Treasury Plans to Invest Billions in HMRC’s Capacity to Collect Tax Debts

A selection of UK bank notes and pound coins, in an undated file photo. (Dominic Lipinski/PA)

Chancellor Jeremy Hunt has vowed to raise billions for the UK’s public services by investing in HMRC’s capacity to collect tax debt.

Delivering the Spring Budget on Wednesday, Mr. Hunt said the Treasury set out plans to polish its debt recovery process in the next five years.

“The government is continuing to tackle tax non-compliance by making further investments, including in HMRC’s capacity to collect tax debts. These measures are forecast to raise over £4.5 billion of tax revenue by 2028-29,” the chancellor said in his speech.

The announcement comes amid the cost-of-living crisis in the UK, with a sharp public focus on government policies on increasing funding for public services.

This, alongside high inflation, mortgage rates and the tax devoted to servicing the national has affected the economic well-being of British households across the country.

Meanwhile, widespread industrial action across various sectors keeps exhausting the GDP growth.

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Given the prevalence of the cost-of-living pressure, the Public Accounts Committee (PAC) last year advised the HMRC to ensure that “businesses and individuals who are able to pay, do.”

The committee had reported an “eye-watering” £42 billion in tax revenue owed to the HMRC in 2021-2022.

In March 2023, HMRC recorded a £43.9 billion tax debt, significantly higher than the pre-pandemic figure of £14 billion.

The agency explained the debt was being driven by an increase in self-employed people and small businesses not paying tax “due to financial distress rather than deliberate non-payment.”

HMRC Performance

In the Autumn Statement, Mr. Hunt set out funding for 700 additional debt officers, both in-house and from external collection agencies.

In its latest review of the HMRC performance, the PAC reported an increase in spending on agencies from £20.6 million to £34 million.

The year of 2022-2023 was marked by a £82.9 billion increase in HMRC tax revenues from the previous year.

Revenue generated from tax compliance activities–including checks of tax returns, disputes and non-payment–was at £34 billion, a ten percent increase on the previous year.

The estimated tax gap–the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid–stood at £35.8 billion in 2021–22, higher than the previous year’s £32 billion figure.

According to the PAC, HMRC failed meet the £36 billion target for compliance yield, or the additional revenue that would otherwise have been lost were it not for the agency’s intervention.

The agency said it expects to miss its compliance yield target again in the next two years and cited the negative impact of inflation on its performance. In turn, the PAC recommended a “sufficiently ambitious” yield target, which takes into account inflation in the tax base.

Customer Service

The PAC Chair, Dame Meg Hillier, has in the past cautioned about the financial damage to the public sector caused by HMRC’s poor compliance services.

She has also raised the issue of HMRC’s declining customer service performance, crucial in maximising collected tax revenues.

Last week, the committee reported that “customer service levels at HMRC are at an all-time low.”

Growing taxpayer population and the complexity of people’s tax affairs have impacted HMRC’s ability to cope, MPs said.

“Almost eight years have passed since our Committee challenged HMRC over its telephone lines’ holding message being one of the most streamed pieces of music in the country. Our latest report into its performance sadly illustrates a continued tale of decline in its services,” said Dame Meg.

However, HMRC insisted that while it doesn’t have the resources to meet an increased demand in phone and post services, its digital services’ quality was good.

In other comments, the committee noted a reduction in criminal prosecutions by HMRC and expressed concerns over the agency’s handling the “distress” to people, when companies use the wrong address to register their business.

In turn, HMRC has acknowledged the widespread issue with bogus registrations from companies seeking to defraud the agency.