Recommendation 20

HMRC agrees a compliance yield target each year with HM Treasury and ministers, set at a level to maintain the tax gap at its current level.68 HMRC told us that this target is derived from a model endorsed by the Office for Budget Responsibility. Given how this model is set up, the target is closely linked to expected tax revenue for that year.69 We have previously expressed concern that any compliance yield projections or targets HMRC expresses in cash terms will not be sufficiently stretching during a period of high inflation.70 However, HMRC said that more employees earning more and hence paying more tax does not necessarily increase the tax gap, as there is little non-compliance associated with Pay As You Earn taxation.71 In addition, a lot of HMRC’s compliance yield comes from settling cases relating to prior years. HMRC said that this causes a lag in 61 Q 62 62 Q 64 63 C&AG’s Report, para 5 64 Qq 24–25 65 Q 24 66 Qq 24, 31 67 Q 30; C&AG’s Report, para 1.26 68 C&AG’s Report, para 1.26 69 Q 26 70 Committee of Public Accounts, HMRC performance in 2021–22, 33rd Report of Session 2022–23, HC 686, 11 January 2023 71 Q 31 HMRC performance in 2022–23 15 its compliance yield performance, which has been accentuated by increasing tax revenues due to inflation. In 2022–23, HMRC’s compliance yield was £34 billion, up 10% from the previous year but £2 billion below its target of £36 billion. HMRC said that it did not expect to hit its compliance yield targets for 2023–24 or 2024–25.72 72 Qq 25, 26; C&AG’s Report, para 6 16 HMRC performance in 2022–23