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Audit office reveals HMRC fraud estimates

Your Expert Witness Tax FraudIn December, the National Audit Office reported HMRC estimates that losses to tax fraud amount to £16bn each year. That is nearly half of HMRC’s estimate of its tax gap of £34bn – the difference between the amount of tax HMRC should collect each year and the amount it actually collects.

The report was the first in a series which will evaluate how effectively HMRC tackles different aspects of tax fraud – a longstanding problem not only for HMRC but for tax administrations around the world. Reducing the amount of tax that is lost due to tax fraud is a high priority for HMRC. To do that it will need to make better use of its data and develop its analysis.

HMRC assesses that two groups – smaller businesses and criminals – are responsible for 17 of the 21 biggest tax fraud risks. Of these, eight relate to organised crime and nine involve medium-sized, small or micro-businesses. It believes those businesses are responsible for tax losses of £17bn – almost half of the total tax gap – but does not consider its internal estimate of how much of this is the result of tax fraud robust enough for publication.

HMRC believes that using its powers to investigate by civil means is usually the best way to recover missing tax at the lowest cost. It pursues criminal prosecution for cases where it believes it needs to send a strong deterrent message or when, given the severity of the fraud, it considers prosecution the only appropriate action.

According to the report, HMRC met its target to increase prosecutions by 1,000 a year by 2014-15, but recognises that it needs to better prioritise the cases it selects for criminal investigation. Although HMRC cannot demonstrate that this was the right number, the target had the effect of prompting the department to change its processes and make its investigations more efficient. This led it to focus on less complex cases, in particular a large number of prosecutions for people who had evaded income tax, VAT and tobacco duty.

In a release, the National Audit Office states: “HMRC has more to do to understand what benefits it has achieved by increasing the number of prosecutions. In 2014-15, HMRC claimed £295m in yield from the deterrent effect of its additional 1,000 prosecutions. However, in 2015 HMRC evaluated the deterrent effect of these prosecutions and found that it could not verify their monetary value.”

The head of the National Audit Office, Amyas Morse said: “HMRC loses £16bn a year due to tax fraud, but reducing these losses is not straightforward. HMRC has met its targets to raise more tax revenue in the short-term. It now needs to consider whether its overall strategy is designed to achieve the best long-term outcomes. We will be evaluating HMRC’s performance in tackling different types of tax fraud in more depth. As we do so, we will be looking for further improvements in the way HMRC uses data and analysis to understand the effect of its actions in both the long and short-term.”

Last Updated on Thursday, 11 February 2016 16:12