Closing the tax gap unlikely to be a quick fix for government

In the last year the government borrowed £151.9bn, almost £15bn more than forecasted a month prior. With the estimated tax gap at £39.8bn in the 2022-23 tax year, the government is turning to HMRC to raise much needed additional funds, whilst sticking to the fiscal rules set out in the newly adopted Charter for Budget Responsibility. So much so that the Spring Statement included a section on “closing the tax gap”, building on plans previously set out in the Autumn Budget and including the recruitment of a further 500 HMRC compliance staff on top of the 5,000 announced in October 2024. Historically, a fully productive caseworker working on small business compliance is estimated to yield £0.76m per year to the Treasury. If the 5,500 of new compliance staff bring the same yield, this could, in theory, raise nearly £4.2bn per year. No doubt this would be an attractive prospect for a cash strapped government.

However, this may not provide the short term funds the government is looking for, as the UK’s tax system is highly complex. A recent NAO report identified that this increasing complexity contributed to HMRC’s costs of tax collection rising by 15% between 2019-20 and 2023-24, whilst only yielding a 16% increase in the tax take in the same period. It is estimated to take at least four years for an HMRC caseworker to reach full productivity and when added to the time required to recruit such a significant number of staff, the disruption to existing staff that will need to train such a large intake, and falling staff retention rates at HMRC, closing the tax gap begins to look more challenging. In the Spring Statement, it was estimated that the resulting yield of a fully productive officer could fall by almost 60% as a result.

In addition, there are timing challenges. HMRC recently successfully convicted a taxpayer involved in a £4.9m fraud, but this took almost six years from arrest to their eventual conviction. It is common for HMRC compliance checks to take years to reach settlement. Current processing times where taxpayers have identified errors and would like to voluntarily settle the tax due to HMRC are high. In our experience, multiple teams have backlogs of over a year before the proposed settlement can be allocated to a caseworker to even begin processing the case. Even after recruiting and training the additional officers, a significant delay is then to be expected before the government begins to see the benefit in terms of tax yield.

HMRC funding and staffing levels are clearly not quick fixes and where skills and experience are lost, these are costly and time consuming to replace. Whilst additional funding for HMRC is welcome, and the government has begun the slow process of turning the ship around, it is important for future governments to stay the course to ensure this yields results and provides value to the taxpayer.