Tax officials have admitted that they failed to collect £9.6bn of VAT returns in 2010-11 – the equivalent of nearly a third of the overall tax gap, the government’s independent auditors have found.
The National Audit Office report also found that HM Revenue & Customs (HMRC) officials do not comprehensively check each registered company’s VAT documents and have yet to produce a comprehensive plan for the emerging threat of VAT losses because of online trading.
According to the report, HMRC estimated that the tax gap for VAT in 2010-11 – the latest year for which the figures are available – was £9.6bn, while the total estimated gap (the difference between the amount of tax owed and the amount collected) is £32bn.
The findings, from an audit of HMRC’s annual accounts, have concerned MPs, who say HMRC officials are under pressure from the government to increase income but are failing to collect what is due. In last week’s spending review, HMRC had its resource budget cut by 5% for the financial year 2015-16.
Margaret Hodge, the chair of the public accounts committee, said the reported VAT tax gap was startling. “That is a huge amount of money – 10% of the VAT that should be collected and a third of the overall tax gap.
“HMRC is responsible for collecting all the tax due. It must do more to crack down on tax avoidance. And it needs to put taxpayers – the customer – at the heart of its services,” she said.
Officials made good use of intelligence to respond to the risks of VAT fraud – checks prevented £579m of erroneous and fraudulent repayments in 2012-13, the report said.
But they did not carry out comprehensive real-time checks across all VAT returns, which leaves the system vulnerable to fraud and mistakes, the auditors concluded.
Auditors also found that HMRC has yet to produce a comprehensive plan to counter VAT losses due to online trading.
“It has helped to ensure legislative change to close existing VAT loopholes and launched a series of initiatives, but overall HMRC has shown less urgency in developing its operational response to this threat.”
Amyas Morse, head of the National Audit Office, said there are inherent tensions in reconciling HMRC’s three priorities of reinvesting money from efficiency savings, reducing operating costs and improving customer relations.
“We have found good progress by HMRC in reducing costs and meeting its revenue targets. In respect of raising customer service levels to an acceptable standard, it has a much longer way to go.
“HMRC faces a considerable management challenge if it is to meet its commitments to increase revenue by stepping up its anti-avoidance and anti-fraud activities. It needs to strengthen its own efforts in tackling avoidance. But it also requires the help of legislators and changes in international tax rules, if it is to respond effectively to the ‘borderless’ internet world,” he said.
In 2012-13, HMRC received total revenue of £475.6bn, which was £1.4bn (0.3%) more than in 2011-12, the report found, although figures for the tax gap in those years are not yet available.
Corporation tax revenue decreased by £0.9bn while revenues for income tax and national insurance fell £0.8bn.
The value of debt either written off or “remitted” – not pursued by HMRC for reasons such as hardship or value for money – was £5.3bn.
The report also details progress by HMRC in stabilising and operating the PAYE (pay as your earn) service and its progress towards the implementation of its new real time information service.
An HMRC spokesperson said VAT returns are carefully examined and the organisation has doubled the amount of extra VAT collected in the last six years.
“We are using web tools to identify online traders and we launched an e-market campaign in March 2012 to give them the opportunity to put their tax affairs in order. We are now following up on those who failed to do so.
“We have also significantly reduced the VAT lost to missing trader fraud to below £1bn in 2010-11 from its peak of £2bn to £3bn in 2005-06,” he added.
Lin Homer, the head of tax, said HMRC brought in an extra £1.3bn last year. “We have cleared the backlog of pay-as-you-earn cases and delivered the biggest ever reform to the PAYE system. These vital projects lay the foundations for a tax system fit for the 21st century,” she said.