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Tax dodgers undeterred because HMRC ‘not doing enough to punish cheats’ after Covid, MPs warn amid £9bn loss

Tax dodgers will remain undeterred because HM Revenue & Customs (HMRC) is “not doing enough to punish cheats” in the wake of the pandemic, an influential committee of MPs has warned.

The House of Commons’ Public Accounts Committee (PAC) said in a damning report published on Wednesday that a drop in prosecutions for tax fraud over the past two years could “weaken the deterrent effect of HMRC’s work”.

“We are concerned that, without sufficient numbers of prosecutions, HMRC cannot demonstrate a credible deterrent effect,” senior MPs warned.

The tax authority has overseen just under 400 prosecutions for tax-related offences over the past two years, compared with around 1,400 in the two years before the pandemic.

It blamed court closures and reduced court capacity during the Covid crisis, but has also said that it does not expect prosecutions to return to pre-pandemic levels, despite courts reopening.

HMRC has instead insisted that “the publicity around high-profile convictions” for tax dodging will be “sufficient to maintain a credible deterrent”.

But Dame Meg Hillier, Labour MP and chair of the PAC, said HMRC’s quality-not-quantity approach would do little to discourage criminals.

“[HMRC] is simply not doing enough to deter and punish cheats, even at very high levels,” she said.

“We cannot and must not arrive at a situation in the UK where it is easier to cheat the tax system than it is to comply with it.”

The report also found that tax non-compliance during the pandemic cost the UK around £9bn in lost taxes, and that the figure is likely to swell in the coming years, due to staffing changes made during the Covid crisis.

HMRC redeployed more than 4,000 compliance staff to work on Covid support schemes such as furlough during the pandemic, which meant there were fewer staff to check whether people and businesses were complying with tax rules.

The PAC report found that the tax department’s remaining compliance staff were also “less productive” because they were unable to conduct in-person investigations during Covid lockdowns.

This resulted in a major drop in the amount of money raised through HMRC chasing people over their taxes, falling from an average of 5.2 per cent of total tax revenues before the pandemic to 4.2 per cent in 2021-22 – the lowest for a decade.

Although HMRC has since hired 4,200 new compliance staff, the PAC warned that the new recruits remain far less experienced and therefore less effective than senior workers who left during the pandemic.

Senior MPs on the Commons’ committee said that this would mean “many more non-compliant taxpayers will now escape paying their fair share of tax,” in a move that could “undermine the sense of fairness on which the tax system relies”.

They called on HMRC to improve the effectiveness of its compliance work to ensure more money is available for cash-strapped public services.

More than £21bn in total has been lost to fraud since the start of the Covid crisis, including around £7bn linked to schemes introduced during the pandemic, according to the National Audit Office (NAO).

The tax watchdog warned earlier this year that it is “very unlikely” that the bulk of the money will be recovered, despite the Government’s promise to “chase down every pound stolen from British taxpayers”.

The PAC report published on Wednesday also warned that the tax gap – the difference between the amount of money owed to the department and how much it has received – will continue to widen due to the cost of living crisis.

It said the number of people failing to pay their taxes continues to rise as Britons struggle to pay their household bills, despite many of them seeking help from HMRC.

MPs urged the tax authority to address poor staffing capacity at its customer services centres, which has meant people have been unable to get through to call support staff for help.

Ms Hillier said: “HMRC’s ability and efforts to draw in the tax that is so desperately needed to pay for public services were seriously compromised by the pandemic.

“That alone is bad enough in the current economic crisis but we need to see more effort from HMRC get this back.”

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