The UK parliament’s Public Accounts Committee (PAC) has published the results of an inquiry into how the tax administration HMRC is tackling tax fraud. The report entitled Tackling Tax Fraud was published by the PAC on 15 April 2016. As part of the inquiry the PAC received oral evidence from the Chief Executive and other representatives of HMRC.

The report points out that tax fraud accounts for at least GBP 16 billion in lost tax each year and that HMRC has only made limited progress in reducing the losses from tax fraud which have remained at around 3% of total tax liabilities in recent years. The PAC considers that HMRC’s strategy for tackling tax fraud is not clear and HMRC is also unclear about the number of prosecutions required to deter tax fraud.

The PAC considers that HMRC must explain why it shows the amount of tax collected each year from its compliance work to be rising sharply while the size of the tax gap (the difference between tax actually collected and the amount HMRC considers should have been collected) remains the same. The PAC recommends that HMRC should publish details of the relationship between its compliance yields and the movement in the tax gap so the connection between the two can be clarified.

The PAC notes that tax fraud consists of three types of behavior. Tax evasion occurs when tax registered individuals or businesses deliberately conceal information to reduce their tax liabilities; the hidden economy involves people entirely unknown to HMRC (ghosts) or people who are taxed on some income but have other hidden sources of income (moonlighters); and criminal attacks generally involve coordinated and systematic actions by criminal gangs. In the view of the committee HMRC’s strategy to tackle tax fraud should be made clearer and this should be done by November 2016. HMRC must identify what resources are allocated to tackling each tax risk and the corresponding yield from its efforts and the yields must be related to each category of the tax gap.

HMRC has also not done enough to combat the view that it is not being tough on tax fraud by high wealth individuals. There is a common public perception that high income and wealth individuals are involved in tax evasion and HMRC should combat this by increasing the number of tax investigations and prosecutions. The work done in this area should be publicized to ensure that this has a deterrent effect and sends the message that there is a high risk of prosecution for tax evasion. Although HMRC appears to have met its target of one thousand additional prosecutions in 2014/15 this may have been done by concentrating on simpler cases. The impact of prosecutions and other measures in deterring evasion needs to be evaluated and quantified.

The report by the PAC also points out that HMRC has not responded adequately to the growing risk of VAT fraud by internet traders. The PAC therefore requires HMRC to review the previous findings by the PAC on this subject, to identify the size of VAT internet fraud and to inform the PAC within twelve months of the success of the latest powers provided in the 2016 budget in tackling the problem of VAT internet fraud.