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covid fraud

HMRC publishes its latest Tax Gap – TaxWatch analysis

27th June 2022 by Alex Dunnagan

HMRC’s Tax Gap has increased for the second year in a row on a like-for-like basis.

The latest HMRC estimates of non-compliance are £32bn for 2020-2021, or 5.1% of total tax revenues. This is the same gap as a percentage as seen in last year’s publication covering 2019-2020.

However, this year’s figure includes a £0.7bn revision downwards to compensate for lower compliance activity during Covid. This means that on a like-for-like basis HMRC’s Tax Gap increased.

Of the £32bn total tax gap, at least £14.4bn, or 45%, of it is attributable to fraud. Fraud as a percentage of the total tax gap hasn’t been this high since 2016-2017. This is based on the limited data available, and the actual figure for tax lost to fraud will be much higher. [1]TaxWatch’s methodology explaining how we arrived at this figure is explained in full detail in our assessment of the 2019-2020 figures, see our report  The Tax Fraud Gap – 2021 edition, … Continue reading

As TaxWatch has previously highlighted, HMRC’s tax gap publication significantly underestimates the true scale of non-compliance with the tax system. Profit shifting by multinationals appears not to be counted at all.

Estimates of error and fraud in the HMRC-administered Covid-19 support schemes are also not included in the figures and reported on separately. These run into the billions of pounds.

Our full analysis is available in a briefing here. HMRC’s publication is available here.

References[+]

References
↑1 TaxWatch’s methodology explaining how we arrived at this figure is explained in full detail in our assessment of the 2019-2020 figures, see our report  The Tax Fraud Gap – 2021 edition, here http://13.40.187.124/tax_fraud_gap_2021/

HMRC’s record on covid support and tax fraud under the microscope

14th February 2022 by George Turner
  • HMRC’s record on tax fraud has been questioned by two select committees and in several parliamentary debates in recent weeks

  • The last select committee inquiry on Tax Fraud was in 2015

Recent weeks have seen HMRC being put under intense scrutiny on their record on tackling tax fraud.

Part of the trigger for this was the revelation that on current estimates, the department would only recover 25% of the £5.8bn paid out in fraud and error via the Covid relief schemes, furlough, Eat Out To Help Out and the Self-Employment Income Support Scheme.

This figure is arrived at if you take the amount HMRC has already managed to recover from overpayments, added to the £800m-£1bn that HMRC says they hope to get back with their Taxpayer Protection Task Force.

HMRC’s estimate of how much the new Taxpayer Protection Taskforce would seek to recover has been around for a while,[1]Richard Partington, HMRC boosts efforts to recoup £1bn in suspect Covid payouts, The Guardian, 16 November 2021, … Continue reading however, HMRC had previously suggested that they could recover substantially more. Notably, when Jim Harra gave an interview to the Financial Times late last year, he said that they would struggle to recoup more than 50% of the funds lost (£2.9bn)[2]Emma Agyemang, HMRC expects to recover less than half £5.8bn lost in Covid fraud and errors, Financial Times, 21 November 2021, https://www.ft.com/content/3991505c-8311-401e-aece-55342f2b07df.

In January, HMRC put out a myth-buster which appeared to disclose for the first time that £1bn is the total of the department’s current ambition in Covid support scheme fraud and error recovery given the resources they currently have to deal with the problem.[3]HMRC responses to inaccurate claims, HMRC, 12 January 2022, https://www.gov.uk/government/news/hmrc-responses-to-inaccurate-claims

TaxWatch picked up on this, noting the apparent revision down from Jim Harra’s 50% remarks to the FT, and tipped off The Times, which ran the story the following week.[4]David Byers, Treasury writes off £4.3bn in Covid payments lost to fraud, The Times, 17 January 2022, … Continue reading

On the day the article was published, Jim Harra was asked about the story at his appearance before the Public Accounts Committee,[5]Public Accounts Committee, Oral Evidence: HMRC’s management of tax debt, HC 953, House of Commons, 17 January 2022, https://committees.parliament.uk/oralevidence/3288/default/ and on Friday 11th February, the committee published a highly critical report, stating that HMRC’s current plans “risks rewarding the unscrupulous and sending a message that HMRC is soft on fraud.”[6]https://committees.parliament.uk/committee/127/public-accounts-committee/news/160942/hmrc-ignorance-and-inaction-rewarding-the-unscrupulous-and-looks-soft-on-fraud/

After HMRC’s grilling before the PAC, next, it was the turn of Treasury Ministers when Labour’s Pat McFadden put down an Urgent Question forcing the Government to make a statement on the issue.

In that statement, the Government argued that the speed with which the Covid support systems were designed and implemented meant that a greater amount of fraud was inevitable. If the government put in place more checks that would have led to delays in getting cash into the hands of businesses that were in crisis, leading to far worse outcomes.[7]Coronavirus Grant Schemes: Fraud, Hansard vol. 707, Tuesday 18 January 2022

That is undoubtedly true, and it is worth noting that the furlough scheme has an estimated fraud and error rate of 8.7%, not wildly above the normal fraud and error rate in the tax system of around 5%.[8]Public Accounts Committee, HMRC Performance in 2020-21, House of Commons, https://publications.parliament.uk/pa/cm5802/cmselect/cmpubacc/641/report.html It is trite but true to say that the vast majority of claims were validly made by people entitled to them.

However, now that the money has gone, with billions currently sitting in the bank accounts of crooks, why are we not spending more to go after it?

This was a point made by Lord Agnew, the Government Minister responsible for counter fraud, in dramatic style later in the week when he resigned from the front bench when responding to a question from Labour on the £4.3bn tax fraud write off, stating that “a combination of arrogance, indolence and ignorance” was freezing the government machine.[9]Conservative minister resigns in anger over Covid fraud, BBC News, 24 January 2022, https://www.bbc.co.uk/news/uk-politics-60117513

Treasury ministers are now keen to stress that the £4.3bn which HMRC has said will, on current estimates, be unlikely to be recovered has not been written off. This point was made by the Chancellor himself in a tweet thread,[10]Rishi Sunak, Tweet Thread on Covid support measures fraud, Twitter, 26 January 2022, https://twitter.com/RishiSunak/status/1486332699337973763?s=20&t=AjAVwWPkHymzw2I7kcfPMw and again by Treasury ministers during an opposition day debate on fraud in the House of Commons.[11]Tackling Fraud and Preventing Government Waste, Hansard Vol. 708, Tuesday 1 February 2022, … Continue reading. The response by the Government that it would not be writing off the fraud prompted Lord Agnew to say that his resignation had at least “achieved something”.[12]Alice Thomson, Lord Agnew: ‘Billions were written off and no one seemed to care but me’, The Times, 28 January 2022, … Continue reading

However, the determination from Ministers to say that they will continue to chase down the missing £4.3bn has not yet been matched with any announcement of more money.

As TaxWatch has pointed out, the Treasury is investing far more money in going after the rise in benefits fraud coming out of the pandemic, giving the DWP a cash injection of £613m to tackle the problem.[13]Funding to fight covid related tax and benefits fraud, TaxWatch, 29 December 2021, http://13.40.187.124/covid_fraud_spending_dwp_vs_hmrc/

HMRC on the other hand appears to be funding their £100m taxpayer protection task force from their own resources. The staff are all being recruited internally, as was recently confirmed by HMRC.[14]Treasury Committee, Oral evidence: The work of HMRC, HC 1095 Q25, House of Commons, 2 February 2022, https://committees.parliament.uk/oralevidence/3394/pdf/

The growing disquiet about HMRC’s plans to recover losses to fraud and error in Covid relief schemes has also led to MPs raising questions about HMRC’s broader approach to tax fraud.

At a recent Treasury Select Committee hearing, Kevin Hollinrake MP began questioning HMRC officials on why levels of both criminal investigations and civil fraud investigations under Code of Practice 9 had been declining since 2016.

In response, HMRC said that they had taken a policy decision to do fewer fraud prosecutions and only concentrate on more serious and complex cases.

Hollinrake seemed unimpressed, saying that it sent the message that some crime doesn’t matter and comparing HMRC’s policy to telling a burglar, “ok so you stole the stuff out the house, give us it back, and a bit extra and you can carry on.”

Mr Hollinrake also questioned why there had been no successful prosecutions for promoters of disguised remuneration schemes, and called on HMRC to bring forward some cases in this area.

http://13.40.187.124/wp-content/uploads/2022/02/TRESCOMM20220202.mp4

This is not the first time MPs have raised concerns about HMRC’s approach to tax fraud in recent years. In 2015, the Public Accounts Committee’s annual report on HMRC’s performance described the number of criminal prosecutions for offshore evasion as “woefully inadequate”[15]HM Revenue & Customs Performance 2014-15, Public Accounts Committee, 28 October 2015, https://publications.parliament.uk/pa/cm201516/cmselect/cmpubacc/393/393.pdf.

The following year, the Committee completed a short inquiry into tax fraud which found that HMRC had “no strategy for tackling tax fraud” and that there was a “perception that HMRC does not tackle tax fraud by the wealthy”, which needed to be addressed.[16]Public Accounts Committee, Tackling Tax Fraud, House of Commons, 23 March 2016, https://publications.parliament.uk/pa/cm201516/cmselect/cmpubacc/674/674.pdf

At the time, HMRC told the committee that it was seeking funding to enable it to prosecute more cases of serious and complex tax fraud. This became a target to increase the number of prosecutions of “serious and complex” tax fraud to 100 a year by 2020.

As our recent State of Tax Administration report has found, HMRC appears to have quietly dropped that target, with progress against the target no longer appearing in HMRC’s Annual Report.[17]State of Tax Administration 2022, TaxWatch, 11 February 2022, http://13.40.187.124/state_of_tax_administration/

Given the growing concern about tax fraud, and indeed all types of fraud, falling levels of civil fraud investigations and criminal prosecutions, and a clear demand from both the public and Parliament for Government to do more in this area, perhaps this is the right time for Parliament to revisit the issue with another inquiry into HMRC’s approach to tax fraud.

References[+]

References
↑1 Richard Partington, HMRC boosts efforts to recoup £1bn in suspect Covid payouts, The Guardian, 16 November 2021, https://www.theguardian.com/world/2021/nov/16/hmrc-boosts-efforts-to-recoup-1bn-in-potentially-fraudulent-covid-payouts
↑2 Emma Agyemang, HMRC expects to recover less than half £5.8bn lost in Covid fraud and errors, Financial Times, 21 November 2021, https://www.ft.com/content/3991505c-8311-401e-aece-55342f2b07df
↑3 HMRC responses to inaccurate claims, HMRC, 12 January 2022, https://www.gov.uk/government/news/hmrc-responses-to-inaccurate-claims
↑4 David Byers, Treasury writes off £4.3bn in Covid payments lost to fraud, The Times, 17 January 2022, https://www.thetimes.co.uk/article/treasury-writes-off-4-3bn-in-covid-payments-lost-to-fraud-dfkxt5fr7
↑5 Public Accounts Committee, Oral Evidence: HMRC’s management of tax debt, HC 953, House of Commons, 17 January 2022, https://committees.parliament.uk/oralevidence/3288/default/
↑6 https://committees.parliament.uk/committee/127/public-accounts-committee/news/160942/hmrc-ignorance-and-inaction-rewarding-the-unscrupulous-and-looks-soft-on-fraud/
↑7 Coronavirus Grant Schemes: Fraud, Hansard vol. 707, Tuesday 18 January 2022
↑8 Public Accounts Committee, HMRC Performance in 2020-21, House of Commons, https://publications.parliament.uk/pa/cm5802/cmselect/cmpubacc/641/report.html
↑9 Conservative minister resigns in anger over Covid fraud, BBC News, 24 January 2022, https://www.bbc.co.uk/news/uk-politics-60117513
↑10 Rishi Sunak, Tweet Thread on Covid support measures fraud, Twitter, 26 January 2022, https://twitter.com/RishiSunak/status/1486332699337973763?s=20&t=AjAVwWPkHymzw2I7kcfPMw
↑11 Tackling Fraud and Preventing Government Waste, Hansard Vol. 708, Tuesday 1 February 2022, https://hansard.parliament.uk/Commons/2022-02-01/debates/151F8D55-94D6-408A-88CC-970D350C6F9D/TacklingFraudAndPreventingGovernmentWaste#main-content
↑12 Alice Thomson, Lord Agnew: ‘Billions were written off and no one seemed to care but me’, The Times, 28 January 2022, https://www.thetimes.co.uk/article/lord-agnew-billions-were-written-off-and-no-one-seemed-to-care-but-me-cvnsqjbzp
↑13 Funding to fight covid related tax and benefits fraud, TaxWatch, 29 December 2021, http://13.40.187.124/covid_fraud_spending_dwp_vs_hmrc/
↑14 Treasury Committee, Oral evidence: The work of HMRC, HC 1095 Q25, House of Commons, 2 February 2022, https://committees.parliament.uk/oralevidence/3394/pdf/
↑15 HM Revenue & Customs Performance 2014-15, Public Accounts Committee, 28 October 2015, https://publications.parliament.uk/pa/cm201516/cmselect/cmpubacc/393/393.pdf
↑16 Public Accounts Committee, Tackling Tax Fraud, House of Commons, 23 March 2016, https://publications.parliament.uk/pa/cm201516/cmselect/cmpubacc/674/674.pdf
↑17 State of Tax Administration 2022, TaxWatch, 11 February 2022, http://13.40.187.124/state_of_tax_administration/

Budget 2021 – Four tax takeaways

2nd November 2021 by Alex Dunnagan

On Wednesday 27 October, the Chancellor Rishi Sunak unveiled his Autumn Budget 2021.

This budget was billed as one looking ahead to the “post-Covid” era, with a lot of focus on growth and the economic outlet. Numerous news outlets have covered the major stories coming out of the budget. At TaxWatch, what we have scrutinised is the perhaps lesser covered tax stories.

1 – Additional Compliance Work

An additional £292m across three years was announced for HMRC, with the goal of ‘bearing down on tax avoidance and evasion’.

The Taxpayer Protection Taskforce, announced in the Spring 2021 budget, is to see an additional £55m of funding next year. This is in addition to the previously announced £100m investment. It is not clear whether this £55m is part of the aforementioned £292m.

This taskforce will seek to recoup money wrongly claimed from pandemic support schemes, such as furlough.1 The spring announcement on the Taxpayer Protection Taskforce stated that it will be staffed by “HMRC operatives” suggesting that staff are to be moved from elsewhere within HMRC.

The March 2021 Budget revealed that the extra spending on compliance would actually lead to less in tax being collected year on year until 2023-24, with one reason given being “impacts on compliance yield reflecting reprioritisation (including to respond to COVID19).”2

Budget 2021 policy decisions (£ million)

HMRC is set to see a “£0.9 billion cash increase over the Parliament to £5.2 billion in 2024-25”. Spending Review 2020 revealed that £1bn would be going to HMRC “to reform and enhance the UK customs system after the end of the transition period, including investment in vital physical and IT infrastructure and additional support for UK traders”.3 So while the £0.9bn cash increase sounds impressive, it’s worth bearing in mind that the vast majority of this will not go towards tackling tax fraud, but rather to deal with the additional complexities surrounding the UK’s departure from the European Union.

2 – Clamping down on promoters of tax avoidance

The budget also revealed that the forthcoming Finance Bill 2021-22 will feature legislation for further measures to clamp down on promoters of tax avoidance.

Section 5.74 of the budget announced that the measures will:

  • allow HMRC to freeze a promoter’s assets so that the penalties they are liable for are paid
  • deter offshore promoters by introducing a new penalty on the UK entities that support them
  • provide for the closing down of companies and partnerships that promote tax avoidance schemes, and
  • support taxpayers to steer clear of avoidance schemes or exit avoidance quickly, by sharing more information on promoters and their schemes.

In September 2020 we submitted evidence to HMRC as part of their consultation “Tackling Disguised Remuneration Tax Avoidance”,4 calling for those who sell disguised remuneration tax avoidance schemes to be investigated for tax fraud.

These proposed measures stop short of HMRC applying the full criminal law to prosecute those who design, operate, and promote dishonest tax avoidance schemes. TaxWatch’s view remains that the best deterrence is to put those who promote fraudulent schemes before a jury.

3 – R&D reliefs need to be made ‘fit for purpose’

Plans to increase R&D investment to £22bn per year, as outlined in the March 2020 budget, have been pushed back from a targeted May 2024 to 2026-27, with the government acknowledging that current R&D reliefs are not fully “fit for purpose.”

It has long been known that the cost of the R&D expenditure credits is far greater than what was originally anticipated, with a February 2020 NAO report highlighting that the actual costs were more than double those forecast.5

Costs compared with forecast for the research and development (R&D) expenditure credit

Sunak stated in his speech that:

“Companies claimed UK tax relief on £48bn of R&D spending. Yet UK business investment was around half of that, at just £26bn. We’re subsidising billions of pounds of R&D that isn’t even happening here in the United Kingdom. That’s unfair on British taxpayers.”

While it’s correct that there are issues with R&D reliefs, the cause of the problem isn’t necessarily research conducted abroad, but whether or not the research is conducted at all.

The total number of claims for R&D tax credits for 2019-20 was 85,900, with £7.4bn in relief claimed on £47.5bn of expenditure. The ONS estimates that businesses only carried out £25.9 billion of privately-financed R&D in the UK in 2019.6 Overseas expenditure can qualify for tax credits, and HMRC previously produced an initial estimate of £4 billion to £7 billion for overseas expenditure in the year ending March 2018. It is highly unlikely that the amount of overseas expenditure in 2019-20 was £21.6bn, the difference between UK R&D and total R&D claimed. Rather, the data points to large scale abuse.

The government said it would set out separate plans to combat abuse of R&D tax reliefs “later in the autumn”.

4 – Climate change given short shrift

With the UK hosting the 2021 United Nations Climate Change Conference, known as COP26, it seemed a little odd that there was so little on climate in the budget. A week prior to the budget, the UK Government had published its Net-Zero Strategy,7 with talk of “Removing dirty fossil fuels from the global economy.”

The chancellor failed to use the word “climate” even once during his budget speech. He did, however, reveal there would be a cut to the rate of air passenger duty on domestic flights, along with the cancellation of the planned rise in fuel duty.

 

Image by mohamed Hassan from Pixabay

 

1 Fraud and the Coronavirus Job Retention Scheme, Taxwatch, 12 May 2021, http://13.40.187.124/furlough_fraud/

2 Budget 2021, HM Treasury, March 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/966868/BUDGET_2021_-_web.pdf

3 Spending Review 2020, HM Treasury, 15 December 2020, https://www.gov.uk/government/publications/spending-review-2020-documents/spending-review-2020

4 TaxWatch to HMRC: Prosecute sellers of disguised remuneration schemes, TaxWatch, 02 October 2020, http://13.40.187.124/hmrc_loan_charge_fraud/

5 The management of tax expenditures, National Audit Office, 14 February 2020, https://www.nao.org.uk/wp-content/uploads/2020/02/The-management-of-tax-expenditure.pdf

6 Research and Development Tax Credits Statistics, HMRC, September 2021, https://www.gov.uk/government/statistics/corporate-tax-research-and-development-tax-credit/research-and-development-tax-credits-statistics-september-2021

7 Net Zero Strategy: Build Back Greener, Department for Business, Energy & Industrial Strategy, 19 October 2021, https://www.gov.uk/government/publications/net-zero-strategy


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