HMRC struggles to collect tax debt

Up to 2.4 million more taxpayers are in debt to HMRC following the COVID-19 pandemic, and those who were already in debt owe more. The average amount taxpayers owe has increased by 60 per cent, from around £4,300 to £6,800. Older debts, which are often more difficult to collect, have increased in value from £2.5 billion in 2019-20 to £4.4 billion in 2020-21.

HMRC paused most of its debt collection in March 2020 and HMRC during this changed how tax debt was collected. To support businesses and individuals, payments of VAT and Self Assessment income tax were also deferred.  

However, as the UK emerges from the COVID-19 pandemic, HMRC said it now needs to pursue tax debt while allowing taxpayers time to recover their finances.

Total tax debt rose to £42 billion in September 2021, from £16 billion in January 2020. Total tax debt peaked at £67 billion in August 2020. More debt has been repaid as extensions for VAT and Self Assessment passed, and the economy has reopened. HMRC forecasts total tax debt will fall to £33 billion by March 2022, but this assumes the COVID-19 pandemic has not changed repayment behaviour. 

HMRC has prioritised which debts to chase based on the likely impact of the COVID-19 pandemic on an individual’s ability to pay. However, those whose ability to pay was considered the least impacted often had larger debts. HMRC categorised debtors into high, medium and low-impact groups. Business taxpayers in the low-impact group had debts around 50 per cent greater than business taxpayers in the high-impact group. Self Assessment taxpayers in the low-impact group did not have access to COVID-19 grants that Self Assessment taxpayers in the high-impact group could draw on.

Tax debts are normally meant to be cleared before the next tax period, but this may be unrealistic for many taxpayers affected by the COVID-19 pandemic. HMRC has made it easier for taxpayers to agree to longer repayment arrangements. The average duration of repayment plans increased from around five months pre-pandemic to 12 months in July 2021. A strong focus on repaying tax within specified time frames may not be appropriate. Leading debt management practitioners outside government tend to focus on agreeing to affordable repayment plans that can be sustained.

Research with stakeholders indicates the impact of the COVID-19 pandemic on taxpayers is polarised, with some groups shoring up their bank balances, and others more badly affected. The NAO focused on the impact of the COVID-19 pandemic on two groups of taxpayers: companies that are wound up and reformed specifically to avoid paying debts, and vulnerable taxpayers. HMRC had a limited understanding of how the COVID-19 pandemic will affect the amount of specialist work needed to support these groups.

Pre-pandemic, HMRC achieved workforce efficiencies, but it did not close the gap between new tax debts and debts collected. HMRC reduced the number of staff working on debt management by 18 per cent from 4,857 to 3,975 between 31 March 2014 and 31 March 2020, helped by a new telephony system and improvements to business processes. HMRC maintained its rate of debt collection at around two-thirds of new debt created each year. This suggests HMRC could have achieved more with greater capacity.

HMRC is unlikely to have enough staff to manage the increased tax debt that has resulted from the COVID-19 pandemic. HMRC intends to recruit 1,000 full-time staff in 2021-22, however, it told the NAO that once staff turnover is factored in, this resource will only address current staffing shortfalls. HMRC forecasts that it will have twice the usual level of debt to manage at the end of March 2022. New debtors may require more support in the short-term to agree to payment plans.

The NAO recommends that HMRC develop a revised strategy for recovering tax debt in light of the COVID-19 pandemic. This should consider the varying impacts of the pandemic on different taxpayers, and should identify which taxpayers are more able to pay, and those most severely affected by the pandemic.