Opinion: ordinary taxpayers suffer because of underfunded HMRC

The taxman is ill-equipped to collect the taxes owed, and it’s normal taxpayers who pay the price.

You would think that the UK would be reliant on HM Revenue & Customs (HMRC) working efficiently.

After all, our public services are paid for through the money raised through our taxes, so having a properly functioning taxman is rather important.

And yet that doesn’t appear to be the case, with a new report from the National Audit Office (NAO) warning that HMRC does not have enough staff to deal with the massive spike in tax debts that have resulted from the pandemic, raising the prospect of the taxman abandoning pursuing some of those individuals and business who aren’t paying what they owe.

Jumping tax debt

When the pandemic took hold last year, HMRC adapted the way it approaches tax debts in order to provide people with a little more breathing space.

For example, it paused debt collection with the idea that it would reduce pressure on taxpayers at a very financially difficult time, as well as defer the payment of self-assessments and VAT bills.

Unsurprisingly, this has led to a sharp jump in the overall level of tax debt across the country.

By September this year, it had hit £42 billion, compared to the £16 billion owed back in January 2020 before Covid reached our shores.

And as a result, the average amount owed by individual taxpayers also spiked by 60%, from £4,300 to £6,800.

Struggling to claim taxes

However, the report also makes clear that as things stand HMRC is ill-equipped to actually retrieve those owed taxes.

Indeed, it already doesn’t have enough staff to deal with retrieving outstanding debts, and with debt levels having jumped thanks to the pandemic it is “unlikely to be able to keep up with the increase in workload” according to the NAO.

It noted that in the last two years the amount that the taxman has written off in tax debt has increased on the previous two years, largely down to them being classed as uncollectable or where “deploying resources to collect the debt does not represent value for money”.

That’s an easier argument to make when you don’t have sufficient resources already, especially given the taxman has been on the hunt for ‘efficiencies’ ‒ read reducing staff numbers ‒ for years. 

As the report states: “HMRC has maintained collection levels across most taxes while reducing staff numbers, but the level suggests that even before the pandemic it had significant potential to collect more debt with additional capacity.”

That’s a pretty clear message.

By trimming back the resources open to the taxman, we have been limiting its ability to function properly, even before its workload was dramatically increased by the pandemic.

'I don’t understand'

The report also dug into HMRC’s understanding of ‘phoenix’ companies, those who carry on the same trade through a series of businesses that are wound up in order to avoid paying debts, including tax debts.

Worryingly, while the taxman has long acknowledged that these firms are an issue it was found to have a “limited understanding” of how the pandemic has impacted how active it will need to be on this issue.

Incredibly, the taxman was found to hold no data on the scale of 'phoenixing' in the past, which inevitably makes it rather difficult to see whether you are tackling the problem effectively.

Taking a harsh approach

There are suggestions that this lack of resourcing may actually push the taxman to adopt a harsher attitude towards those it suspects of underpayments.

Dawn Register, head of tax dispute resolution at BDO, speculated that the lack of resources may mean that HMRC could mean “more punitive action” for non-compliance, as the taxman “will be under pressure to resolve situations quickly”.

I’m not a big fan of this idea either.

We want the taxman to handle these situations fairly and proportionately, rather than walloping certain people in an egregious way simply because they fancy their chances of getting a little extra cash out of them.

We pay the price

It’s important to remember that when the taxman fails to bring in the money it is supposed to, it’s ordinary taxpayers that suffer. 

After all, we are paying our way fairly, and yet the needed funds are not being raised. As a result, we get poorer value for money from our public services, with the prospect of having to put up with higher taxes in the future to tackle those shortfalls.

Taking a long term approach

There’s no getting away from the fact that it will take some time for HMRC to recover all of the taxes owed, so that means a long-term approach needs to be adopted.

The taxman needs to be properly resourced, with a team that can actually do the job. 

This means that they will be better equipped to go after those who have little intention of actually paying the taxes they owe, who have taken the help on offer during the pandemic and are more than happy to ‘phoenix’ by closing their existing business and opening a new one, free of those debts.

A taxman with more muscle is obviously better placed to take on these tax dodgers, rather than have to accept that they are outgunned, writing off the money owed.

A properly resourced team will also mean the taxman does a better job of reclaiming the debts of those taxpayers who do want to pay but need a little help.

They will be better placed to talk repayment strategies with those beleaguered taxpayers, to put plans in place to ensure that even if it does take a while the money will be repaid.

That’s exactly what we should want from a tax authority, the ability to provide a helping hand to those who need it, as well as a no-nonsense attitude to those who fancy trying it on.

However, without proper resourcing, that simply isn’t going to happen. And it will be me and you that end up paying the price.