Background to the report
HM Revenue & Customs (HMRC) is responsible for administering the UK’s tax system. Its objectives include to collect the right tax, to make it easy to get tax right and hard to bend or break the rules, and to maintain taxpayers’ consent through fair treatment and protect society from harm.Jump to downloads
The COVID-19 pandemic changed the priorities and make-up of HMRC’s work. At short notice, it had to implement new COVID-19 support schemes and provide additional support to taxpayers, including more time to pay tax. This involved redeploying staff from across the department, reducing its overall capacity for tax compliance work. Lockdowns and social distancing affected its ability to conduct investigations in person. A wide range of factors influence levels of tax compliance, some of which were affected by the pandemic.
HMRC’s estimates indicate that without its compliance work at least 10% of taxes owed would not be paid. It records how much its compliance work yields and estimates this normally reduces overall levels of non-compliance to around 5% of taxes owed. HMRC uses two main approaches to improve tax compliance:
- Upstream compliance work to encourage voluntary compliance and prevent non-compliance before it happens.
- Downstream compliance work to identify and tackle non-compliance after it has happened. It involves monitoring risks of non-compliance, investigation and follow-up action.
Before the pandemic HMRC’s strategy increasingly focused on upstream compliance, which it considers more cost-effective and better for customers because it aims to help taxpayers get their tax right first time. HMRC uses downstream activity to respond to non-compliance, including more severe forms such as tax evasion and other criminal activity, and to maintain a strong deterrent effect to encourage other taxpayers to take compliance seriously. The pandemic reduced HMRC’s ability to conduct downstream investigations. It now faces a challenge to restore compliance performance following the pandemic.
Scope of the report
This report examines the extent to which HMRC is well-placed to manage its compliance work following the pandemic, including new risks and challenges to tax compliance. It covers whether HMRC understood the immediate impacts of the pandemic and organised an effective response. Secondly, whether it has a good understanding of its compliance performance and what this shows about its performance since the start of the pandemic. And thirdly; whether it has a clear vision and plan to manage tax compliance risks following the pandemic.
The COVID-19 pandemic had a significant impact on HMRC’s compliance work. In challenging circumstances, HMRC focused its resources on key priorities and redeployed some staff to new support schemes, which left reduced capacity for downstream tax compliance activity. It needed to make reductions to its casework, beyond those it was already making as part of a strategy to focus on upstream compliance.
Compliance yield reduced significantly during the pandemic and there is a risk that more non-compliant taxpayers ultimately fail to pay the right tax or escape investigation and prosecution. It is concerning that HMRC’s planning indicates that the tax gap may grow following the pandemic. It will take some time to understand fully whether the pandemic has affected tax compliance. The next two years are critical and swift action is likely to be needed to prioritise efforts and stem potential losses.
Understanding performance is essential for government and HMRC to deploy resources effectively. There is little doubt that HMRC’s compliance work offers good value for money, but its compliance yield measure needs to be sufficiently robust and transparent to instil confidence in the absolute level of returns it can generate. HMRC is taking steps to improve how it quality-assures its measure.
Particular areas for improvement include understanding how assumptions affect the range of uncertainty around compliance yield, adjusting for errors across the estimates, and understanding how much it is overcharging or undercharging taxpayers as a result of tax compliance enquiries. With a better-quality measure, HMRC can make more effective trade-offs and achieve better value for money.
- Report - Managing tax compliance following the pandemic (.pdf — 475 KB)
- Summary - Managing tax compliance following the pandemic (.pdf — 182 KB)
- ePub - Managing tax compliance following the pandemic (.epub — 1 MB)
- ISBN: 978-1-78604-464-8 [Buy a hard copy of this report]
- HC: 957 2022-23
View press release (16 Dec 2022)