Tax fraud amounts to around £16bn annually and accounts for nearly half of the estimated £34bn tax gap, according to a report by the National Audit Office (NAO), which says HMRC needs to make better use of its data and develop its analysis in order to reduce the amount lost through tax evasion, the hidden economy and criminal attacks, despite an armoury of anti-evasion tools including HMRC's data analytics system Connect and a team of dedicated tax inspectors
Meg Hillier, chair of the Public Accounts Committee, described the fraud losses as ‘staggering’ and said: ‘HMRC clearly needs to think harder about how it tackles tax evasion, the hidden economy and criminal attacks. The Committee will be examining HMRC’s work in this area throughout this Parliament.
‘Time and time again we hear that government departments don’t have the data or information that they need to plan or evaluate their activities properly, despite them being responsible for setting up these projects or programmes in the first place. HMRC is no different in this respect. HMRC needs to use the powers and sanctions it has to make a public example of those who break the rules.’
In 2014/15 HMRC reported £26.6bn additional revenue from all its compliance work, including work to tackle tax fraud but also work to tackle other parts of the tax gap like error and tax avoidance. However, the NAO points out that 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 audit watchdog says HMRC has only partial data on how much of the total yield is derived from its work to counter tax fraud. For example it has more complete information on its work to tackle organised crime than tax evasion. The NAO estimates that between 30% and 40% of total compliance yield is generated by HMRC’s activities to tackle tax fraud, but says this is an estimate based on partial evidence.
HMRC assesses that two groups, smaller businesses and criminals, are responsible for 17 of the 21 biggest tax fraud risks. Of these, eight relate to organised crime and nine involve medium-sized, small or micro-businesses.
Estimates show that these businesses are responsible for tax losses of £17bn, but does not consider its internal estimate of how much of this is the result of tax fraud robust enough for publication.
The report found that HMRC had met its target to increase prosecutions by 1,000 a year by 2014-15, and has said it recognises that it needs to better prioritise the cases it selects for criminal investigation.
However, HMRC has a raft of tools to target evasion including the IT Connect system to analyse behaviour and identify those who evade tax, while the introduction of compulsory digital tax accounts from 2016 will give the tax authority much more oversight of actual taxpayer activity.
The NAO says that the target had the effect of prompting the department to change its processes and make its investigations more efficient. However, it notes that this led it to focus on less complex cases, in particular a large number of prosecutions for people who had evaded income tax, VAT and tobacco duty. HMRC has recognised that it needs to prosecute cases that more closely correspond with its analysis of tax fraud risks, the NAO says.
It also needs to do to understand what benefits it has achieved by increasing the number of prosecutions. In 2014-15, HMRC claimed £295m in yield from the deterrent effect of its additional 1,000 prosecutions. However, in 2015 HMRC evaluated the deterrent effect of these prosecutions and found that it could not verify their monetary value. HMRC research found increased awareness of prosecutions but could not find evidence they led to changes in behaviour or increases in tax revenues.
Amyas Morse, NAO head, said: ‘HMRC has met its targets to raise more tax revenue in the short-term. It now needs to consider whether its overall strategy is designed to achieve the best long-term outcomes.
‘We will be evaluating HMRC’s performance in tackling different types of tax fraud in more depth. As we do so, we will be looking for further improvements in the way HMRC uses data and analysis to understand the effect of its actions in both the long and short-term.’
The report, Tackling tax fraud: how HMRC responds to tax evasion, the hidden economy and criminal attacks, is here
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