HMRC'S annual report is out - Here's what you need to know

Accountants are no strangers to poring over lengthy financial documents and annual reports. However, even the most seasoned professionals can benefit from a concise overview of key findings. HMRC’s recently released Annual Report and Accounts for 2023-24 is a treasure trove of information, but at hundreds of pages long, it’s not exactly light reading.

Let’s break down some of the most important takeaways from this report, focusing on the aspects that are most relevant to accounting professionals and their clients. We’ll explore HMRC’s performance, key financial figures, and emerging trends in tax administration that could impact your work in the coming year.

Record tax revenues amidst economic volatility

One of the most striking figures in the report is the record-breaking total tax revenue collected by HMRC in 2023-24: £843.4 billion. This represents a 3.6% increase from the previous year’s £814.0 billion. The growth in revenue is primarily attributed to two factors: the continued freezing of income tax bands and thresholds, and an increase in the Corporation Tax rate from 19% to 25% in April 2023.

While these figures might seem impressive at first glance, it’s important to consider them in the context of high inflation during this period. The increase in nominal terms may not necessarily reflect real growth in the tax base. Furthermore, the freezing of tax thresholds, often referred to as “fiscal drag,” means that many taxpayers have been pulled into higher tax brackets without experiencing real income growth. This situation presents challenges for tax planning and may require accountants to review their clients’ tax positions more frequently.

A persistent challenge with tax

Despite the increase in revenue, HMRC’s estimate of the “tax gap” – the difference between the amount of tax that should be paid and what is actually collected – has grown to £39.8 billion. While this represents a slight decrease as a percentage of tax due (from 5.2% to 4.8%), the absolute figure has increased, highlighting the ongoing challenge HMRC faces in ensuring full tax compliance.

Perhaps most notably, small businesses now account for 60% of the tax gap, up from 37% in 2017-18. This trend suggests that HMRC may increase its focus on small business compliance in the coming years. Accountants with small business clients should be prepared for potentially greater scrutiny and may need to place additional emphasis on robust record-keeping and timely, accurate tax filings.

Compliance Yield: HMRC’s Enforcement Efforts Pay Off

HMRC’s compliance activities generated £41.8 billion in additional revenue in 2023-24, a significant 23% increase from the previous year. This figure exceeds HMRC’s target of £40.5 billion and represents 5.0% of total revenue collected. The increase is partly attributed to HMRC’s growing focus on “upstream” compliance work – efforts to prevent non-compliance before it occurs.

This shift towards preventative measures could signal a change in HMRC’s approach to enforcement. Accountants may find that helping clients establish robust tax governance frameworks and internal controls becomes increasingly important in minimizing the risk of non-compliance.

Growing R&D tax fraud and error

The report highlights continuing issues with the Research and Development (R&D) tax relief schemes. HMRC estimates that £601 million, or 7.8% of R&D tax relief expenditure, was claimed erroneously or fraudulently in 2023-24. While this represents an improvement from the previous year’s estimate of 13.3%, it remains a significant concern.

The Small and Medium-sized Enterprise (SME) scheme continues to be particularly problematic, with an estimated error and fraud rate of 14.6%, compared to 2.8% for the Research and Development Expenditure Credit (RDEC) scheme used by larger companies.

These figures underscore the importance of rigorous due diligence when preparing R&D claims. Accountants should be aware that HMRC is likely to maintain heightened scrutiny in this area, potentially leading to more frequent and detailed inquiries into R&D claims. Ensuring that clients have robust processes for identifying and documenting qualifying R&D activities will be crucial.

Issues with personal tax credits

While Personal Tax Credits are being phased out in favor of Universal Credit, they continue to be a significant area of focus in HMRC’s accounts. The estimated rate of error and fraud resulting in overpayments remains at 4.7% of expenditure, equating to £365 million. Although this represents a decrease in absolute terms from the previous year (£415 million), it’s largely due to the overall reduction in Tax Credits as claimants migrate to Universal Credit.

In a notable development, HMRC’s estimate of error and fraud in Child Benefit payments has led to a first-time qualification of the audit opinion on this expenditure. The estimated rate of error and fraud is 1.6% of expenditure, or £200 million. This increase from 0.8% in the previous year is partly attributed to a change in HMRC’s estimation methodology, but it nonetheless highlights an area of growing concern.

For accountants with clients receiving these benefits, these figures emphasize the importance of ensuring accurate reporting of circumstances and prompt notification of any changes that might affect eligibility or payment amounts.

Room for customer service improvement

HMRC’s customer service performance continues to be an area of concern. The department answered only 66.4% of phone calls, down from 71.1% in the previous year and well below its target of 85%. Average waiting times for those calls that were answered increased to 23 minutes and 14 seconds, up from 16 minutes and 24 seconds in 2022-23.

While HMRC has improved its handling of correspondence, with 76.3% dealt with within 15 working days (up from 72.7%), this still falls short of its 80% target. These figures suggest that accountants and their clients may continue to face challenges when seeking assistance or clarification from HMRC, underscoring the value of proactive tax planning and management to minimize the need for HMRC interactions.