Tax dodgers face never being pursued for their debts because the tax authority does not have enough staff to recover a £42bn payments backlog, the public spending watchdog has warned.
A report from the National Audit Office said HM Revenue & Customs was unlikely to be able to manage the massive tax debt pile that has built up over the pandemic, following budget cuts to its collection department that have resulted in an increasing number of debts being written off altogether.
So-called “phoenixing” companies – which fold and set up under a new name to dodge bills – have become a particular risk to the public purse, it found. Experts said firms that took taxpayer support during lockdown could get away with never paying it back.
Gareth Davies, head of the watchdog, said it would be years before HMRC was able to recover money owed to British taxpayers. This was on top of the estimated £6bn of public money already lost to fraud via the furlough, self-employed income support and “Eat Out to Help Out” schemes, rolled out during the crisis.
Mr Davies added: “HMRC faces several years of managing a far greater level of debt than it has been used to, because of the pandemic. Some debtors have been able to repay their tax bills quickly, but an unknown number of taxpayers have been badly affected and will struggle to do so. HMRC needs to significantly increase its capacity if it is to meet the changed scale and nature of the challenge,” he added.
Tax debts increased by £26bn between January 2020 and September of this year, with more than two million people falling behind on payments, putting yet further strain on the public finances. The overall debt pile now stands at £42bn, after HMRC paused collections and focused on supporting struggling businesses and freelancers.
The average amount owed has risen to £6,800, up from £4,300 – a 60pc increase. Older debts, often more difficult to collect, stand at £4.4bn for the 2020-21 tax year, almost double the £2.5bn recorded the year before.
However, HMRC was short 300 full-time debt collectors, having cut the number of staff in its recovery office by a fifth between 2014 and 2020, the NAO found. The report said the tax authority was already struggling to recover debts before coronavirus, collecting just two thirds of all the new debts created each year on average.
HMRC had increasingly been giving up on recovering the hardest-to-collect debts, writing off or remitting more than £9bn between 2018 and 2020, around £1bn more than the two years prior, the NAO added.
Nimesh Shah of accountants Blick Rothenberg said HMRC’s collection process was “broken” and that taxpayer’s faced being “shortchanged”.
“The Government has provided significant funding to HMRC to address these issues, but would seem fruitless if HMRC cannot physically chase down the debts. The concern is that fraudsters who have knowingly claimed support will get away with it if HMRC does not make an effort to recover it,” he said.
HMRC said it had plans to recruit 1,000 new full-time debt collectors and predicted its debt pile would shrink to £35bn by March. A spokesman added: “We have taken, and will continue to take, an understanding and supportive approach to dealing with those who have tax debts or are concerned about their ability to pay their tax.”