Source · Select Committees · Public Accounts Committee
Recommendation 25
25
Rejected
Weakened measures and insufficient compliance yield indicate the tax gap will likely grow.
Recommendation
Some measures that affect the tax gap have weakened since the start of the pandemic, indicating that the tax gap may grow in the coming years. Non-payment of taxes owed is one such component of the tax gap that HMRC expects will grow. Levels of debt and non-payment rose considerably during the pandemic, and debt levels are not reducing as quickly as HMRC expected them to.40 Compliance yield, which reduces the tax gap, also saw a significant drop during the pandemic.41 HMRC’s Customer Compliance Group (CCG) produces planning estimates of the level of compliance yield it thinks it will need to achieve to stop the tax gap from growing, and the range of yield it thinks it could achieve. Its own planning estimates indicate that it is unlikely to generate enough compliance yield to stop the tax gap from growing in the next few years. The gap between the required level and HMRC’s mid-point planning estimate equates to around £17 billion in total over the three-year period. HMRC would need to achieve its upper estimate of compliance yield to stop the tax gap from growing, but in practice expects to achieve somewhere between its upper and mid-point estimates.42
Government Response Summary
The government rejects the committee's implication, asserting its commitment to ensure HMRC has sufficient funding to maintain compliance performance and tackle the tax gap. It highlights a £79 million investment in Autumn Statement 2022 for staff to combat tax fraud and risks among wealthy taxpayers, expected to generate £725 million in revenue.
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.