The National Audit Office (NAO) has issued a report on ‘Managing tax debt through the pandemic’ assessing how HMRC is dealing with a significant rise in outstanding amounts of unpaid tax due to the exchequer.

The NAO reports that total tax debt increased from £16bn in January 2020 to £67bn in August 2020, before falling to £42bn in September 2021 - more than double the level going into the pandemic.

A significant amount of the increase was driven by the government deciding to allow taxpayers to defer VAT and self assessment payments as part of its overall response to the pandemic. 

The figures also reflect a change in debt management approach in the early stages of the pandemic, with HMRC pausing debt collection activity, moving staff over to helping businesses and individuals apply for furlough payments, and extending access to online repayment tools allowing taxpayers to schedule tax payments over longer periods. 

Many of the payments deferred from last year have now been settled, bringing the amount of tax debt down from its peak without much effort from HMRC. However, it is unsurprising that the overall amount of tax debt is still much higher than before the pandemic given how many businesses and individuals have struggled financially and so are unable or have decided not to pay all the taxes they owe. 

Key findings by the NAO include:

• The debt balance has improved as COVID-19 payment extensions have passed and the economy has reopened but is still more than double the level before the pandemic.

• HMRC maintained telephone and postal services but could not cope with demand.

• The number of taxpayers in debt has increased by 2.4m from 3.8m in January 2020 to 6.2m in September 2021.

• HMRC has tried to target recovery efforts to those who can afford to pay, but the use of high, medium and low-impact categories of those affected by the pandemic does not fully reflect the financial circumstances faced by those in debt.

• It is unrealistic to expect taxpayers to be able to clear their debt before the next tax period and HMRC should change its self-serve system to permit taxpayers to spread the amounts they owe over longer periods without going into formal debt recovery procedures.

• The current forecast for tax debt to fall to £33bn by 31 March 2022 assumes the pandemic has not changed taxpayer behaviour and the NAO believes it is possible higher levels of tax debt may persist for some time.

• HMRC has a limited understanding of how the pandemic will affect its approach to corporate insolvencies and vulnerable taxpayers, with HMRC planning to develop its management information in this area.

• HMRC is understaffed. 

• HMRC has made efficiency gains in recent years, but debt write-offs over 2018-19 and 2019-20 were £1bn higher than for the previous two years.

• New powers, tools and additional capacity planned before covid-19 are not expected to be enough to recover tax debt built up over the course of the pandemic.

• HMRC lacks sufficient detailed understanding to be able to optimise debt collection and needs to improve its analysis of the effectiveness of different debt management activities.

The NAO is positive about how HMRC is regarded by debt charities and other stakeholders as a leading public sector practitioner in debt management and how it supports vulnerable taxpayers. HMRC have made it clear that if you need support you should get in touch.

The NAO’s recommendations include better information sharing across government to understand taxpayers’ exposures, speeding up staff recruitment and training, targeting greater levels of return from debt management activities and a different approach to older debts, the level of which is increasing. The NAO also recommends improving HMRC’s understanding of taxpayers in debt and obtaining data from a wider variety of sources so that it can better focus on those that can afford to pay.

The report concludes by recommending that HMRC invest more in tools and capability, including data analytics, the single customer account and online payment tools. The focus should change from targeting debt recovery within one year to an approach based on affordability, with greater use of independent debt advice. HMRC also needs to be tougher with companies that deliberately misuse insolvency rules, using new powers to attach debts to the owners of companies that go bankrupt.

Alison Ring OBE FCA, Director of Public Sector and Taxation for ICAEW, commented: “The National Audit Office has highlighted how unpaid taxes have more than doubled as a consequence of the pandemic and it is important that HMRC does what it can to recover the amounts owed if the public finances are to be brought back under control.

“During the pandemic, HMRC has adopted greater flexibility in how taxpayers can manage the way they pay their taxes, with improved online tools and options to extend repayment when necessary. We hope that HMRC will maintain and extend this flexibility for those taxpayers facing genuine difficulty in paying their taxes, while at the same time vigorously pursuing those who seek to abuse the system to avoid paying taxes that they can afford to pay.”