Source · Select Committees · Public Accounts Committee
Recommendation 24
24
Rejected
Current tax gap estimates do not fully reflect pandemic impact, showing high uncertainty.
Conclusion
Due to the way it is estimated, the tax gap does not yet reflect the full impact of the pandemic and will not do so for some time. HMRC’s latest estimate is that the tax gap remained stable in 2020–21, at 5.1% of taxes theoretically owed. However, HMRC’s tax gap estimates typically need to be revised over several years as it gets more data. HMRC told us that its 2020–21 estimate has a much larger range of uncertainty than normal, because of the impact the pandemic had on some of the key data sources it uses.39
Government Response Summary
The government disagrees with the committee's observation, stating that HMRC's funding levels are adequate, with a track record of investment in compliance to generate revenue and maintain a stable tax gap, as shown in the 2023 Measuring Tax Gaps publication.
Government Response
Rejected
HM Government
Rejected
6.1 The government disagrees with the Committee’s recommendation. 6.2 HMRC’s funding levels are a decision for Treasury ministers based on advice from HMRC and HMT officials. The government remains committed to ensuring HMRC has sufficient funding to enable it to maintain its compliance performance over time, while continuing to make efficiencies, both in this and future Spending Review periods. The government also has a track record of investing additional funds in HMRC’s compliance work to generate additional revenue. For example, at Autumn Statement 2022 the government announced a further £79 million over the next five years to enable HMRC to allocate additional staff to tackle more cases of serious tax fraud and address tax compliance risks among wealthy taxpayers. This investment is forecast to bring in £725 million of additional tax revenues over the next five years. 6.3 HMRC published the 2023 edition of Measuring Tax Gaps on 22 June 2023, which shows that the tax compliance gap has fallen from 7.5% in 2005-06 to a low of 4.8% in 2020-21 and has remained low and broadly stable since 2017-18. 6.4 The government disagrees with the Committee’s recommendation. 6.5 The government did not set performance targets for HMRC during the pandemic (2020-21 and 2021-22). Some of the reduction in yield over the pandemic period is due to the deployment of experienced staff to the Taxpayer Protection Taskforce (TPT) to recover grants that were incorrectly claimed under the COVID-19 support schemes. The backfilling of these posts with new recruits means that the opportunity cost of that deployment will be mitigated – but over a longer time period as it takes time for new recruits to be trained. Over the COVID-19 pandemic period the closure of some large cases has been delayed but this yield will be recovered in future years. Much of this is part of the normal variation of HMRC’s compliance work from one year to the next. Compliance yield performance and the tax compliance gap should always be considered on a multi-year basis. 6.6 In any year, HMRC decides how best to deploy compliance resources against compliance risks in order to deliver the best outcomes. Compliance risks that were not addressed during the COVID-19 pandemic period can still be acted on. HMRC constantly assesses the full range of risks that are present, both new and historical, when deciding how best to deploy its resources.