

That point becomes considerably more pertinent if you look behind the headline data to discover that the number of criminal prosecutions for tax-related offences reduced from around 900 in 2017/18 to a pitiful 163 prosecutions in 2020/21, although there was a pickup to 236 last year.

Cost to the Exchequer

For once, it isn’t just AccountingWEB journalists who recognise the cost to the Exchequer. The head of NAO, Gareth Davies is quoted as saying: “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.”

HMRC’s response includes the immortal line: “This does not mean other money will go uncollected, however, and we can go back up to 20 years in the most serious cases of evasion.” Don’t hold your breath.

The big question is whether Jeremy Hunt will listen and, more importantly, take action that is long overdue.

Replies (5)

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By ireallyshouldknowthisbut
23rd Dec 2022 09:56

in any business anyone pulling in over £1million a year would be treated like royalty. And a load more would be hired.

but in HMRC.........

I have been saying for years the lack of proper volume of tax investigations is the biggest cause of the 'tax gap'. There is simply no fear factor when you just don't get any in many sectors, and quite frankly the calibre of the staff we do come across is so low as to be laughable in most cases.

HMRC seem to have no idea about good/bad agents, and don't seem to set out to find out. Eg target agents and assess the quality of their work on a periodic basis. There are 40-50,000 tax agents in the UK. With 1,000 staff you could spend a week with each one on average (small ones maybe a day, bigger ones several weeks), and check every one in the country in a year. It would annoy the heck out of people out side, but boy they would find out who was good and who was pushing rubbish through of they got properly stuck in and did a decent sample of files. It would also give a massive wave of "I had better get my house in order" from any flaky agents.

Thanks (4)
Replying to ireallyshouldknowthisbut:
By Hugo Fair
23rd Dec 2022 17:48

Totally agree ... but the mindset throughout govt, under Cameron but arguably started under Blair, has been that 'light touch' self-regulation (without too much 'nanny' state intervention or even supervision) is the utopia around the corner!

The result of course (whether in City fraud or Audit or Border control or Burglary or you pick your area) is that investigation levels fall (followed quickly by the competency to do them properly) - and 'efficiency' drives then erode resource levels (as, with circular logic, the remaining resources aren't achieving much)!

It's a rubbish approach from the perspective of any 'business' interested in achieving objectives and generating a RoI - almost as much as it is a rubbish method of disincentivising the crooked from chancing their arm.

The big problem - aside of govt policy - is that the costs of further investment in policing anything are easily visible & quantifiable, whilst the benefits/gains are harder to measure (if only because such poor baseline stats are currently collected - possibly deliberately).
Smoke and mirrors are still the currency employed (and enjoyed) at HMRC!

Thanks (2)
By Philysis
26th Dec 2022 23:11

Cop out by the nao, I quote this article ..,

“What anyone who has worked in the profession knows, is that if HMRC is operating effectively, it should be a massive revenue generator for the nation – a fact that has been proven yet again by the NAO statistics published last week” , damning … but it’s U.K. so …

let’s no rock the boat eh ! Nah I think we should this idiotic I’ll designed hmrc. organisation needs a redesign and restructure before they mess with tech. Bring on 2023 and modernisation of hmrc. The answer in delivery of our tax collection system for small business is through the accountancy professions , qualified , innovative and customer focused. Hmrc should be left to PAYE coding . Period . Office of tax simplication should be re Instated to reduce the tax code.

Finally , Jim harra has to go quickly , the nhs need him in triage as he proved in 2o21 when he left his desk to Marshall at the covid vax door instead of collecting much needed revenues. Boris was very angry at the time so are tax pros , where are you Jim

Thanks (0)
By AndyC555
29th Dec 2022 09:04

"Depending on whose numbers you believe, this loss has increased the tax gap by something like 20% (HMRC figures) or 10% (Richard Murphy)."

It's hard to take anyone seriously who suggests that Richard Murphy's tax gap figures might be believed.

As a reminder, Murphy included £28bn in his tax gap figures as "tax owed but not collected by HMRC". Turned out that £28bn was simply the amount owed on a particular day and of the £28bn, £25bn was subsequently collected. Also included in Murphy's figures was £25bn tax not collected because of perfectly legitimate and legal tax reliefs because Murphy didn't agree with them. Small wonder he ended up with a bloated estimate of £120bn.

As then Treasury Minister David Gaulke commented in the commons about Murphy's figures "even a brief analysis reveals that it is deeply and systematically flawed."

HMRC itself went as far as to say that the £120bn figure “could be dangerous if not countered by HMRC’s published estimates … partly because they give a misleading view of HMRC’s effectiveness and the amount of uncollected revenues. But also because they encourage the perception that deliberate non-compliance in the UK is the norm—a perception which could encourage further noncompliance.”

It would be cynical of me to suggest that Murphy's report - which concluded that the tax gap showed more staff were needed at HMRC - was influenced by having been paid for by the PCS Union which represents HMRC staff.

Thanks (2)
Chris M
By mr. mischief
30th Dec 2022 20:05

I have a real life example. It was a client who did her own VAT return, but she's a good one so I attended her enquiry. The reason for the visit was some fool at HMRC thought the £60k of VAT claimed on buying a pub was not valid. 5 minutes of the meeting - showing the inspector the VAT invoice from the pub chain seller and other documents - was enough to see off the £60k.

He then spent an hour running through a few returns. This generated £10k for HMRC, he really knew his stuff. We had a chat and two things came up:

1. He brought in £3m per year and his last, very major, enquiry into a big VAT fraud generated £1m on its own.
2. HMRC thought he was too expensive and he was being made redundant.

There in a nutshell is why the people who run HMRC are utter, utter, numpties.

Thanks (0)