“All the world is topsy-turvy,” wrote Jack London, “and it has been topsy-turvy since the plague”. Certainly, during the recent pandemic, the world was very topsy-turvy from a tax point of view. Never in our lifetimes has the taxman given so much money away. As we struggled with lockdowns, a myriad of schemes paid people’s wages, subsidised their self-employment and even gave us extra money to ‘eat out to help out’ at our local pub or restaurant. And topsy-turvy as that all was, it seems even topsy-turvier that – even though HMRC’s prosecutions of tax evaders dropped by a third – it doesn’t plan to ramp them back up soon. Doesn’t it want some of that money back?

How much have prosecutions of potential tax evaders dropped?

A recent report by the House of Commons Public Accounts Committee found that HMRC opened 32% fewer cases into potential tax evaders in 2020-21 than during the previous year. It also put some investigations on hold.

Completed prosecutions of tax evaders also dropped. In 2020-21 there were 163, while the following year saw 236. Before the pandemic, the annual figure stood at around 700.

Why did tax prosecutions drop?

The main reason for the drop in prosecutions was the introduction of the various COVID-19 support schemes. Some 4,000 HMRC compliance staff were drafted in to help administer these schemes.

Initially, HMRC didn’t recruit at scale to cover this shortfall. More recently it has recruited 4,200 new compliance staff. However, it will take 4 years for these staff to develop the skills they need to become fully productive. This means the average annual return per staff member – £1.3m before the pandemic ­– is likely to stay lower.

When will prosecutions of possible tax evaders rise again?

Perhaps the most interesting part of the report is contained in this sentence:

“[HMRC] is not planning on restoring the number of prosecutions to pre-pandemic levels, even with the backlog.”

When asked why this was, HMRC said that it wanted to focus its criminal prosecution powers to tackle the most serious and complex cases, rather than large volumes of smaller cases. It also said that it was not seriously concerned that this reduction in prosecutions would weaken the deterrent effect. It does not currently have a method for monitoring this.

So, in short, it seems that HMRC prosecutions will not be rising significantly in the near future. However, it’s worth remembering that the taxman still has other enforcement tools, particularly civil powers, to increase its tax take.

Are tax evaders getting away with it more?

Probably, yes. Before the pandemic, tax revenue from compliance work stood at 5.2%. That dropped to 4.2% in 2021-22. HMRC essentially lost £9bn in compliance yield over the two years from 2020 to 2022. This is set against a backdrop of rising tax debt levels, so it’s surprising that HMRC doesn’t intend to ramp up prosecutions.

What does this drop in tax prosecutions mean for me?

Hopefully nothing. Despite the drop in prosecutions of potential tax evaders, it’s simply not worth trying to game the tax system. Even in the first year of the pandemic, HMRC opened 114,000 cases into possible tax evasion.

Rather than evade taxes, it’s a much better option to use legal tax planning strategies to cut your tax bill. This isn’t about using shady loopholes, but doing things like choosing a tax efficient structure for your business, making sure you benefit from capital allowances and claiming any R&D tax credits you’re eligible for. Talk to us today if you’d like to learn more, or if you’d like to learn more about our tax investigation fee protection service.

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    About Jon Pryse-Jones

    Since joining THP in 1978, Jon Pryse-Jones has been hands on with every area of the business. Now specialising in strategy, business planning, and marketing, Jon remains at the forefront of the growth and development at THP.

    An ideas man, Jon enjoys getting the most out of all situations, “I act as a catalyst for creative people and encourage them to think outside the box,” he says, “and I’m not afraid of being confrontational. It often leads to a better result for THP and its clients.”

    Jon’s appreciation for THP extends to his fellow team members and the board.  “They really know how to run a successful business,” he says.  He’s keen on IT and systems development as critical to success, and he continues to guide THP to be at the cutting edge and effective.

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