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Managing tax debt through the pandemic

Tax debt is more than double pre-pandemic levels, and current staffing at HM Revenue & Customs (HMRC) is unlikely to be enough to manage the increased tax debt workload, according to the National Audit Office (NAO).

As the country went into lockdown in March 2020 HMRC paused most of its debt collection activity. During this pause, it changed how tax debt was collected, including the tone of communications and the pace of pursuit. To support businesses and individuals, payments of VAT and Self Assessment income tax were also deferred.  As the UK emerges from the COVID-19 pandemic, HMRC needs to pursue tax debt while allowing taxpayers time to recover their finances.

Total tax debt rose to £42 billion in September 2021, from £16 billion in January 2020. Total tax debt peaked at £67 billion in August 2020. More debt has been repaid as extensions for VAT and Self Assessment passed, and the economy has reopened. HMRC forecasts total tax debt will fall to £33 billion by March 2022, but this assumes the COVID-19 pandemic has not changed repayment behaviour. 

Up to 2.4 million more taxpayers are in debt to HMRC following the COVID-19 pandemic, and those who were already in debt owe more. The average amount taxpayers owe has increased by 60%, from around £4,300 to £6,800. Older debts, which are often more difficult to collect, have increased in value from £2.5 billion in 2019-20 to £4.4 billion in 2020-21.

HMRC has prioritised which debts to chase based on the likely impact of the COVID-19 pandemic on an individual’s ability to pay. However, those whose ability to pay was considered the least impacted often had larger debts. HMRC categorised debtors into high-medium and low-impact groups. Business taxpayers in the low-impact group had debts around 50% greater than business taxpayers in the high-impact group. Self Assessment taxpayers in the low-impact group did not have access to COVID-19 grants that Self Assessment taxpayers in the high-impact group could draw on.

Tax debts are normally meant to be cleared before the next tax period, but this may be unrealistic for many taxpayers affected by the COVID-19 pandemic. HMRC has made it easier for taxpayers to agree longer repayment arrangements. The average duration of repayment plans increased from around 5 months pre-pandemic to 12 months in July 2021. A strong focus on repaying tax within specified timeframes may not be appropriate. Leading debt management practitioners outside government tend to focus on agreeing affordable repayment plans that can be sustained.

Research with stakeholders indicates the impact of the COVID-19 pandemic on taxpayers is polarised, with some groups shoring up their bank balances, and others more badly affected. The NAO focused on the impact of the COVID-19 pandemic on two groups of taxpayers: companies that are wound up and reformed specifically to avoid paying debts, and vulnerable taxpayers. HMRC had a limited understanding of how the COVID-19 pandemic will affect the amount of specialist work needed to support these groups.

Pre-pandemic, HMRC achieved workforce efficiencies, but it did not close the gap between new tax debts and debts collected.  HMRC reduced the number of staff working on debt management by 18% from 4,857 to 3,975 between 31 March 2014 and 31 March 2020, helped by a new telephony system and improvements to business processes. HMRC maintained its rate of debt collection at around two thirds of new debt created each year. This suggests HMRC could have achieved more with greater capacity.

HMRC is unlikely to have enough staff to manage the increased tax debt that has resulted from the COVID-19 pandemic. HMRC intends to recruit 1,000 full time staff in 2021-22, however, it told the NAO that once staff turnover is factored in, this resource will only address current staffing shortfalls. HMRC forecasts that it will have twice the usual level of debt to manage at the end of March 2022. New debtors may require more support in the short term to agree payment plans.

The NAO recommends that HMRC develops a revised strategy for recovering tax debt in light of the COVID-19 pandemic. This should consider the varying impacts of the pandemic on different taxpayers, and should identify which taxpayers are more able to pay, and those most severely affected by the pandemic.

“HMRC faces several years of managing a far greater level of tax debt than it has seen in recent times, as a result of the COVID-19 pandemic. Some debtors have already been able to repay their tax debt quickly, but an unknown number of taxpayers have been badly affected and will struggle to do so. HMRC needs to significantly increase its capacity if it is to meet the changed scale and nature of the challenge.”

Gareth Davies, the head of the NAO

Notes for Editors

  1. Press notices and reports are available from the date of publication on the NAO website. Hard copies can be obtained by using the relevant links on our website.

About the NAO

The National Audit Office (NAO) scrutinises public spending for Parliament and is independent of government and the civil service. It helps Parliament hold government to account and it uses its insights to help people who manage and govern public bodies improve public services.

The Comptroller and Auditor General (C&AG), Gareth Davies, is an Officer of the House of Commons and leads the NAO.

The NAO audits the financial accounts of departments and other public bodies. It also examines and report on the value for money of how public money has been spent. In 2020, the NAO’s work led to a positive financial impact through reduced costs, improved service delivery, or other benefits to citizens, of £926 million.

Contact

NAO Press Office
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