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The economic downturn has been largely responsible for a £21.7 billion reduction in taxes and duties collected by HM Revenue and Customs (HMRC) in 2008-9, according to a report released today by the National Audit Office.

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Income Tax and National Insurance contributions fell by £5.7 billion; revenue from VAT fell by £6.4 billion (partly reflecting the cut in the rate of VAT to 15 per cent), Stamp Duty fell by £6.1 billion (including a £5.1 billion fall owing to fewer residential and commercial property transactions) and Corporation Tax fell by £5 billion. There were increases in revenue from Capital Gains Tax (£2.7 billion) and Petroleum Revenue Tax (£0.9 billion).

The economic downturn has also been a major factor in the increase in the amount of debt owed to HMRC which rose by £2.7 billion to £27.7 billion in 2008-09. HMRC has increased the provision for doubtful debts to £11.2 billion on 31 March 2009 – equivalent to 40 per cent of total debt. The provision of doubtful debts has risen from £7.9 billion on 31 March 2008.  

The difficult economic conditions have also played a part in the increase in companies seeking and receiving repayments for Corporation Tax that they have overpaid. Repayments in 2008-09 totalled £9.7 billion. (In 2006-07 repayments stood at £5.4 billion and in 2007-8 £8.1 billion). This rise is expected to continue as companies continue to face difficult trading conditions and it is vital that HMRC maintains its controls in place around such large sums of money flowing out of the Department.   

Tax credits were overpaid in 2007-08 to the value of £1 billion. This total is significantly lower than the total overpaid in each of the first three years of the scheme. However, as expected the underpayment of tax credits has risen to £0.8 billion (from £0.5 billion in 2006-07) affecting some 1.3 million families (500,000 more than in 2006-07) as a result of the component in the Pre Budget Report 2005 which aimed to tackle the problem of families overestimating falls in their income.  HMRC has estimated that net spending on tax credits will rise by £500 million annually because of the economic downturn. At the end of March 2009, HMRC had £4.4 billion of overpayments to be recovered (£4.3 billion at the end of March 2008).

The Department’s latest estimate for 2007-08 is that error and fraud in tax credits resulted in between £1.58 billion and £1.84 billion (between £1.31 billion and £1.54 billion in 2006-07) being paid to claimants incorrectly. There is currently no evidence that HMRC has reduced the level of error and fraud in tax credit awards for 2008-09. The Comptroller and Auditor General has therefore qualified his opinion on the regularity of this expenditure.  

"These difficult economic times underline the fundamental importance of an efficient tax system. During the economic downturn, not only is there less tax to collect but the process of collecting that tax is more challenging. It is essential that HM Revenue and Customs actively manages tax debt and takes positive steps to clear processing work on hand so that taxpayers have certainty about their liabilities."

Amyas Morse, head of the National Audit Office


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