Total tax revenue fell by 4.4% in 2020-2021 because of the COVID-19 pandemic according to the National Audit Office (NAO). HM Revenue and Customs (HMRC) now needs to recover fraudulent claims made to the COVID-19 support schemes, and restore its tax compliance activity to pre-pandemic levels.
The economic impact of COVID-19 caused a significant reduction in tax revenues in 2020-21. HMRC reported total tax revenues of £608.8 billion in 2020-21, down by £27.9 billion compared to 2019-20 (£636.7 billion). The largest components of revenue were income tax, national insurance contributions and VAT.1 HMRC estimates that the income tax and national insurance contributions due on the COVID-19 support scheme payments it made during the year accounted for around £10.7 billion of revenue in 2020-21.
HMRC estimates that the yield from its tax compliance activities in 2020-21 was £30.4 billion, down 18% compared to 2019-20.2 The yield was affected by the unprecedented economic circumstances caused by COVID-19, and because pandemic restrictions meant HMRC had to reduce its compliance activity. HMRC opened 29% fewer civil compliance cases in 2020-21 than in 2019-20 and closed 26% fewer cases. HMRC told the NAO it recognised the challenges that businesses and individuals were facing, and therefore took a sympathetic approach to those struggling to pay their tax.
HMRC demonstrated considerable agility in implementing substantial aspects of the government’s response to COVID-19, with a cost of at least £94 billion in 2020-21. The Coronavirus Job Retention Scheme (CJRS) enabled employers to keep employees in 11.5 million jobs on a period of temporary leave or furlough, or reduced working, at a cost of £61 billion. The first three phases of the Self-Employment Income Support Scheme (SEISS) have seen 7.2 million claims totalling £20 billion in support for the self-employed.
The Comptroller & Auditor General of the National Audit Office, Gareth Davies, has qualified his opinion on the regularity of HMRC’s Accounts. This is due to material levels of error and fraud in the COVID-19 support schemes, in tax credits and in Corporation Tax research and development reliefs.
HMRC’s current estimate of error and fraud in the COVID-19 support scheme payments is £5.8 billion, of which £5.3 billion relates to CJRS. HMRC’s current estimate of the rates of error and fraud in each of the schemes is 8.7% for CJRS, 2.5% for SEISS and 8.5% for the Eat Out to Help Out scheme. Its estimates are subject to considerable uncertainty and the actual levels of error and fraud in the schemes could be significantly different.
HMRC estimates that error and fraud resulted in overpayments of tax credits of £880 million from 490,000 claims, a reduction of £220 million compared to the previous year. Errors in 350,000 claims resulted in underpayments of £150 million, a reduction of £20 million compared with the previous year.
HMRC estimates that the level of error and fraud present in corporation tax research and development reliefs in 2020-21 is £336 million, a rate of 3.6%, which is equal to the previous year. This represents an increase of £25 million compared to the previous year.
“The COVID-19 pandemic has significantly reduced tax revenues and made it more difficult for HMRC to take enforcement action. Now that the initial impact of the pandemic has eased, normal tax compliance levels should be restored. HMRC also needs to recover money paid out through fraudulent claims made under the COVID-19 support schemes.”
Gareth Davies, head of the NAO
Read the full report
HM Revenue & Customs 2020-21 Accounts
Notes for editors
1. Revenues from VAT, hydrocarbon oils duties and Income Tax arising from Self Assessment all fell during the period. Income Tax arising through Pay As You Earn, Corporation Tax and Capital Gains Tax all rose compared to 2019-20. Revenues from National Insurance Contributions remained broadly unchanged.
2. While most tax revenue is paid to HMRC without the need for further intervention, some revenue is only received as a result of specific compliance actions. Compliance yield measures the effectiveness of these compliance and enforcement activities. It is one of HMRC’s main performance measures.
3.Press notices and reports are available from the date of publication on the NAO website. Hard copies can be obtained by using the relevant links on our website.
About the NAO
The National Audit Office (NAO) scrutinises public spending for Parliament and is independent of government and the civil service. It helps Parliament hold government to account and it uses its insights to help people who manage and govern public bodies improve public services.
The Comptroller and Auditor General (C&AG), Gareth Davies, is an Officer of the House of Commons and leads the NAO. The NAO audits the financial accounts of departments and other public bodies. It also examines and report on the value for money of how public money has been spent.
In 2020, the NAO’s work led to a positive financial impact through reduced costs, improved service delivery, or other benefits to citizens, of £926 million.