New measures and greater clarity needed to fight tax fraud

15 April 2016

The Public Accounts Committee report concludes that HMRC is not doing enough to tackle tax fraud. It finds the department has made "only limited progress" in reducing the level of losses, which has been "relatively constant" over the last five years.

Report findings

Tax fraud results in losses of some £16 billion a year, almost half of the £34 billion tax gap—that is, the difference between the amount of tax HMRC collects and how much it should, in theory, collect.

The Committee finds the department has not set out a clear strategy for dealing with tax fraud and concludes it does not know what meeting its target of 1,000 additional prosecutions has achieved.

Performance reporting "too confusing"

The Committee describes the department's reporting of its own performance as "too confusing".

It also calls on HMRC to address the perception that it does not tackle tax fraud by the wealthy.

Impression created that "rich can get away with tax fraud"

The Report states:

"We concluded in November 2015 that the number of criminal prosecutions for offshore tax evasion was still 'woefully inadequate'.

HMRC told us that it needs to send the clear signal that anyone who evades tax runs the risk of prosecution.

The failure to prosecute more than one individual from the Falciani list, HMRC having closed this case and the Financial Conduct Authority no longer taking further action, creates the impression that the rich can get away with tax fraud."

HMRC should publicise investigations and prosecutions

Among its recommendations, the Committee urges HMRC to "clearly set out in its annual reports the relationship between its compliance yields and changes in the tax gap", and also publish this information "in a way that is accessible for everyone to understand."

The Committee says HMRC should set out its strategy to tackle fraud by November 2016, and also take steps to "counter the belief that people are getting away with tax evasion".

It calls on HMRC "to increase the number of investigations and prosecutions, including wealthy tax evaders, and publicise this work to deter others from evading tax and to send out a message that those who try will not get away with it".

The Committee also calls for clarity on the "growing risk" of VAT fraud by internet traders, and on the effectiveness of measures intended to tackle this fraud.

Chair's comment

Meg Hillier MP, Chair of the PAC, said:

"The scale of tax fraud, both in cash terms and as a proportion of uncollected tax, demonstrates just how vital it is for HMRC to bring focus to its efforts in this area.

The public purse is missing out on some £16 billion in tax a year because of evasion and other criminal activities. When people break the law, there must be consequences—and there must be seen to be consequences.

Honest taxpayers rightly expect a tax system that works fairly for all and any perception that this is not the case undermines the public's trust in that system. Its credibility is at risk. 
The release of the 'Panama Papers' underlines that there are wealthy people and companies who seek to keep their affairs secret.

Where this secrecy involves criminal activity, prosecution must follow—and the threat of prosecution must serve as an effective deterrent to others.

The department must be far clearer with Parliament and the public about its strategy for combating tax fraud and the impact of that strategy on the tax gap. To achieve this it needs a better grasp of its own work.

The evidence we heard from HMRC did not convince us it properly understands the effectiveness of the different enforcement and deterrent tactics it employs. This is a fundamental weakness in its strategy.

From this month there are significant changes in senior management at HMRC. The Public Accounts Committee will expect the incoming regime to respond to the challenges and shortcomings we have highlighted with renewed vigour."

Report summary

HM Revenue & Customs (HMRC) is not doing enough to tackle tax fraud, which accounts for at least £16 billion of uncollected tax each year.

HMRC has made only limited progress in reducing the level of tax fraud losses which has remained relatively constant over the last 5 years, at around 3% of all tax liabilities.

HMRC's strategy for tackling tax fraud is unclear, particularly its approach to prosecutions where it does not know the number needed to provide an effective deterrent.

HMRC needs to explain constant tax gap

The failure to prosecute more than one individual from the Falciani list, HMRC having closed this case and the Financial Conduct Authority no longer taking further action, creates the impression that the rich can get away with tax fraud.

HMRC also needs to explain why the amount of tax it claims to have recovered from its compliance work rises sharply each year, but the size of the tax gap (the difference between the amount of tax that it collects and how much it should, in theory, collect) stays the same.

Further information

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