Getting Tax Right? NAO Report suggests this is not always the case…

Insight /  20 December 2022

On 16 December 2022 the National Audit Office (“NAO”) produced some pre-Christmas reading; a 53 page report entitled “Managing tax compliance following the pandemic”.

The report issued looks at the challenges that HMRC has faced during the pandemic and those which it will continue to face over the next few years.

A lot of the commentary comes as no surprise and not many people will be too upset that the likelihood of them having an HMRC visit has been lower over the last few years than it was previously, although the reduction in Treasury income resulting from this should not be overlooked. HMRC has certainly been less visible and its compliance teams have been less active for a number of reasons, not least because many were redeployed elsewhere in the Department.

An area of concern that is highlighted in the report, however, is the section regarding HMRC’s quantification of yield and the “overcharging” of some taxpayers. Indeed, a lot of the recommendations by NAO are not about how HMRC undertakes the work but on how it measures the results.

HMRC is returning to its compliance activity and clearly intends to get back on track. We are already seeing an increase in commencement of compliance activity. On the flip side, however, the comments in the report about HMRC overcharging some taxpayers demonstrates the need to make absolutely sure that HMRC’s calculations are both technically and arithmetically correct.

Key findings in the Report

1356 – average number of full-time equivalent (FTE) compliance staff HMRC redeployed to support on COVID-19 schemes in 2020-21 (peaking at 4,396 FTE in May 2020), reducing the staff available for its core tax compliance work by 12%.

£9 billion reduction in the revenue raised by HMRC’s compliance work across the two pandemic years compared with historical average. Compliance yield per staff member fell from £1.3 million on average in the five years before the pandemic to around  £1.1 million a year across 2020-21 and 2021-22.

2,500 – approximate increase in HMRC’s compliance staff between 2021-22 and 2022-23. However, new staff typically need up to four years to become fully effective. The plans also include a new training unit to train tax graduates, who can then be deployed where they are most needed as well as improving the professional skills of existing staff. HMRC expects to recover from the reduced performance levels over the next five years.

£30.8 billion – estimate of compliance yield in 2021-22, down from a peak of £36.9 billion in 2019-20.

29% reduction in compliance cases that HMRC closed in 2020-21 compared with 2019-20 (103,000 fewer cases), while it also opened 32% fewer cases (114,000).

80 out of 400 of cases selected for quality assurance check showed errors, generally overstating how much tax would be recovered. HMRC’s testing also identified seven cases where it had overcharged taxpayers (none of which were large businesses), by a total of £32.2 million although we aren’t provided with the detail of how this happened. HMRC subsequently took corrective action to ensure the tax position was remedied. This may mean that many more taxpayers that didn’t fall within the quality assurance checks have also been overcharged. NAO’s recommendations states “HMRC should estimate and report the likely extent of official error affecting taxpayers – by either overcharging or undercharging them – in carrying out its compliance work. This should include ensuring it has the data needed to make a robust and representative estimate, and to determine whether additional testing is required”.

36% reduction to in-person visits to individuals and small businesses in 2022 compared with 2019. The pandemic accelerated HMRC’s strategy to move away from face-to-face casework, as it aims to target investigations more cost-effectively. HMRC has not yet assessed how this change has affected detection of non-compliance or the behavioural effect on attitudes to paying tax among those it has investigated.

A link to the NAO report is here.

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