PAC “not confident” in HMRC’s ability to pull back tax debt after “game-changing” pandemic hit

• Rogue or ‘phoenix’ firms have exploited Covid measures to embezzle large sums of public during the pandemic 

In a report today the Public Accounts Committee says COVID19 has “changed the nature and scale of tax debt” and there’s an “enormous task” for HMRC to bring tax debt back from the current “mountain” of £39 billion to the pre-pandemic level of £16 billion. The Committee says “to achieve this fairly, and without harming economic recovery, HMRC will need to strike a difficult balance” - actively pursuing those who can pay their tax debts but are choosing not to, while supporting individuals and businesses struggling with the ongoing impact of the pandemic that “has left more taxpayers in vulnerable circumstances and less able to cope with their debts”. 

The PAC has particular concerns about “rogue or ‘phoenix’ firms that 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”.

HMRC “does not know how long it might take to reduce the debt balance to pre-pandemic levels and has not clearly articulated a clear plan or set out a detailed timescale to give the PAC confidence it can manage the challenge it now faces”. The longer that tax remains uncollected, the greater the risk that HMRC will never collect it. This is unfair to the majority of taxpayers paying their fair share and results in a loss to the exchequer.

The PAC says HMRC needs more effective communications with taxpayers, a better understanding of taxpayers’ ability to repay debt and whether it should make more - or less - use of private sector firms to help collect debts. 

Dame Meg Hillier MP, Chair of the Public Accounts Committee, said: “You might be forgiven for thinking we’ve magically found that tree after all - the public purse is rattling but a chunk of the tax revenues needed to refill it have not been collected. Add to that the pandemic and record inflation, and HMRC has a tricky balance to strike. Those least able to afford rising bills, including tax bills, are also the easiest collection “targets”. HMRC must tread carefully, taking a sensitive approach that supports a renewing economy, and doesn’t necessarily include bailiffs coming knocking.

“At the same time, HMRC’s challenges chasing down high-wealth individuals and companies who take advantage of every trick in the book to avoid and evade tax and outrun the law are well-known. Those tricks are just not available to ordinary people, now emerging from the misery of the pandemic into an exploding cost of living crisis. HMRC must push much harder at the doors - no matter where they are - of those who are not paying their fair share.”

PAC report conclusions and recommendations

7. We are not satisfied that HMRC has a clear plan to tackle the mountain of tax debt which has built up during the pandemic. At £39 billion in November 2021, tax debt is more than double the £16 billion it was before the pandemic. HMRC must also manage an additional 2.4 million taxpayers who, on average, owe more money and require longer to pay. Despite the sums of money involved, HMRC could only provide a vague timeframe for when the level of debt will return to pre-pandemic levels. It has also not updated its forecast of debt at the end of the 2021-22 financial year to account for the recent ‘Plan B’ action taken by government. HMRC expects the debt balance at year end will be higher than the £33 billion it had forecast in September 2021, but could not say how much higher. The debt balance has reduced considerably from its high point of £67 billion at August 2020, but the debt which is left is likely to be the toughest to collect and rates of repayment have slowed. The main cause for bad (unpaid) debts is insolvencies and, while HMRC has increased the provision it makes in its accounts for bad debts, it faces an unknown backlog of insolvency cases.

Recommendation: Within the next six months, HMRC should develop, and share with the Committee, a plan to manage the increased levels of debt back down to pre-pandemic levels within a specific timeframe. The plan should include: 

• Long-term forecasts for tax debt, including the target levels it will achieve at the end of each financial year with its planned resources. 
• Far more transparency about the level of write-offs and remissions HMRC is providing for. In particular, in what financial year the tax debts written off and remitted in each of the past five years were incurred, and HMRC’s targeted levels of write-offs and remissions over the next five years. 
• Contingency arrangements, detailing how HMRC will manage debt levels, and write-offs and remissions, under a range of scenarios, including if further variants of COVID-19 emerge.

8. HMRC is not being ambitious enough in bringing down debt levels and securing the resources this will require. The longer a debt is left, the harder it is to collect. The increase in tax debt and the number of taxpayers in debt also increases HMRC’s debt management workload. We are concerned that a lack of appropriately trained HMRC staff will lead to more debt going unpaid. HMRC’s debt management team had made staff reductions before the pandemic to improve efficiency. Its planned recruitment in 2021-22 will only close the current shortfall in staffing of 300 FTE. HMRC makes limited use of private sector debt collection agencies to increase its capacity to work with specific customer groups. HMRC has additional funding over the next three years (of £40m, £60m and £90m) for “spend to raise” work but has not decided whether any of this will be used for debt recovery, despite this work bringing in at least £18 for every £1 spent. HMRC has been successful in securing additional funds from HM Treasury for time-limited recruitment, but we are concerned that the long-term uncertainty associated with this approach may prevent HMRC from planning effectively and protecting value for money. The Committee has raised this issue before on HMRC’s compliance work, which also offers high rates of return.

Recommendation: There is a clear value for money case to increase debt management capacity. HMRC should set out how much more tax debt it can bring in with increased levels of capacity using private sector and public sector options and write to the Committee alongside its Treasury Minute response with its findings and the actions it is taking to maximise value for money. 

9. Rogue companies are exploiting the pandemic to profit at the expense of taxpayers. We are concerned that rogue firms have been able to exploit temporary restrictions on insolvency action and the availability of covid support grants and loans to embezzle large sums during the pandemic. In particular, there is an increased risk from ‘phoenix’ companies (whereby individuals continue the same trade through a series of companies that are wound up, usually to avoid paying debts). While the NAO found that HMRC held no data on the scale of phoenix activity in the past, HMRC asserted that the number of such companies has not increased. It was not clear to us how it can be certain that this is the case, or how much taxpayer money is at risk, without management information. HMRC is developing a strategy to combat phoenix companies and is beginning to use new powers alongside its existing approaches to identify, and bring sanctions against, individuals involved in this practice. 

Recommendation: Alongside the Treasury Minute response to this report, HMRC should provide the Committee with a summary of substantive work it has undertaken to: 

• Estimate the number of rogue companies at risk of defaulting and the value of the tax at risk.
• Ensure commensurate resources are in place to prevent such fraudulent activity. 

HMRC should be prepared to bring the full force of the law to bear on those who defraud the Exchequer, and report publicly and regularly to Parliament on the numbers prosecuted. 

10. HMRC is far behind where it needs to be in making good use of data to manage debt effectively. Over a decade ago, in 2009, HMRC told our predecessor committee that it planned to take an incremental approach to gradually link debts in different IT systems. This would create a single customer record, which we agreed was needed. Yet, 13 years later, HMRC still records details for different taxes on different IT systems and has no straightforward way to combine them. Current cross-government work to bring together all debts individual customers owe to government departments will not bear fruit within the next three years. When HMRC agrees a debt repayment plan with a customer, it seeks to consider their overall position, including expenditure and non-tax debts. But it currently has no means of knowing this until it speaks to them, while the private sector agencies with whom HMRC works, do access private sector data that can identify other customer debts. HMRC is running a pilot to determine whether purchasing private sector data would be cost effective. It is also exploring how to identify what methods of contact are most effective to tailor contact to individual taxpayers. 

Recommendation: HMRC should write to the Committee within six months, to provide an update on: 

• How much it has spent on the single customer record so far, how much it expects to spend to complete this work, and when it expects to complete this work.
• The scope of its work with the rest of government to share data and take a more customer orientated approach, and the timeframe over which it expects to complete this work.
• The results of its pilot test using private sector data and plans for further use.

11. HMRC is not using all relevant data sources to understand how the pandemic is affecting taxpayer’s ability to repay. The pandemic has had a varied economic impact, with some groups improving their financial position during the pandemic while others have been negatively affected.  HMRC used data it already held, on business customers’ revenue, staffing and use of employment support schemes, to identify how severely they were affected by the pandemic. However, HMRC has not used business sector data – and does not plan to. We believe that sectoral data is likely to become more important over time as the pandemic continues to affect business sectors differently and, as government support schemes close, data about which customers accessed these schemes will be less informative about their current situation. HMRC told us that it does not wish to drive any viable business to the wall by pushing them to repay debt too quickly, but we cannot see how HMRC will be able to make informed judgements about how hard it chases customers without understanding the context in which they operate.

Recommendation: HMRC should identify and obtain the data sources which are most relevant to understand the ongoing impact of the pandemic on businesses. As a minimum we would expect HMRC to make use of sectoral data. 

12. We are concerned that HMRC is not doing enough to identify vulnerable people who need extra support with their debts. The pandemic has left more people in vulnerable positions, such as managing serious illness, bereavement and with low resilience to financial shocks. The Financial Conduct Authority has reported a 15% increase in the number of adults who met one of their characteristics of vulnerability. Yet HMRC has not seen an increase in the number of customers it identifies as being vulnerable. Around 1,400 customers currently access help from its Extra Support Team, a tiny fraction of the 6.2 million customers with tax debt. HMRC is adopting the vulnerability toolkit developed by the Cabinet Office to better identify vulnerable customers. However, we are concerned that, despite this, HMRC may be failing to identify vulnerable people, and that it may therefore fail to provide them with extra support because it doesn’t understand actual need. HMRC acknowledges that the number of vulnerable customers it has identified looks lower than it would expect and that the take-up of some of its offers of support, such as the Breathing Space scheme, is low. 

Recommendation: HMRC should ensure regular and adequate training is in place for staff and it should carry out research to independently estimate how many vulnerable people are affected by tax debt and how effectively it is identifying those customers and write to us with its findings.