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Written by: Matt Taylor

Matt Taylor

Partner, Private Client Services

Record tax receipts for the Treasury but tax yield from HMRC compliance activities remains static

HMRC published its annual report last week which revealed it collected a record £731bn in tax revenues during the tax year ended 31 March 2022. This represents a 20% increase in revenues on the previous year and almost a 15% increase on tax receipts for the year ended 31 March 2020. This is perhaps a more suitable benchmark as the year ended 31 March 2020 was mostly unaffected by the coronavirus pandemic. There are some interesting trends to observe from the latest report.

As the political debate continues as to whether tax cuts will stimulate economic growth, corporation tax receipts increased to £68bn during the year ended 31 March 2022. During each of the previous four years, corporation tax revenues were £53bn, whilst the main rate of corporation tax remained at 19%. This potentially reflects how the UK economy quickly bounced back as the coronavirus restrictions were lifted. It will be interesting to observe how corporation tax revenues perform if the planned increase in the corporation tax rate to 25% goes ahead on 1 April 2023.

We are all familiar with the increase in hybrid working as a result of the pandemic. What is less understood is why the level of economic inactivity (the number of people who are not available for work) is still above pre-pandemic levels, as confirmed by the latest Labour Force Survey by the Office of National Statistics for the quarter ending April 2022, even though the economy has a record number 29.6million payrolled employees (HMRC PAYE RTI).

The fall in the workforce has not impacted the income tax and NIC receipts which were £391.7bn for the year ended 31 March 2022, compared to £336.1bn for the year ended 31 March 2020. Both the National Insurance increase (ahead of the introduction of the Health and Social Care Levy in 2023) of 1.25% and the freezing of the personal tax allowance and higher rate threshold until 5 April 2026 came into force on 6 April 2022. We will start to see the impact of these changes on income tax and NIC over the coming months. 

The report revealed HMRC has not materially increased tax yield from its compliance activities during the last year. It generated a tax yield of £30.8bn during the year ended 31 March 2022 compared to £30.4bn in the previous year. In the year ended 31 March 2020, which was mainly unaffected by the coronavirus pandemic, HMRC protected £36.9bn from its interventions and enquiries. The report points to a number of factors for this decline:

  • The decline in economic activity as a result of the pandemic and lockdown;
  • The redeployment of tax compliance staff to tackle non-compliance in the Covid-19 support schemes;
  • Delays in settlement of cases.

It is surprising that the tax yield has not increased during the last year as HMRC was able to return more of its staff to compliance activities as Covid support was withdrawn. HMRC opened 137,000 tax investigations in the second half of 2021 which was a 9% increase on the same period in the previous year. It would be reasonable to expect an increase in the number of tax cases settled by returning compliance staff.

The yield from HMRC’s future compliance activities will be closely scrutinised to determine its success in tackling non-compliance of Covid support measures and the return of compliance yields to pre-Covid levels.

Although, if the current global supply chain disruption and inflation results in the UK economy going into recession, HMRC’s compliance yields may be again impacted by a decline in economic activity.    

 
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