HMRC ‘may never catch up’ with tax compliance work ditched because of Covid-19

MPs flag £7.5bn shortfall in first-quarter compliance income on top of £3.5bn estimated fraud from furlough scheme
PAC chair Meg Hillier

By Jim Dunton

16 Oct 2020

HM Revenue and Customs has been warned that it needs to “fundamentally rethink” the way it collects unpaid tax because of the Covid-19 pandemic after the agency’s compliance work yielded £7.5bn less in the first quarter of the current financial year than it did in the same period of 2019-20.

A new report from parliament’s Public Accounts Committee says the pandemic has “greatly compounded” issues HMRC faced with reducing the “tax gap” between what is owed by individuals and business and what is collected. The gap was estimated at £31bn in 2018-19 by HMRC, a figure MPs said was too vague.

Today’s report points to the 51% drop in compliance-related receipts in the first quarter of 2020-21 and HMRC’s estimate that £3.5bn in furlough scheme support may have been claimed fraudulently, and said HMRC may never catch up with the compliance work that was foregone earlier this year.

MPs accepted that HMRC’s Covid-19 support schemes had led to a “major reprioritisation of its resources” during the spring lockdown, which “led to a backlog of work”. They questioned whether the backlog would ever be dealt with.

“HMRC assumes that most taxpayers will comply and can pay the tax they owe,” they said. “Covid-19 means HMRC needs to reassess these assumptions.”

The committee said HMRC had already adapted its approach to compliance by reducing contact with taxpayers considered to be under financial pressure, and was initially contacting those considered "most able to pay.”

MPs said taxpayers’ ability and willingness to report and pay their taxes in line with the rules “may have changed – in the short term and possibly for several years to come”.

The committee called on HMRC to set out more detailed information on the tax gap when it published such data, including a sector-by-sector and devolved nations breakdown, and give a clearer sense of the limitations of its estimates. It also called for a separate update on how HMRC would change its approach to compliance in light of Covid-19.

Additionally, committee chair Meg Hillier called on HMRC to publish the names of businesses that had taken part in the furlough scheme in the interests of transparency.

“We expect HMRC to be doing more to collect the tax owed, whether from individuals or companies,” she said.

“With families and businesses straining every sinew to stay afloat it is just as critical that the government collects tax effectively and efficiently, as it is that the government spends money wisely.”

Hillier said the government’s “astonishing lack of economic planning for a pandemic” had resulted in “hastily drawn up economic support schemes” that contained “unacceptable room for fraud”.

A government spokesperson said strict rules on taxpayer confidentiality meant it would not be possible to publish a list of businesses that had taken part in the furlough scheme, but added that HMRC’s help schemes had been designed to “minimise fraud” without introducing unnecessary delays in payment. 

“The government’s number one priority from the start of the outbreak has been on protecting jobs and getting support to those who need it as quickly as possible,” the spokesperson said.

“Our income support schemes have provided a lifeline to millions of hard working families across the UK and we make no apology for the speed at which they were delivered. Without them lives would have been ruined.

“Our schemes were designed to minimise fraud from the outset and we have rejected thousands of fraudulent claims. We will not tolerate those who seek to defraud taxpayers and will take action against perpetrators – including criminal prosecution.”

The spokesperson added that HMRC was the only revenue authority in the world that published such a detailed tax gap figure every year and was “very clear” that the tax gap is an estimate.

The PAC report can be read here.

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