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U.K. Watchdog Sets Out Post-Pandemic Challenges Facing HMRC

Posted on Nov. 8, 2021

Normal tax compliance levels should be restored “now that the initial impact of the pandemic has eased,” Gareth Davies, head of the U.K. National Audit Office (NAO), said as HM Revenue & Customs published its accounts.

Total U.K. tax revenue fell by 4.4 percent in the year that ended March 31, 2021, because of the COVID-19 pandemic, the NAO said in a November 4 release, adding that HMRC also needs to recover fraudulent claims made under COVID-19 support schemes.

HMRC reported total tax revenues of £608.8 billion in 2020-2021, down by £27.9 billion compared with 2019-2020 (£636.7 billion), the NAO said. The £608.8 billion figure includes £159.8 billion of tax liabilities that had not been paid by March 31.

HMRC estimated the yield from compliance activities in 2020-2021 at £30.4 billion, down 18 percent compared with 2019-2020, the NAO noted. HMRC “told the NAO it recognized the challenges that businesses and individuals were facing, and therefore took a sympathetic approach to those struggling to pay their tax,” the release says.

Compliance activity is “gradually returning to a more normal level” as the United Kingdom emerges from the pandemic, HMRC said in its report. “As businesses begin to recover from the pandemic, we will increase the number of our people working on tax compliance. . . . We will keep the situation under review to ensure we aren’t doing anything which could unnecessarily jeopardize the nation’s economic recovery as we continue to adapt to the impact of the pandemic.”

Coronavirus Support Schemes

The tax authority “demonstrated considerable agility” in implementing substantial elements of the government’s response to the pandemic, the NAO noted. The coronavirus job retention scheme “enabled employers to keep employees in 11.5 million jobs on a period of temporary leave or furlough or reduced working” at a cost of £61 billion in 2020-2021, it said. The first three phases of the self-employment income support scheme “have seen 7.2 million claims totalling £20 billion in support for the self-employed.”

Davies qualified his opinion on the regularity of the accounts because of “material levels of error and fraud” in the COVID-19 support schemes, in personal tax credits, and in corporation tax reliefs for research and development.

HMRC’s current estimate of error and fraud in the COVID-19 support scheme payments is £5.8 billion, of which £5.3 billion relates" to the coronavirus job retention scheme, the NAO said. HMRC estimated that error and fraud in personal tax credits claims resulted in overpayments of £880 million and underpayments of £150 million, and that the level of error and fraud present in corporation tax R&D reliefs is £336 million, or 3.6 percent of related expenditure.

The R&D relief schemes "are complex, opening up opportunities for abuse. . . .  HMRC has taken steps to improve both taxpayer compliance and its approach to measuring error and fraud,” the NAO added.

Challenges

The NAO’s audit report, published on page 302 of HMRC’s annual report and accounts, also noted that COVID-19 contributed to “a deterioration in key aspects of HMRC’s customer service performance,” but it added that “customer satisfaction with HMRC’s digital services improved.”

HMRC needs to ensure that the United Kingdom is ready for the end of staged customs controls in January 2022, and its role in implementing the Northern Ireland protocol is “challenging, given the ongoing uncertainty” around the protocol’s operation, the NAO observed.

The NAO said that while HMRC has identified the likely benefits of its 10-year tax administration strategy, it has not yet set specific targets. “Delivering on its transformation ambitions against the backdrop of the other strategic objectives HMRC is working towards will be challenging,” it said.

HMRC has sought to mitigate potential risks to its regional center program by accommodating staff from other public bodies in its regional centers, the NAO noted. “In 2020-2021 HMRC opened regional centers in Edinburgh, Cardiff, Leeds, and Stratford, alongside those already open in Croydon, Bristol, and Belfast. HMRC considers that the pandemic has accelerated existing trends around working patterns, and that these trends may have long-term impacts on how offices are used and potentially alter demand for office space,” it said.

The House of Commons Public Accounts Committee argued in January that the strategy, involving the closure of local HMRC offices, risked becoming “woefully out of date” in the wake of the pandemic.

On October 21 the committee opened an inquiry into HMRC’s performance in 2020-2021. It issued a call for evidence, to be submitted by November 24.

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