Recommendation 6

HMRC’s reliance on the tax gap measure is not providing a sufficiently stretching target for its compliance performance. The tax gap is subject to a variety of factors, not just HMRC’s compliance performance, and its relationship to compliance yield is not straightforward. In 2021–22, the latest year available, HMRC estimated the tax gap had remained at 4.8% of all liabilities, despite compliance yield as a proportion of theoretical tax liabilities declining in that year. The lag in measuring the tax gap means that HMRC must pay closer attention to compliance yield as an indicator of performance in the short term. In 2022–23, HMRC’s compliance yield was £34 billion, against a target of £36 billion, set at a level to maintain the tax gap. HMRC expects to miss its compliance yield target again in both 2023–24 and 2024–25, and identified inflation as negatively affecting its performance on compliance yield. We are concerned that HMRC places too much reliance on the tax gap measure to justify its performance, rather than focusing on achieving its compliance yield targets, which are a more direct measure of its performance. Recommendation 6: HMRC needs to demonstrate that its compliance yield target is sufficiently ambitious to provide stretch in HMRC’s performance each year and to take account of inflation in the tax base. 8 HMRC performance in 2022–23 1 Supporting taxpayers