Unprecedented levels of taxpayer debt

The UK National Audit Office (NAO) report ‘Managing the tax debt through the pandemic’, published in November 2021, sets out the NAO’s assessment of how HMRC has managed the rapid escalation in the level of debt owed by taxpayers during the coronavirus pandemic and whether it has adapted sufficiently to the changing nature and scale of that debt.

Statistics

The NAO report and subsequent data highlights a number of key statistics and issues facing HMRC in relation to taxpayer debt. 

• Total UK taxpayer debt stood at £39bn as at November 2021, up from its pre-pandemic level of £16bn, but down from a high of £67bn at August 2020. The Chancellor’s announcement that the payment of self-assessed income tax and VAT due between 20 March 2020 and 30 June 2020 could be deferred until 31 January 2021 and 31 March 2021 respectively was a key driver for the rapid increase to £67bn. At the same time, HMRC all but ceased its debt recovery work and redirected resources to help taxpayers applying for government support grants. 
• The number of taxpayers with tax debt increased from approximately 3.8 million in January 2020 to 6.2 million in September 2021. The average level of individual taxpayer debt increased from £4,300 to £6,800 over the same period.
• The average length of the repayment plan agreed by taxpayers in arrears increased from around five months pre-pandemic to around 14 months as at January 2022.
• HMRC staff numbers working on debt management fell by 18 per cent between March 2014 and March 2020.

Meeting of the Public Accounts Committee

The House of Commons Committee of Public Accounts (PAC) met to consider the NAO report in January 2022, publishing its own report in March 2022. Whilst acknowledging the NAO finding that HMRC has taken steps to respond to the increased levels of tax debt, the PAC report is highly critical of HMRC’s efforts to date, highlighting that:

• HMRC appeared unable to provide current and accurate debt forecasts – it had not updated its forecast for the debt level to March 2022 to consider the impact of the Omicron coronavirus variant and the Government’s ‘Plan B’ response, and was unable to say anything more accurate than ‘a couple of years’ when asked how long it would take for the debt to return to pre-pandemic levels;
• although it is stepping up its debt recovery staffing levels, HMRC had failed to foresee the need to have enough appropriately trained staff in place to manage the debt recovery, even though it recognises that such work brings in at least £18 for every £1 invested;
• although initiatives such as the business tax account have improved HMRC’s management of taxpayer data, progress in this area has been too slow, pointing to the fact that HMRC continues to record taxpayer debts in respect of different taxes on different systems with no straightforward way to combine that information;
• HMRC makes insufficient use of data to better target and collect debt through strategies such as customer segmentation; and
• HMRC does not have a clear and effective strategy to tackle what the PAC refers to as the embezzlement of funds by ‘rogue companies’ that have taken advantage of government lending schemes set up to support businesses through the pandemic (eg Coronavirus Business Interruption Loans) and that this includes companies that have then been liquidated by the directors before the same trading activity is re-established by way of new phoenix companies. 

What might we expect from HMRC in response?

There is no question that HMRC will have been stung by the comments made by the PAC at the hearing and in its report. We expect to see a robust response from HMRC in response to the raft of recommendations included in the PAC report. This may take the form of a step-up in the ongoing work to identify and sanction individuals involved with phoenix companies that recommence activities of liquidated businesses in receipt of government pandemic support scheme funding. Such steps could include being able to attach company debts to individuals who serve as directors, engaging with the Insolvency Service to disqualify directors, and requiring upfront financial security from new businesses that have been created as successor businesses. 

HMRC may also increase its focus on ‘identifying the insolvency practitioners that phoenix companies prefer to use, and replacing them with more stringent practitioners’.

In light of the political concerns now surrounding the issue of taxpayer debt levels, those with outstanding tax debts should, if they have not already done so, seek advice and, where appropriate, engage with HMRC to mitigate the risk that enforcement action is taken.

For more information, please get in touch with Suze McDonald, or your usual RSM contact.