HMRC’s Covid response may increase tax gap, say MPsby
HMRC’s ability to collect tax was compromised during the pandemic and this could result in the tax gap growing, concluded an influential group of MPs.
The public accounts committee (PAC) has found that HMRC’s response to the demands of the pandemic by redeploying compliance staff to its Covid support schemes resulted in less capacity to check whether people and businesses complied with the tax rules.
“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,” said Dame Meg Hillier MP, Chair of PAC. “That alone is bad enough in the current economic crisis but we need to see more effort from HMRC to get this back.”
Hillier also noted that HMRC is not doing enough to “deter and punish cheats”.
“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,” she added.
The impact of Covid reprioritisation
As revealed in its Managing tax compliance following the pandemic report, the PAC said the result of prioritising the Covid support schemes meant fewer tax enquiries were opened and fewer people were prosecuted for tax evasion.
Based on tax revenue attributable to HMRC tax compliance work falling from 5.2% before the pandemic to 4.2% in 2021/22, the MPs said this equates to the tax compliance yield being down by £9bn over the two years of the pandemic, compared to pre-pandemic figures.
Due to the social distancing rules brought in by the lockdown rules and more experienced staff being redeployed elsewhere, the MPs said HMRC’s compliance staff were less productive during the pandemic era, with staff working on tax compliance only generating £1.1m of compliance yield compared to pre-pandemic average of £1.3m.
The number of staff it redeployed varied over the pandemic, but on average 1,356 full-time equivalent (FTE) compliance staff worked on the Covid schemes in 2020/21, peaking at more than 4,000 FTE in May 2020.
Tax gap may grow
The PAC’s concern is that since HMRC does not have a full understanding of the impact of the pandemic on non-compliance, the tax gap may grow, and “HMRC does not have the operational resilience needed to deal with this”.
Calling for a contingency plan for bringing in additional compliance capacity, the PAC said that the tax gap doesn’t reflect the full impact of the pandemic and HMRC will not know for some time. “HMRC’s latest estimate is that the tax gap was stable in 2020/21, but HMRC says that this has a much larger range of uncertainty than normal and may need to be revised as it gets more data.
“There is a significant risk that the tax gap will grow, in light of compliance yield dropping and levels of debt and non-payment rising,” said the report.
HMRC’s deterrent weakened
The legacy of the pandemic may also mean fewer compliance investigations and prosecutions. According to the report, HMRC doesn’t expect these to return to pre-pandemic levels, which the MPs are concerned will “weaken the deterrent effect of HMRC’s work”.
“It 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,” said the report.
The report goes on to say that HMRC will not prosecute as many people as before the pandemic, despite publicly saying that “no one will escape prosecution” and it has 20 years to follow up fraud cases.
The MPs raised concern that HMRC’s strategy of focusing on high-profile cases instead of smaller criminal activity is not a credible deterrent and recommended the tax authority to develop a better understanding of the deterrent effect of its compliance work.
Lessons from the pandemic
With HMRC opening 114,000 fewer tax compliance cases in 2020/21 than during the same period the previous year, the PAC is calling on HMRC to learn lessons from its reprioritisation of staff for the pandemic.
And with the compliance yield falling during the pandemic too, the PAC said the Revenue will need the compliance yield to exceed 5.2% of tax revenue over the next couple of years to catch up. The MPs have recommended HMRC set a clear target of the compliance yield required to make up the pandemic shortfall.
In addition to prosecuting fewer people, the PAC raised concerns about the tax department not doing enough to support taxpayers under pressure from the economic crisis and the pandemic who want to pay their taxes correctly. The report pointed to issues from high call volumes at certain times of the year, which have made it more difficult for taxpayers to pay their debts.
The PAC was also concerned that HMRC may be overstating the impact of its compliance yield and how the tax department’s testing found seven cases where the taxpayers were overcharged by a total of £32m.
In response to the report, HMRC said it has maintained a long-term reduction in the UK’s tax gap from 7.5% in 2005 to 2006, to 5.1% in 2020 to 2021.
It also said that its response to the pandemic and redeploying staff to deliver Covid support schemes helped legitimate taxpayers access the support they needed.
The Revenue also noted that tax receipts fell in 2020/21 before reaching record levels in 2021/22 due to the economic impact of the pandemic and the tax policy measures taken by the government in response to it. HMRC also said that it is on course to protect more compliance yield in 2022 to 2023 than in either of the previous two years.
It also stressed that the compliance risks picked up during the pandemic haven’t been lost and the tax department will decide how best to deploy its resources. For example, it is targeting newer, higher-priority or higher-value risks.
As for the problems with staffing, HMRC said it is recruiting compliance roles and has 2,500 more full-time employees than in 2021/22.
An HMRC spokesperson said: “We want everyone to pay the tax that’s due and we collected a record amount for our public services last year.
“The vast majority get their tax right and we collect around 95% of the tax due. Our compliance work is on course to protect more in 2022/23 than in either of the previous two years. The National Audit Office has recognised that our compliance work offers good value for money for the taxpayer.”