The National Audit Office has today released a white paper on HMRC and its actions to tackle fraud. The study, Tackling Tax Fraud, supports HMRC’s efforts to close the £34bn tax gap and offers areas for improvement.
The main focuses of the report include:
- Tax revenues and spending in 2014/15
- How HMRC estimates the tax gap and risks to tax collection
- HMRC’s estimate of the compliance yield
- Strategy to improve tax administration
- Progress in managing fraud, error and debt from personal tax credits
HMRC has revealed that £16.6bn a year is lost to tax fraud and the other half is from errors, legal avoidance and other non-payment issues.
Although the amount of tax taken this year is up by 2.4% to £517.7bn, the study has highlighted three key areas for HMRC to improve upon in order to reduce the loss of revenue to fraud. The main areas include £5.1bn to criminal activity, £4.4bn to tax evasion and £6.2bn to the hidden economy.
HMRC has positioned SMEs alongside organised crime as one of the biggest perpetrators of tax fraud. Small businesses are said to be at risk of 9 of 21 the biggest fraud risks.
Small businesses, who fail to register for VAT when their turnover reaches the necessary threshold, are quoted as one of the main contributors to the loss of £17bn in tax. This has provoked a number of complaints from businesses who have argued that HMRC is focusing on small cases rather than chasing serious criminals and corporate tax evaders.
Last year, HMRC was given the target of increasing prosecutions to 1,000. This target was achieved and resulted in greater efficiency; although the focus tended to be on smaller cases such as income tax, VAT and tobacco duty.
The National Audit Office found HMRC did not use or have the right data or management information to fully evaluate its activities. HMRC was unable to say what proportion of the tax gap was related to businesses evading tax. It costs HMRC £26.6bn a year to complete the compliance work and to tackle fraud, error and evasion. This sum is referred to as the ‘compliance yield’ which is a complex measure that combines the tax recovered from civil and criminal investigations.
This study continues to be the benchmark for the continuing scrutiny of HMRC’s effectiveness in tackling fraud over the course of this Parliament. HMRC is noted to have begun to adopt a more strategic view of its compliance business. There is also a clear shift to the balance of work placing increasing emphasis on measures to prevent non-compliance. The focus on the department as a whole will be on automating its systems and migrating more taxpayers into digital channels in order to increase efficiency and effectiveness. This comes alongside the overhaul of offices, software and strategy which is being implemented over the next five years.
Whilst the National Audit Office recommends the updates to the strategy, there are concerns that the customer service record will be affected. However, there is a positive feeling that if successful, the improvement to service and digital channels will facilitate higher rates of tax collection.