UK Politics

VAT fraud: Revenue and Customs urged to show 'more urgency'

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Image caption More than £30bn in tax owed to the Exchequer in 2010 has not been paid

HM Revenue and Customs (HMRC) has been urged to show "more urgency" in how it deals with VAT fraud and tax losses arising out of online trading.

A National Audit Office report found £32bn of tax was uncollected in 2010, including an estimated £9.6bn in VAT.

Labour MP Margaret Hodge said such a gap was "startling" and the agency's response to the challenge presented by the digital economy was too slow.

HMRC said it was using key data and new technology to respond to the threat.

In its report on its performance in the last financial year, the public spending watchdog said HMRC had made good use of intelligence to tackle VAT abuses - including preventing £579m in fraudulent repayments.

'Huge money'

But it found the agency did not carry out comprehensive real-time checks across all VAT returns and had yet to produce a comprehensive plan to react to the emerging threat of VAT losses due to online trading.

"It has helped to ensure legislative change to close existing VAT loopholes and launched a series of initiatives, but overall HMRC has shown less urgency in developing its operational response to this threat," the report said.

HMRC should consider devoting more resources to enhanced risk profiling of VAT returns, the watchdog added.

'Risk assessed'

Mrs Hodge, who chairs the cross-party Commons Public Accounts Committee, said the size of the estimated VAT gap in 2010 showed that concerted action was needed.

"That is a huge amount of money - 10% of the VAT that should be collected and a third of the overall tax gap," she said.

"Yet despite some progress, HMRC still does not comprehensively check all VAT returns and its response to the emerging threat from online trading has been far too slow."

HMRC said it had launched a campaign last year urging online traders to put their tax affairs in order and was chasing those believed to owe tax who failed to come forward. Guidelines for online traders have also been simplified.

"The government has made almost a billion pounds available to us to tackle non compliance and we have committed to bring in over £24bn by 2015/16 from policing the tax rules," a spokesman said.

"All VAT returns are carefully risk assessed for further action and we have doubled the amount of extra VAT collected in the last six years," he added.

"We have also significantly reduced the VAT lost to missing trader fraud from its peak of £2bn to £3bn in 2005-06 down to £500m to £1bn."

'Inherent tensions'

The report also found that between £1.9bn and £2.3bn had been overpaid in tax credits in 2011-12 because of error and fraud while between £170m and £360m had been underpaid due to error.

However, the level of error and fraud was the lowest since tax credits were introduced in 2003-4.

More generally, the NAO warned there were "inherent tensions" involved in HMRC's need to cut its costs and, at the same time, improve customer experience and reinvest savings to help the fight against tax avoidance.

"We have found good progress by HMRC in reducing costs and meeting its revenue targets," said its director general Amyas Morse. "In respect of raising customer service levels to an acceptable standard, it has a much longer way to go.

"HMRC faces a considerable management challenge if it is to meet its commitments to increase revenue by stepping up its anti-avoidance and anti-fraud activities."

In response, HMRC said it had brought in an extra £1.3bn in tax revenue last year and made a series of structural changes that would lay the foundation for a tax system "fit for the 21st Century".