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The National Audit Office has reported that HMRC wrote off £5.2bn in taxes and overpaid tax credits by nearly £2.5bn in 2011-2012.

Happening for the twelfth year on the trot, HMRC again have been criticised by the National Audit Office (NAO) for their lack of evidence surrounding the loss of tax due to fraud and tax credit errors; urging the Revenue to ‘get a better understanding of the costs and benefits of its interventions’.

The NAO assessment report found that HMRC had to write of £5.2bn in unpaid tax and that there were errors with tax credits: £290m tax credits were underpaid to many families who rely on the tax reliefs, whilst others were overpaid tax credits by a total thought to be around £2 – £2.5bn; auditors found that tax credit fraud had risen from 7.5 – 8.8 percent, when HMRC should be aiming for 5 percent.

£5bn unpaid tax written off by HMRC includes:HMRC write off £5bn tax

£756m income tax HMRC have decided not to pursue;
£53.7m PAYE tax has been overlooked by HMRC in order to keep workloads manageable in their efforts to stabilise Pay-As-You-Earn systems;
NAO estimated that around £4bn in tax credits are unlikely to be recovered by HMRC: £1.7bn of old debt was written off and now a further £2.3bn has been announced.
Controller and auditor general for the NAO, Amyas Morse, said on the release of the report: “There are broad lessons here which reinforce the messages in our recent value for money work on tax administration. The department should seek to apply those lessons across the full range of its activities.

“Staff at HMRC should get a better understanding of the costs and benefits of its interventions – such as debt campaigns and initiatives to drive down levels of error and fraud in tax credits. It should prioritise and target its activities on the basis of a better understanding of risks, such as the risk-profiling of taxpayers,” he added.

Margaret Hodge, Chairwoman of the Public Accounts Committee is said to be ‘stunned’ by the loss of £5bn tax due to tax credit fraud and HMRC errors:

“The sheer scale of waste and mismanagement at HMRC never ceases to shock. It wrote off a staggering £5.2 billion of tax owed, overpaid nearly £2.5 billion in tax credits due to fraud and error and underpaid around £290 million. This year has seen a litany of tax errors and scandals come to light with mistakes made at the most senior level from the Permanent Secretary for Tax downwards.

“HMRC needs to get a grip before it introduces its new real time Pay-As-You-Earn information systems and begins the high-risk move from tax credits to the universal credit.”

PAYE errors uncovered 5.8m people were paying the wrong taxProblems with the PAYE system aroused when HMRC merged together 12 different computer systems in the aim of making it easier for PAYE taxpayers to pay the correct amounts of National Insurance and income tax, as well as helping to spot errors.

However, in 2010 government announced that the new PAYE computer system uncovered that 5.8 million people had not been paying the right amount of tax between 2008-2010; leaving millions of taxpayers hit with bills they could not afford to pay, some of which went back for several years. So as not to struggle with the workload from all of the unpaid taxes that had emerged, HMRC decided to write off most of the revenue.

A spokesperson for HMRC said that the Revenue has a ‘long way to go’ but that progress has been made. With the UK tax gap currently standing at £35bn HMRC are looking to tax evasion taskforces and the introduction of the General Anti-Avoidance Rule in the 2013 Finance Act to combat the loss of tax from tax avoidance, tax evasion and tax fraud.

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