HM Revenue & Customs’ IT systems are failing to detect 98.5 percent of Britain’s cash-in-hand tax evasion, leaving the Exchequer short of at least £2 billion every year.
That is the verdict of the Committee of Public Accounts, a powerful body of MPs that oversees government spending, in a new report entitled ‘HMRC: Tackling the hidden economy’.
HMRC was unaware of the exact scale of the problem, the committee said. HMRC had only detected 30,000 cases a year out of an estimated two million in total. Self-employed people, buy-to-let landlords and individuals who sell goods on the internet were the main culprits avoiding cash on tax earnings, according to the report.
HMRC was making “little ground” in its efforts to curb the problem, said Edward Leigh, chair of the committee. This was in spite of a £41 million investment in 2006 to 2007 to improve detection, impose sanctions, and publicise the need for cash-in-hand workers to declare all their earnings.
“HMRC has no solid estimate of the level of losses, but it might be over £2 billion a year,” Leigh said. “With a detection rate of only 1.5 per cent, the chances of being caught are very slight.”
HMRC has recently made more use of data matching techniques in order to improve detection, the committee said. But it was “some way behind” the Department for Work and Pensions, “which carries out regular bulk data matching exercises to detect errors and fraud in benefits”.
While HMRC had used advanced software to identify 300,000 cases of suspected “ghosts and moonlighters”, this was still “experimental” and required further work, the report stated. It advised HMRC to make better use of other government data, including data on those paying business rates; local authority licences for doormen, street traders and taxis; and vehicle ownership data held by the DVLA to indicate who might be living a wealthy lifestyle and failing to declare all their income.
HMRC responded to the report by saying it was improving detection and the way it tackles the problem. “HMRC is committed to deterring and challenging those who do not pay their fair share,” a spokesperson stated.
“Those who persist in operating outside the formal economy face civil penalties - up to 100 per cent of the tax evaded - and, for the most serious offenders, a criminal conviction.”
In July, HMRC denied that separate IT system problems meant a further £2.8 billion was being lost in overpayments of tax credits.
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