Amyas Morse, the Comptroller and Auditor General, has today issued a report on the 2014-15 accounts of HM Revenue & Customs.
Tax revenues and spending in 2014-15
HMRC received total tax revenue of £517.7 billion, £11.9 billion (2.4 %) more than in 2013-14 (building on a 6.3% increase in 2013-14). The taxes that contributed most of this increase were VAT, which increased by £5.7 billion (5.3%), and income tax and national insurance contributions, which increased by £2.3 billion (0.9%). HMRC has reduced tax losses (taxes written off where there is no practical way to collect them) to £4.2 billion, below £5 billion for the first time in many years. HMRC also reduced the balance of tax debt (taxes that are overdue and outstanding at 31 March 2015) to £13.0 billion (£13.3 billion at 31 March 2014). However, the balance of aged debt has increased to £4.0 billion at 31 March 2015, from £3.7 billion at 31 March 2014.
While HMRC has collected more tax revenue this year, and paid out more in benefits and credits, it has reduced its administration expenditure from £3.3 billion to £3.1 billion (6% decrease).
HMRC faces risks to collecting tax efficiently: ranging from simple mistakes by taxpayers to large-scale criminal attacks. The tax gap is an estimate of how much tax HMRC does not collect. Between 2005-06 and 2012-13 (the latest year available), HMRC estimates that the tax gap fell as a proportion of the tax due, from 8.5% to 6.8 %. HMRC estimated the tax gap was £34 billion in 2012-13, a slight increase from its 2011-12 estimate of £33 billion (6.6% of the tax due). Income taxes (41%) and VAT (36%) are the taxes which account for most of the tax gap, while the largest share by customer group comes from small and medium-sized enterprises (44%).
Compliance work aims to hold and close the tax gap. HMRC’s measure of compliance yield (the additional revenue generated through its compliance activities) is an indicator of the effectiveness of its enforcement and compliance activities. HMRC reported compliance yield of £26.6 billion in 2014-15, its highest figure to date, but caution is needed as new areas were included in its measure this year. In the absence of these changes, HMRC’s yield would have been £25.2 billion (2013-14: £23.9 billion).
A significant element of the yield calculation relies on estimates of current and future benefits and is not the amount of cash generated each year from HMRC’s enforcement and compliance activities. The NAO recommends that HMRC be clearer in its published statements that the yield figure is not a cash figure and the inclusion of ranges around the estimated elements of yield would help to achieve this.
Tax credits error and fraud
The C&AG has qualified his regularity audit opinion on the 2014-15 Resource Accounts because of material levels of fraud and error in the payments of personal tax credits. He has qualified the accounts on these grounds every year since tax credits were introduced in 2003-04. HMRC’s central estimate of fraud and error in 2013-14 (the most recent available) is £1.26 billion overpayments (which represents 4.4% of finalised entitlement) and £0.18 billion underpayments (0.6% of finalised entitlement). The personal tax credits balance of overpayments rose by £0.4 billion to £6.9 billion at 31 March 2015 while in year recoveries increased by £152 million to £967 million over the same time period.
HMRC has reduced fraud and error from 8.1% in 2010-11 to its latest estimate for 2013-14, 4.4%, the lowest level since tax credits were introduced in 2003-04. This decline suggests that HMRC’s initiatives to tackle specific fraud and error risks have had an impact. For example, it has worked with credit reference agencies to increase the number of checks and used new data to address the undeclared partner risk. The reduction is encouraging, and HMRC will conduct further analysis to understand fully the reasons for all of the reductions.
In 2014-15, HMRC employed a private sector company, Synnex-Concentrix UK Ltd, to provide additional capacity to tackle fraud and error on a payment-by-results basis. So far, the benefits of the contract have been fewer than anticipated. HMRC estimates that the project delivered savings of £0.5 million in 2014-15, compared with its original forecast of £285 million. The original estimate of £1 billion savings over the three year contract is not achievable. HMRC currently estimates that the project will deliver savings of £423 million, although this relies on increasing staff numbers and improving performance.