1.On the basis of a Report by the Comptroller and Auditor General, we took evidence from HM Revenue & Customs (HMRC) on its approach to tackling tax fraud. HMRC is responsible for administering the tax system, including reducing the risks to tax revenue. It is also the primary investigator of tax related crimes in the UK. HMRC measures the tax gap (the gap between how much it does collect and how much it should in theory collect) and assesses what behaviour led to that gap. Three types of behaviour that illegally deprive the Exchequer of tax revenue are referred to as tax fraud: evasion—when registered individuals or businesses deliberately omit, conceal or misrepresent information to reduce their tax liabilities; the hidden economy—which involves people whose entire income is unknown to HMRC (‘ghosts’) and those for whom HMRC knows of some sources of income but not others (‘moonlighters’); and criminal attacks—which typically involve coordinated and systematic actions by criminal gangs, with varying levels of sophistication and organisation.
2.HMRC has a range of interventions, powers and sanctions that it can use to tackle tax fraud. HMRC described to us the mix of its activities. These include: campaigns focused on encouraging people working within specific industries to come forward and settle outstanding tax liabilities; publicising the successful results of its work; criminal prosecutions; educating people about their responsibilities; and publishing names of deliberate defaulters. During the last parliament, HMRC received specific funding to extend the scope of its work to tackle tax fraud. The previous Committee heard that HMRC agreed to re-invest £917 million in further activities to tackle tax evasion and avoidance, and to collect more debt as part of its Spending Review settlement in 2010.
3.HMRC estimates that tax fraud costs the Exchequer £16 billion annually in lost revenue. This figure forms part of its annual tax gap estimate. HMRC’s latest estimate is that the tax gap stands at £34 billion, meaning almost half is due to losses from tax fraud. HMRC considers that its record in tackling tax fraud is good. But this is not substantiated by the figures. Since 2009–10, the overall tax gap has fallen by 0.9% from 7.3% to 6.4%. During the same period, the tax fraud tax gap has fallen by only 0.2% from 3.2% to 3.0%. While there has been a small reduction as a proportion of total tax collected, in cash terms there was an increase in the amount of tax lost due to tax fraud.
4.The relationship between HMRC’s tax gap and its reported amount of additional tax collected from its compliance activity (compliance yield) is not clear. HMRC’s reported compliance yield increased by £5.3 billion between 2011–12 and 2013–14, rising from £18.6 billion to £23.9 billion. In the same period HMRC reported that the monetary value of the tax gap moved from £33 billion to £34 billion.
5.HMRC confirmed that some of its enforcement and compliance work stops the tax gap increasing any further rather than reducing it. But it was not able to state how much of its compliance effort simply maintains the status quo. HMRC was also unwilling to predict to what level the tax gap may fall or give a long term target for its reduction, but noted that its analysts were “predicting that we will make some more incremental inroads into the tax gap” in the future.
6.HMRC received funding in the 2015 summer budget for measures with an estimated impact to the Exchequer of £7.2 billion by the year 2020–21 and explained some of its priorities for this period. Measures for which HMRC received additional funding included ones to tackle illicit tobacco, illicit alcohol, the hidden economy and non-compliance by wealthy individuals. HMRC told us that it believes these represented a strategic mix of interventions, and that its work has been getting “more and more strategic.”
7.HMRC raised £26.6 billion of compliance yield in 2014–15. We asked HMRC how much focus it puts on tax fraud, rather than other areas such as tax avoidance, but HMRC could not tell us as it does not routinely record this information in this way. HMRC told us that it knows this information for some areas of tax fraud, for example the hidden economy, but not all. The National Audit Office estimated that 30% to 40% of HMRC’s compliance yield is related to tax fraud. In addition, HMRC cannot identify the resources it spends on tax fraud due to limitations in its current management information system. HMRC told us that a better case management system that gives finer detail was required which was “on the agenda” for the current period.
2 Tackling tax fraud: how HMRC responds to tax evasion, the hidden economy and criminal attacks
7 Compliance and Enforcement Programme, Committee of Public Accounts
10 Measuring tax gaps 2014 edition
14 Annual Report and Accounts 2014–15
15 Measuring Tax Gaps 2015 edition: Tax gap estimates for 2013–14
Prepared 4 April 2016