HMRC’s strategy to cut fraud

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In December last year, the Public Accounts Committee started an inquiry into HMRC’s effort to tackle the estimated £16bn lost to tax fraud each year. Although HMRC recently achieved its targets which was to raise more tax revenue in the short-term, however its success at tackling tax fraud (which is estimated to account for about half of the UK’s estimated £34bn tax gap − the difference between how much tax HMRC should collect and the amount it actually does), is less impressive.

It’s still not clear how much of the tax that is collected by HMRC comes from its compliance work to counter tax fraud (tax evasion, undeclared income, the “hidden economy” and organised criminal gangs).

“HMRC has only partial data on how much of the total yield is derived from its work to counter tax fraud,” came from a report by the National Audit Office (NAO) published last December. It recommended that HMRC improves the use of data and analysis when trying to tackle tax fraud.

Smaller businesses and criminals are responsible for a lot of the tax fraud; “17 of the 21 biggest risks” relating to tax fraud, the National Audit Office said.

A quick example of tax fraud is when a small business does not register for VAT when its turnover exceeds the threshold for registration.

“HMRC believe that these businesses are responsible for tax losses of £17bn, almost half of its estimate of the total tax gap, but it does not consider its internal estimate of how much of this is the result of tax fraud robust enough for publication,” the NAO report said.

A day after the National Audit Office report, MPs on the Public Accounts Committee questioned HMRC executives about tackling different types of tax fraud: HMRC’s use of prosecutions, how it assesses risk and uses data, and more importantly how to “prevent losses rather than relying so much on investigating them afterwards.

HMRC chief executive Lin Homer, who had said that she will resign in April, told MPs on the committee that it was focusing more on the “hidden economy” because it “can see a growth in microbusinesses and we can see a growth in online trading, and we want to ensure that that does not become an area that grows in the tax gap”.

Reducing VAT evasion (usually when companies close and then open again the next day under a different name) is another priority for HMRC.

Jennie Granger, director, general enforcement and compliance, at HMRC, said “phoenixism” was a “scourge” and was hard to track.

“Deliberately shutting down quickly and moving on makes it difficult for us to catch up with people. We have specialist insolvency expert teams in Simon’s area; it is their job to detect this and tackle it. We are getting better at tracing through directors. The challenge there, of course, is that they often use straw people.”

HMRC usually makes civil prosecutions for tax fraud, such as fines. The number of criminal prosecutions for tax fraud has increased since 2010 to more than 1000 criminal prosecutions for tax fraud in 2014-2015. One of the main reasons for criminal prosecutions is to deter other people from evading tax.

Calculating the financial value of this deterrence is tricky, though. Stephen Phillips, an MP and member of the Public Accounts Committee, said that the target for 1000 criminal prosecutions seemed to have been “plucked out of the air” and that HMRC was unable to say whether an increase in criminal prosecutions of mass market tax fraud (also called “volume crime”) had deterred other people from engaging in the same offences.

 
 
 

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