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

On 18 July 2022, HMRC published its annual report, which revealed it collected a record £731bn in tax revenues during the tax year ended 31 March 2022. This represents a 20 per cent increase in revenues on the previous year and an almost 15 per cent increase on tax receipts for the year ended 31 March 2020. The latter 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 around £53bn, whilst the main rate of corporation tax remained at 19 per cent. 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 given the scheduled increase in the corporation tax rate to 25 per cent is no longer set to go 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 market review by the Office for National Statistics for the quarter ended July 2022, even though the economy has a record number, 29.7 million, of payrolled employees per HMRC PAYE real time information reporting.

The fall in the workforce has not impacted the income tax and National Insurance contributions (NICs) 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 short-lived 1.25 per cent NICs rate increase (ahead of the previously intended introduction of the Health and Social Care Levy) and the freezing of the personal tax allowance and higher rate tax threshold until 5 April 2026 came into force on 6 April 2022, but the basic rate of income tax is now scheduled to reduce to 19 per cent from 6 April 2023. We will see the impact of all these changes on income tax and NICs receipts over the coming months.

The report revealed HMRC has not materially increased tax yield from its compliance activities during the year end 31 March 2022, generating a return of £30.8bn 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 as a result of its interventions and enquiries. The report points to a number of factors for this decline, being:

• 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; and
• delays in the settlement of cases.

It is surprising that the tax yield has not increased during the last fiscal year as HMRC was able to return more of its staff to compliance activities as Covid-19 support was withdrawn. HMRC opened 137,000 tax investigations in the second half of 2021, which was a 9 per cent 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-19 support measures and in returning the general level of compliance yields to pre-pandemic levels; although, if the current global supply chain disruption and inflation results in the UK economy going into recession, as it now seems very likely it will do, HMRC’s compliance yields may be again impacted by a decline in economic activity.