HMRC tax debts hit £42bn with 2.4m more people falling behind on payments

The tax office may struggle to recoup a vast backlog of payments that have accrued during the pandemic as HMRC does not have enough staff and budget cuts to its collection department have resulted in an increasing number of debts being written off according to new analysis by the National Audit Office (NAO).

The research shows that tax debts increased by £26 billion between January 2020 and September of this year, with the debt pile currently standing at £42 billion, with up to 2.4m more taxpayers having fallen into debt to HMRC. The backlog in payments, which comes after HMRC paused collections and focused on supporting struggling businesses during the coronavirus crisis, is on top of the estimated £6 billion of public money already lost to fraud via various pandemic-related support schemes.

The average amount taxpayers owe now at £6,800, a 60% increase. The tax authority has forecast that it will have twice the usual level of debt to manage at the end of March 2022, predicting that total tax debt will be around £33 billion.

The report says that the HMRC faces several years of managing the impact of the pandemic on tax debt and current staffing is unlikely to be enough to manage the increased workload. It made efficiencies before the pandemic but it did not improve overall levels of debt collection and it was writing off more debt. It estimates that adding staff and private sector capacity would have the most success in increasing debt collection.

While some debtors have been able to repay tax debt quickly during the pandemic (helped by loans and support from other parts of government), there remains an unknown number of taxpayers who have been badly affected and will struggle to repay tax debt. HMRC must build on its initial work and better understand the resources it needs to manage the scale of the challenge it faces.

Gareth Davies, Head of the NAO, said it would be years before HMRC was able to recover money owed to taxpayers, warning that the tax authority faces several years of managing a far greater level of debt than it has been used to. “The HMRC needs to significantly increase its capacity if it is to meet the changed scale and nature of the challenge.”

Commenting on the report Dawn Register, Head of Tax Dispute Resolution at BDO said “Today’s report has confirmed that HMRC will need additional resourcing in order to collect and support taxpayers with spiralling tax debts. Recent statistics have misleadingly omitted the full extent of the current tax gap, which will have rapidly increased due to the Covid-19 pandemic.”

“With many Covid-19 support measures now withdrawn, there is likely to be a strong emphasis on collecting unpaid tax regardless of whether HMRC remains understaffed. A lack of resources could even result in more punitive action for non-compliance given that HMRC will be under pressure to resolve situations quickly.”

“The Government is investing £100m into HMRC to build up its Taxpayer Protection Taskforce to go after an estimated £5.2 billion in pandemic support fraud but the current tax debt of £42 billion dwarfs this figure, and it must be worth investing more in HMRC’s debt management service to collect that. In my experience, better service from HMRC’s debt team helps struggling businesses and individuals pay back more and faster, so it has to be a good investment for the Government in the long run.”

“The NAO report acknowledges that pandemic tax debts will be outstanding for years and it is vital that both the Government and HMRC accept that this is a long term issue. Tragic cases related to taxes owed for the disguised remuneration loan charge led to HMRC allowing tax debt payment plans over 5 years and a similar approach will be needed with pandemic related tax debts. If HMRC allows much longer ‘Time To Pay’ arrangements for pandemic tax debts, far fewer individuals and businesses will be pushed over the edge into bankruptcy and the Government will start getting tax debts paid down.  Monthly or quarterly instalments plan are generally helpful and practical for both sides.”

“Taxpayers with overdue tax bills must not bury their heads in the sand – if they have not received enforcement demands, they are likely to do so soon, which if not dealt with appropriately will lead to even more challenging times ahead”