PAC makes recommendations to close the tax gap

The Public Accounts Committee (PAC) report acknowledges that tax collection is at its highest level on record at £731.1bn. However, the report also suggests that a greater focus on tackling fraud and error is required by HMRC. Returning to setting a formal compliance yield target to improve accountability would also be beneficial, it says. 

Echoing a key issue for ICAEW members, the report highlights that taxpayers and their agents are still not receiving an acceptable level of customer service. The report expresses concern that HMRC’s customer service levels fell considerably through the pandemic. It considers that HMRC’s plan to increase digital communication channels may not be sufficient to address this – especially given that demand for traditional channels of communication may not fall a great deal.

The report also highlights that in the past five years, HMRC has reduced its customer service staff numbers from 25,500 to 19,500, an average reduction in staff of nearly 5% every year and an overall reduction of a quarter in five years. The impact of this reduction on service standards is not quantified. But a reduction in staff of this magnitude helps to explain the consistently poor level of service across most sectors of HMRC’s activity.

The report makes several recommendations to HMRC to improve its customer service levels as a matter of urgency and recommends that improvements should be monitored through clear metrics. HMRC must write to the committee within three months to set out its plans for improving customer service.

During the oral evidence session, Jim Harra, Chief Executive and First Permanent Secretary, HMRC stated: “On average, for every pound that we spend in our customer compliance group, we recover about £18 worth of additional tax revenues. That does not mean that the marginal benefit of an extra pound would be another £18, but it shows you that there is a very positive rate of return.” 

The report acknowledges that HMRC is under-resourced in the compliance group and is therefore missing opportunities to recover large amounts of unpaid tax. This was also an area of focus for the National Audit Office in its pre-Christmas report on tax compliance following COVID-19.

The PAC report suggests that more resources should be spent on tax recovery, including mitigating losses made through fraud and error within the COVID-19 support schemes. Similarly, the report also recommends that HMRC should engage with its international counterparts to understand what lessons can be learnt on reducing fraudulent VAT registrations. There is a concern that by not challenging abuse appropriately, dishonest individuals and businesses are benefiting ahead of compliant taxpayers.

The amount of tax debt owed to HMRC in August 2022 stood at £42bn, less than at the height of the pandemic but significantly higher than before the pandemic. The PAC report recommends that HMRC should set out how it might best differentiate between those taxpayers genuinely struggling and those that can afford to meet their liabilities. It also raises concerns that to manage debtors’ tax position effectively it is important to understand their position across all taxes. Delivery of the single customer account project is key to this.

The report also questions the effectiveness of research and development (R&D) tax reliefs in increasing investment within the UK economy. ICAEW’s Tax Faculty is currently in discussion with members concerning changes to the R&D regime. While it is essential that the government takes steps to evaluate the effectiveness of the R&D reliefs, ICAEW recommends that HMRC should undertake focused compliance activity to tackle abuse in the sector rather than introduce blanket policy changes that affect compliant taxpayers, deter investment and hinder growth in the wider economy.

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