UK estimates annual tax fraud losses at £16bn

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Annual losses to the UK attributable to tax fraud amount to £16bn, according to Her Majesty’s Revenue and Customs (HMRC), the government’s non-ministerial department responsible for tax collection.

The estimated figure is taken from a newly-published report from the National Audit Office (NAO). It represents nearly half of HMRC’s estimate of the tax gap (£34bn): the difference between the amount of tax it should collect each year and the amount it actually collects.

The report is the first in a series which will evaluate how effectively HMRC tackles different aspects of tax fraud, a “longstanding problem not only for the UK but for tax administrations around the world,” observes the NAO. The report adds that reducing the amount of tax lost to tax fraud is a high priority for HMRC, but to do this it will need to make better use of its data and develop its analysis.

In 2014/15 HMRC reported £26.6bn additional revenue from all its compliance work, which includes work to tackle tax fraud but also tackling other areas of the tax gap such as error and tax avoidance.

HMRC has only partial data on how much of the total yield is derived from its work to counter tax fraud. For example it has more complete information on its work to tackle organised crime than tax evasion. The department estimates that 30% to 40% of total compliance yield is generated by HMRC’s activities to tackle tax fraud, but this is an estimate based on partial evidence.

HMRC cites two groups in particular – smaller businesses and criminals – as responsible for 17 of the 21 biggest tax fraud risks. Of these, eight relate to organised crime and nine involve medium-sized, small or micro-businesses. HMRC believes these businesses could be responsible for tax losses of £17bn, almost half of the total tax gap, but stresses this is an internal estimate and not official.

The department aimed to increase prosecutions by 1,000 a year by 2014-15. Although the target was met, it wants to better prioritise the cases selected for criminal investigation. It has already focused on less complex cases, in particular a large number of prosecutions for people who had evaded income tax, value added tax (VAT) and tobacco duty.

“HMRC loses £16bn a year due to tax fraud, but reducing these losses is not straightforward,” said Sir Amyas Morse, head of the NAO. “HMRC has met its targets to raise more tax revenue in the short-term. It now needs to consider whether its overall strategy is designed to achieve the best long-term outcomes.
“We will be evaluating HMRC’s performance in tackling different types of tax fraud in more depth. As we do so, we will be looking for further improvements in the way HMRC uses data and analysis to understand the effect of its actions in both the long and short-term.”

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