The COVID-19 pandemic has changed the nature and scale of tax debt. There is an enormous task for HM Revenue & Customs (HMRC) to bring debt back from its current position (£39 billion) to pre-pandemic levels (£16 billion). To achieve this fairly, and without harming economic recovery, it will need to strike a difficult balance. HMRC must actively pursue those who can pay their tax debts but are choosing not to whilst also supporting individuals and businesses struggling to recover from the pandemic. In particular, we are concerned that rogue firms (phoenix companies) have been able to exploit the temporary restrictions on insolvency action and the availability of covid support grants and loans to embezzle large sums during the pandemic.
The number of taxpayers in debt increased by 2.4 million to around 6.2 million over the past two years. Over the same period, the average value of each debt increased by 60%, from £4,300 to £6,800. Repayment plans are now of longer duration, an average of 14 months, meaning many taxpayers will carry debts forward to their next tax bill. The ongoing economic impact of the pandemic has left more taxpayers in vulnerable circumstances and less able to cope with their debts.
HMRC did act swiftly at the beginning of the pandemic, and there is some evidence its actions have been effective in reducing the balance of tax debt from its peak of £67 billion in August 2020. However, HMRC does not know how long it might take to reduce the debt balance to pre-pandemic levels and the Department has not articulated a clear plan or set out a detailed timescale to give us confidence it can manage the challenge it now faces. The longer that tax remains uncollected, the greater the risk that HMRC will never be able to collect it. This is unfair to the majority of taxpayers paying their fair share and results in a loss to the exchequer.
Taxpayer debt does not sit in a vacuum and taxpayers may have many other pressures. This means HMRC will need: a better understanding of taxpayers’ ability to repay debt; more effective communications with those taxpayers; and decide whether it should make more or less use of private sector firms to help collect debts.