Tax Dodging During COVID-19 Pandemic Cost UK £9 Billion: Watchdog

Models of a man and woman stand on a pile of British coins and bank notes, in this file photo dated Sept. 11, 2018. Joe Giddens/PA Media

Tax dodging and non-compliance during the pandemic cost the UK government £9 billion ($11 billion) as thousands of tax compliance staff were redeployed to COVID-19 support schemes, a government spending watchdog has found.

According to the latest report by the National Audit Office (NAO), released on Dec. 16, HM Revenue & Customs (HMRC) has raised around £9 billion less in tax revenue from its compliance activity since the pandemic began in 2020, compared with its historic performance.

Before the pandemic, tax revenues from compliance activity were on average 5.2 percent of total revenues. This reduced to 5 percent in 2020–2021, a £1.5 billion ($1.8 billion) reduction. It then fell further to 4.2 percent in 2021–2022, which amounted to a further reduction of £7.5 billion ($9.1 billion).

Reduced Capacity

The NAO said: “The COVID-19 pandemic had a significant impact on HMRC’s compliance work. In challenging circumstances, HMRC focused its resources on key priorities and redeployed some staff to new support schemes, which left reduced capacity for downstream tax compliance activity.”

During the pandemic, then Chancellor of the Exchequer Rishi Sunak launched a range of support schemes for individuals and businesses, including the £70 billion ($94 billion) Coronavirus Job Retention Scheme, commonly known as furlough, which supported 11.6 million UK workers over 18 months.

Rishi Sunak, then chancellor of the Exchequer, speaks during a virtual press conference after announcing a new three-tier COVID-19 alert system inside 10 Downing Street, in central London, on Oct. 12, 2020. Toby Melville/Pool/ AFP via Getty Images

Around 1,350 workers were redeployed to the COVID-19 support schemes throughout 2020–2021, shrinking the number of those working on tax compliance by 12 percent, the watchdog said.

During the pandemic, HMRC paused many inquiries into suspected non-compliance, except in cases of potential fraud or criminal activity, closing 29 percent fewer cases in 2020–2021 than in the previous year.

Lockdowns meant the department also conducted fewer in-person investigations. The number of in-person visits for individuals and small businesses was 36 percent lower in 2022 compared with 2019.

A man crosses the road in the City of London financial district amid the outbreak of COVID-19, in London, Britain, on Sept. 23, 2020. John Sibley/Reuters

Criminal prosecutions for tax-related offenses decreased significantly during the pandemic, when many courts were unable to operate. While there were around 700 prosecutions in 2019–2020, there were only 163 in 2020–2021, rising slightly to 236 in 2021–2022.

The NAO said: “Compliance yield reduced significantly during the pandemic and there is a risk that more non-compliant taxpayers ultimately fail to pay the right tax or escape investigation and prosecution.”

Instead of returning to normal levels after the pandemic, HMRC analysis indicates that the tax gap—the difference between the amount of money owed to and received by the department—is likely to continue growing over the next few years.

While the department is recruiting and training new compliance staff, they will be less experienced and therefore less effective in the short term.

‘Swift Action’

The watchdog called on HMRC to improve the effectiveness of its tax compliance work to ensure more money is available for cash-strapped public services.

Gareth Davies, the head of NAO, said: “HMRC had to move swiftly to reallocate resources to COVID-19 schemes, as the circumstances of the pandemic demanded. However, this directly affected its ability to investigate cases of people and businesses not paying the right tax.

“There is now a risk that more people ultimately fail to pay the right tax or escape investigation or prosecution. It is concerning that HMRC’s planning indicates that non-compliance may grow following the pandemic. The next two years are critical, and swift action is likely to be needed to stem potential losses.

“There is little doubt that HMRC’s compliance work offers good value for money, but it needs to evaluate its performance more consistently. Improving the effectiveness of HMRC’s compliance work can help maximise the amount of money available for public services in a challenging economic context.”

A parliamentary committee also urged the HMRC to step up its work on tax compliance to alleviate the pressure on public finances.

Dame Meg Hillier, chair of the Public Accounts Committee of the House of Commons, said: “HMRC must step up its work on tax compliance, through allocating sufficient resources and better understanding the effectiveness of its work. With significant pressures on public finances, there is no time to lose.”

In response to the NAO report, an HMRC spokesperson said: “We welcome the NAO’s confirmation that our compliance work offers good value for money. Through it, we target the areas where tax is most at risk of not being paid and prioritise the highest value returns—exactly as taxpayers would expect.

“This does not mean other money will go uncollected, however, and we can go back up to 20 years in the most serious cases of evasion. We are adding a further 2,500 people to our compliance workforce next year, increasing our ability to recover unpaid tax and ensure everyone pays what is due.”

PA Media contributed to this report.