In the general election, both the Labour and the Conservative parties said their spending plans were funded, at least in part, by a pledge to reduce tax avoidance and evasion by billions of pounds.
Is this feasible and what would it mean in practice?
There is plenty of money that people in theory owe, but do not pay. In June, HM Revenue and Customs published its estimate of the tax gap for 2022-23. This showed that HMRC thinks it should have received about £40bn more tax revenue for the year than it did.
The tax gap is the difference between the amount of tax that should be paid to HMRC based on the tax rules and the amount that is actually paid. This is wider than avoidance and evasion and includes errors, late payment, criminal attack and taxpayers not taking reasonable care. It represents HMRC’s best estimate of how much more it could in theory raise.
The tax gap has hovered at around 5% since 2017-18, meaning HMRC collects about 95% of what it is owed and doesn’t collect the remaining 5%. In 2022-23, HMRC thinks it collected 95.2% of the tax owed to it, compared to 94.8% a year earlier. But the actual value of the tax gap grew from £38bn in 2021-22 to £40bn, because the amount of tax owed to HMRC went up.
We at the NAO have been looking at whether there is in fact anything HMRC can do to close this theoretical tax gap and raise billions more. We think the answer is it can if it does three things:
Target its compliance function for best effect
HMRC recently published its 2023-24 annual accounts. In our accompanying auditors report, we said that HMRC believes it is getting more out of its tax investigation "compliance officers" than it had targeted and that in total, they’d helped to bring in an extra £42bn of tax revenue in the year. But we also pointed out that the target for HMRC compliance teams was set at a level to maintain the tax gap at or around 5% – not to reduce it.
"There is little doubt that HMRC’s compliance work offers good value for money in terms of its return on investment"
If government wants to close the tax gap, it may need to equip HMRC to do so. There is little doubt that HMRC’s compliance work offers good value for money in terms of its return on investment. HMRC told the Treasury Select Committee in November 2022 that its marginal rate of return from investments in closing the tax gap at that time was around £9 for every £1 invested – or as we reported, over £1 million per tax inspector and support staff it employs. Building on our work, the Committee of Public Accounts recommended in May 2023 that there was a strong value for money case for increasing resources for HMRC's compliance work.
But to justify that investment, HMRC may need to get better at demonstrating its performance. For several years we’ve been arguing that calculation differences between the tax gap and the compliance activity makes it difficult for HMRC to understand how it is performing. If it improved this, it could get crucial information on how it could best deploy its resources to drive the tax gap down. This will be important to show that it can absorb additional resources and use them effectively, maintaining its high levels of rates of return per person.
Making it easier for customers to comply
HMRC also needs to make it easy for customers to comply and to get help so they pay the right amount at the right time, which in turn should bring in more money.
For example, HMRC estimates that its work to "make tax digital" and in doing so, improve customer service and reduce tax lost to avoidable errors, brought between £185m and £195m in additional VAT in 2019-20. However, its plans to improve digital services for other taxes have faced multiple delays.
We have also raised concerns about other aspects of HMRC’s customer service, which may affect how likely customers are to comply. Our 2024 HMRC customer service report found that HMRC has been "unable to cope with telephone demand and consequently fallen short in processing correspondence and dealing with telephone calls”. In our 2023-24 HMRC auditors report, we noted that around a third of calls to HMRC advisors weren’t answered in 2023-24, falling way short of HMRC’s target to answer 85% of calls and presumably leaving some taxpayers unsure on what they need to do to comply.
Making the rules easier to comply with
The final strand of increasing the tax take is to make the tax rules more focused, simpler and easy to comply with. A good example is tax reliefs. In January 2024, our report Tax measures to encourage economic growth, spoke about the way government evaluates the tax reliefs it puts in place. We concluded that reliefs failing to meet their objectives, or subject to error or fraud, were costing the Exchequer billions of pounds. Completing evaluations, and acting on them, could be an efficient way for HMRC to quickly increase the tax-take.
Conclusion: There is money to be had but this will take time and focus
Since the election, the government has further signalled its intention to invest in HMRC’s compliance work, improve taxpayers experience of interacting with HMRC, and to “simplify tax, close loopholes and reduce non-compliance”. Of course, HMRC will face challenges in achieving these goals: new staff typically need up to four years to become fully effective; digitalisation and customer service improvements are not guaranteed and will require sustained management; and it will need to conduct and act on evaluation to iterate and improve how the tax system operates. But with sustained management and focus, and through deploying resources in the right way, there is potential for government to bring in billions of pounds.
Joshua Reddaway is director of fraud and propriety at the NAO