Sir Jim Harra, outgoing CEO of HMRC, got a tense grilling by the Public Accounts Committee (PAC) yesterday when he admitted that HMRC don’t have a specific strategy or target for tax evasion within the overall tax gap, as found by the National Audit Office which we wrote about in September.
Responding to probing questions from veteran Labour MP Clive Betts and new Liberal Democrat MP Rachel Gilmour, Harra conceded that their estimate of £5bn of revenue lost to evasion is uncertain and requires ‘expert’ judgement on top of the data to attempt to make up for areas where HMRC are completely unsighted on criminal activity.
Mr Betts hit the nail on the head when he challenged Sir Jim about the level of tax evasion, saying, “it’s a big number….and yet you don’t have a strategy to combat it. I think most people would be quite surprised about that.”. Sir Jim referred back to the overall compliance target for managing the tax gap overall merely reiterating that HMRC has no target for reducing this part of the tax gap.
Ms Gilmour concluded that this amounts to a certain tolerance for tax evasion and pressed Sir Jim to quantify the monetary value of the evasion tolerated by the department. Sir Jim quibbled about the premise of the question, referring back to the overall reduction in the estimated tax gap achieved by the department in the last decade. Both Sir Jim and the head of HMRC Customer Compliance Penny Ciniewicz made frequent reference to the additional resources granted to the department in the recent Autumn Budget to employ 5,000 ‘additive’ (a term coined by Ciniewicz) staff roles between now and 2029 to raise an extra £6.5bn. TaxWatch notes that nearly two thirds of this revenue has been scored as VAT based on previous yield generated from new entrant compliance caseworkers, and only 5% from corporation tax.
Lloyd Hatton MP challenged HMRC as to why they don’t monitor the tax gap by economic sector, especially in areas where there are known to be large issues with tax compliance such as online retail. Sir Jim responded that HMRC don’t have enough data to be able to do so across the economic sectors that comprise the main areas despite being asked to by the previous Public Accounts Committee, although he later contradicted himself by stating the department has very good intelligence about online retail, albeit that it’s a ”fast moving market”.
Mr Hatton described the lack of sector focus as “concerning” particularly so, given that the offshore tax gap and transnational profit shifting by multinational tech giants are not included within the tax gap. He concluded that that HMRC were leaving out, by design, a large part of the picture and thus may be incorrectly assessing that the majority of the tax gap was made up of errors by small businesses.
Part of the hearing concerned electronic sales suppression (ESS) tools and software used to depress turnover and therefore profit especially in the retail sector. HMRC’s updated estimate of tax loss from ESS has been delayed until spring 2025. The delay between identifying the ESS risk, devising a strategy to quantify the risk, and then having the powers to mitigate its abuse was cited as a serious flaw in HMRC acting nimbly in response to revenue risk.
Rebecca Paul MP and PAC Chair Sir Geoffrey Clifton-Brown MP also grilled Ms Ciniewicz and Sir Jim about the fall in criminal prosecutions since 2019 and the loss of the deterrent effect, reminding the officials that they are on the record conceding that there could be a loss of deterrent effect as a direct result of the fall in prosecutions by the Fraud Investigation Service. Ms Ciniewicz cited the higher monetary value of civil cases, and greater proportion of custodial sentences achieved where cases have been brought to trial. whilst Sir Jim referenced an impact of Covid backlogs affecting all crime, not just tax cases. He also mentioned a higher rate of positive charging decisions on cases being worked within HMRC and a boost in the staff within FIS.
Sir Geoffrey finished proceedings noting the aspirational comments between HMRC, Companies House and the Insolvency Service for more joined up working to minimise losses to financial crime and tax evasion. He put the witnesses on notice that PAC will be keeping a focus on how this will be ‘translated into real action’ in upcoming hearings.
