Recession And Mismanagement Deplete UK's Tax Coffers

by Robert Lee, Tax-News.com, London

24 July 2009

Economic adversity and government incompetence have combined to deplete the Treasury’s already threadbare coffers even further, a new report by the country’s fiscal watchdog has shown.

According to the National Audit Office (NAO) report on HM Revenue and Customs’s 2008-09 accounts, the economic downturn has been largely responsible for a GBP21.7bn reduction in taxes and duties collected by the department. However, the government’s track record of haemorrhaging money through tax credit fraud and faulty IT and administrative systems is once again reaffirmed, further exacerbating the problems caused by falling revenues and skyrocketing debt.

The accounts show that income tax and National Insurance contributions fell by GBP5.7bn, revenue from VAT fell by GBP6.4bn (partly reflecting the cut in the rate of VAT to 15%), stamp duty fell by GBP6.1bn (including a GBP5.1bn fall owing to fewer residential and commercial property transactions) and corporation tax fell by GBP5bn. However, there were increases in revenue from capital gains tax (GBP2.7bn) and petroleum revenue tax (GBP0.9bn) during the period under review.

The economic downturn has also been a major factor in the increase in the amount of debt owed to HMRC which rose by GBP2.7bn to GBP27.7bn in 2008-09. HMRC has increased the provision for doubtful debts to GBP11.2bn on March 31, 2009 – equivalent to 40% of total debt. The provision of doubtful debts has risen from GBP7.9bn on March 31, 2008.

The difficult economic conditions have also played a part in the increase in companies seeking and receiving repayments for corporation tax that they have overpaid. Repayments in 2008-09 totalled GBP9.7bn compared to GBP5.4bn in 2006-07 and GBP8.1bn in 2007-08. The NAO predicts that this trend is set to continue as companies continue to fact difficult trading conditions, and it urged HMRC to somehow reduce this outflow. “It is vital that HMRC maintains its controls in place around such large sums of money flowing out of the Department,” the NAO stated.

The report also noted that the government’s much-maligned tax credits system overpaid claimants to the tune of GBP1bn in 2007/8, and little progress appears to have been made in the recovery of overpaid tax credits, with the total outstanding having risen by GBP0.1bn to GBP4.4bn over the year to the end of March 2009. However, the government’s attempts to tackle fraudulent claims is also having the opposite affect, and underpayments rose to GBP0.8bn in 2007/8 compared to the previous year, affecting some 1.3 million low-income families.

HMRC’s latest estimate for 2007-08 is that error and fraud in tax credits resulted in between GBP1.58bn and GBP1.84bn (between GBP1.31bn and GBP1.54bn in 2006-07) being paid to claimants incorrectly. According to the NAO, there is “currently no evidence” that HMRC has reduced the level of error and fraud in tax credit awards for 2008-09.

The HMRC Accounts was one of a series of damning reports casting light on the government's apparent mishandling of the public purse across the departmental board, which were released by the NAO on the eve of Parliament's summer recess. Normally, such reports are released in stages, leading the opposition Conservatives to claim that the government chose this publish date to 'bury' a barrage of bad fiscal news. The reports also revealed that: a faulty military payroll system cost the Ministry of Defence GBP140m as a result of errors; some GBP11m million was erroneously paid to employers under a government-backed training scheme; and fraud and error cost the Department for Work and Pensions GBP2.7bn.

In addition, an NAO review of overpayments to public service pensioners totalling GBP90m found a “complex and fragmented administrative process, prone to error, and for which there is no clear overall responsibility.”

However, perhaps the greatest concern flagged by the Comptroller and Auditor General was that the Treasury incurred expenditure of some GBP24bn more than Parliament had authorized under the Asset Protection Scheme for the banking sector. This led to Amyas Morse, the head of the National Audit Office, qualifying his audit opinion on HM Treasury’s Resource Accounts for 2008-09.

“This financial year has been an extraordinary one and has presented extraordinary challenges for HM Treasury,” Morse observed. “The department’s huge in-year growth in its assets and liabilities illustrates the extreme nature of the problems faced and action taken.”

“The breach of the Treasury’s expenditure limits has necessitated my qualifying my opinion on its resource accounts,” he explained. “This arose from the need to take action at a point when it was too late to obtain spending authority through the Parliamentary estimates process.”

Morse has said that the difficult economic circumstances also underline the “fundamental importance” of an efficient tax system.

“During the economic downturn, not only is there less tax to collect but the process of collecting that tax is more challenging," he said. It is essential that HM Revenue and Customs actively manages tax debt and takes positive steps to clear processing work on hand so that taxpayers have certainty about their liabilities.”

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