HM Revenue and Customs (HMRC) is unable to explain the relationship between its work to reduce tax fraud and the effect it has on the “tax gap” between what is owed and what is collected, MPs have claimed.
A new report from the Public Accounts Committee says the tax collection and enforcement agency cannot demonstrate why the tax gap has remained broadly the same in recent years despite “sharp rises” in compliance rates.
The PAC said HMRC’s own figures were “too confusing” for the public to understand and that a significant increase in tax fraud prosecutions since 2010 was undermined by the wrong category of offenders being targeted.
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It said the current tax gap was estimated at £34bn, of which tax fraud was responsible for some £16bn, and that the impact that HMRC claimed for its compliance work far exceeded any reduction in the tax gap.
The report said the tax gap had remained constant at around 3% over the past five years.
MPs added that HMRC was failing to demonstrate to the public that it was tackling tax fraud committed by the wealthy, and did not appear to know what the “correct” number of prosecutions to target for such cases.
According to the report, HMRC currently investigates 35 “wealthy individuals” on suspicion of tax evasion every year, and is seeking to increase the number to 100 by 2021.
MPs noted that while HMRC had increased prosecutions for tax evasion from 165 in 2010-11 to 1,165 by 2014-15, it had sought to meet the target by going for “lower complexity cases” and did not know what it had achieved by the measure.
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PAC chair Meg Hillier said it was vital for HMRC to “bring focus” to its efforts to tackle tax and warned incoming HMRC chief executive Jon Thompson and executive chair Edward Troup, who took over from Lin Homer at the beginning of this month, that “renewed vigour” was required.
“The release of the ‘Panama Papers’ underlines that there are wealthy people and companies who seek to keep their affairs secret,” she said.
“Where this secrecy involves criminal activity, prosecution must follow – and the threat of prosecution must serve as an effective deterrent to others.
“The department must be far clearer with parliament and the public about its strategy for combating tax fraud and the impact of that strategy on the tax gap. To achieve this it needs a better grasp of its own work.
“The evidence we heard from HMRC did not convince us it properly understands the effectiveness of the different enforcement and deterrent tactics it employs. This is a fundamental weakness in its strategy.
“From this month there are significant changes in senior management at HMRC. The Public Accounts Committee will expect the incoming regime to respond to the challenges and shortcomings we have highlighted with renewed vigour.”
As well as calling on HMRC to clearly set out the relationship between its compliance yields and changes in the tax gap in its annual reports, the committee also called on it to publish its strategy for tacking fraud by November this year.
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MPs said HMRC should identify how much resource was devoted to tackling different risks and the corresponding yield.
Additionally, they said HMRC should carry out detailed work on the “optimum number and mix” of people to prosecute as part of a review of its prosecutions strategy.
Responding to PAC's report, a spokesperson for HMRC said the department was "one of the most effective tax collectors in the world, getting 93 pence of every pound due".
They added: "Few other countries have a smaller tax gap. We remain relentless and strategic in tracking down the few that try to get out of paying their fair share.
"Tackling tax evasion is an absolute priority for HMRC with 26,000 staff focusing on evasion, avoidance and fraud. We have increased prosecutions of wealthy tax cheats and our crackdown on offshore tax cheats has already brought in more than £2 billion since 2010.
“HMRC is currently investigating 1,100 cases of offshore evasion, including 90 criminal cases, of which 29 cases are already in the court system, ensuring that no-one is beyond our reach."