LOSSES to tax fraud amount to £16bn each year, around half of the estimated tax gap, according to a National Audit Office report.
In 2014/15 HMRC reported £26.6bn additional revenue from all its compliance work, including work to tackle tax fraud but also to deal with other aspects of the tax gap such as error and tax avoidance. However, the NAO found HMRC has only partial data on how much of the total yield is derived from its work to counter tax fraud.
By way of example, the tax authority has more complete information on its work to tackle organised crime than tax evasion. The NAO estimates between 30% and 40% of total compliance yield is generated by HMRC’s activities in tackling tax fraud, but this is an estimate based on partial evidence.
Today’s report is the first in a series of reports which will evaluate how effectively HMRC tackles different aspects of tax fraud.
Small business concern
Two groups – smaller businesses and criminals – are responsible for 17 of the 21 biggest tax fraud risks, according to HMRC. Of these, eight relate to organised crime and nine involve medium-sized, small or micro-businesses.
HMRC believes these businesses are responsible for tax losses of £17bn, almost half of the total tax gap, but does not consider its internal estimate of how much of this is the result of tax fraud robust enough for publication, the NAO said.
The taxman met its target to increase prosecutions by 1,000 a year by 2014/15, but it was found it needs to better prioritise the cases in which it pursues criminal investigation. Although HMRC cannot demonstrate the 1,000 figure was the right number, the target had the effect of prompting the department to change its processes and make its investigations more efficient.
The target led it to focus on less complex cases, particularly a large number of prosecutions for people who had evaded income tax, VAT and tobacco duty. HMRC has recognised that it needs to prosecute cases that more closely correspond with its analysis of tax fraud risks, the NAO stated.
Head of the National Audit Office Amyas Morse said: “HMRC loses £16bn a year due to tax fraud, but reducing these losses is not straightforward. HMRC has met its targets to raise more tax revenue in the short-term. It now needs to consider whether its overall strategy is designed to achieve the best long-term outcomes.
“We will be evaluating HMRC’s performance in tackling different types of tax fraud in more depth. As we do so, we will be looking for further improvements in the way HMRC uses data and analysis to understand the effect of its actions in both the long- and short-term.”
A spokesman for HMRC said the department is “cracking down on tax avoidance and evasion” with a “wide range of civil and criminal interventions to collect and protect revenue for public services”.
Those measures, he said, are “steadily reducing the tax gap to its lowest-ever level. Last year, HMRC collected and protected a record £26bn in revenues from compliance activities, contributing towards the UK’s highest ever tax take of £518bn”.
He added: “Additional funding and new measures contained in the Summer Budget and Autumn Statement are allowing HMRC to crack down further on the hidden economy, get tougher on offshore evasion, and increase the number of prosecutions of wealthy tax evaders. The small minority who persist in dragging their feet, hiding or helping others to hide their money and assets at home or abroad, now face increased financial penalties and risk criminal prosecution.”
CIot urges HMRC to consider a delay to the 1 September 2017 introduction of its new corporate offence of failure to prevent the criminal facilitation of tax evasion
HMRC intends to extend the date for withdrawal of transitional relief on investment growth from 30 November 2016 to 31 March 2017
The current business rates system is over-complex and reform is needed, but reforms should focus first of all on simplifying the appeals process, particularly for businesses which are subject to business rates exemption
The CIoT has called on the government to rethink its approach to ensuring online sellers pay the correct amount of VAT.