28 January 2025
The Committee of Public Accounts (PAC) issued a report on 22 January following a review of HMRC’s customer service and accounts. Following this report, HMRC Chief Executive, Jim Harra felt it was necessary to publicly deny “deliberately poor” phone service.
Whilst customer service for taxpayers is important, there are other important points raised in the report, which have slipped under the radar. One of these relates to the level of tax debt.
The current economic environment is seeing large numbers of businesses suffering financially. HMRC is still seeing high levels of new tax debt, a large proportion it attributes to small businesses’ cash flow issues.
The report expresses concern that HMRC is focusing its efforts on the collection of these newer tax debts, as they are easier to collect, and not effectively pursuing older debts. The report outlines the tax debt at 31 March 2024 was £43bn and suggests that approximately £20bn of that amount may be irrecoverable. Although this figure is not easily reconcilable to HMRC’s most recent annual accounts, it is notable that the amount considered not collectable has increased year-on-year.
It goes without saying, the increasing uncollectible debt figures are significant. Putting HMRC’s debt figures into context, in May 2023 the previous government announced there would be a new hospital programme which would be backed by over £20bn of investment. This funding did not materialise, and it was announced last week that the new plan would be on average £3bn of annual investment for each of the next five years.
In the five years prior to the COVID-19 pandemic, the average tax debt reported in HMRC’s annual accounts was around £15bn. It is acknowledged that in the intervening period there have been events impacting the global economy. However, for the tax debt to almost triple, the performance of HMRC’s debt management team must be assessed and there is a question as to whether there is more that can be done to reduce this amount.
It is evident that the global economy and external factors are still impacting cash flow of businesses in the UK. 2023 saw the highest number of creditors’ voluntary liquidations in any year, and this figure was only 8% lower in 2024 according to statistics released by The Insolvency Service. It is anticipated that liquidations and insolvencies are likely to continue for some time, impacting the overall level of tax debt. Once in formal insolvency, on average the amount HMRC eventually receives in relation to a tax debt is five pence in the pound.
It is interesting to note that in HMRC’s most recent annual accounts, it was estimated that 15% of unpaid tax debts in the prior year were because of phoenixism. Phoenixism is where the same people trade successively through a series of companies, each becoming insolvent or being wound up in turn, only to continue the same business through a new company, with the intention of not paying various debts, often including tax. HMRC outlines that data and information held is used to target the people behind phoenixism and that powers are used to make directors liable for the debt of a company in certain circumstances.
HMRC is using increasingly advanced technology and analytics to enhance the way compliance and debt risks are predicted, assessed, and targeted. Could these tools be used earlier to identify taxpayers in financial distress or purported financial distress, leading to the uncollectable tax debt being reduced?
Taxpayers struggling to meet their tax liabilities can seek to agree a time to pay arrangement with HMRC. Affording taxpayers this additional time to pay, is one means of collecting tax debt and potentially avoiding insolvencies. Experience tells us that HMRC’s debt management team has taken a tougher stance on its approach to time to pay arrangements.
In the post-pandemic period, the level of debt for which taxpayers have time to pay arrangements in place has stayed stagnant at around £5bn, suggesting HMRC has not adapted its approach in more financially testing times for taxpayers whilst the level of uncollectable debt has significantly increased over the same period.
It will be interesting to see where the additional 1,800 debt management staff, announced in the 2024 Autumn Budget, will be allocated and whether this investment can make a significant impact on the overall levels of tax debt, or help in a more proactive approach to collection.
The PAC report re-emphasises the pressure and scrutiny that is currently on HMRC, and no more so than in the collection of outstanding tax debts, not just to maintain the tax gap but to reduce it.

