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HMRC accounts reveal huge losses from COVID-19

Author: ICAEW Insights

Published: 15 Nov 2021

HMRC’s 2020-21 financial statements report a big drop in tax revenues and high levels of fraud in £81.2bn COVID-19 support schemes.

HMRC recently published its 2020-21 annual report and accounts. These report that core departmental expenditure nearly tripled from £45.8bn in 2019-20 to £124.7bn in 2020-21, reflecting £81.2bn incurred on three major COVID-19 support schemes administered by HMRC. Tax revenues were also £27.9bn lower than 2019-20. 

ICAEW’s public sector team highlighted how central government 2020-21 accounts published before the summer recess showed significant impacts from COVID-19 but warned that those entities most affected by the pandemic, such as HMRC, would not publish their accounts until at the earliest the autumn.

£60.7bn of the £81.2bn on COVID-19 support schemes was for the Coronavirus Job Retention Scheme (CJRS), which provided grants to employers to fund up to 80% of the wages of employees placed on furlough. The Self-Employment Income Support Scheme (SEISS) provided grants to self-employed workers affected by the pandemic at a cost of £19.7bn in 2020-21, and the much smaller Eat Out to Help Out scheme that operated during August 2020 cost £840m.

The Comptroller and Auditor General (C&AG) qualified his regularity opinion on whether public money has been used appropriately in relation to the material levels of fraud and error in these schemes. This was in addition to repeating qualifications from previous years in his regularity opinion on the level of fraud and error in personal tax credits, and in corporation tax research and development reliefs.

HMRC estimates that the most likely level of fraud and error in 2020-21 in COVID-19 support schemes is £5.8bn or 7.1% of the total expenditure, although they say the amount of fraud could be as high as £8.0bn or 9.9% of the total. This compares with a net fraud and error loss in benefits expenditure of £7.6bn or 3.6% of the total spent reported in the Department for Work and Pensions 2020-21 annual report and accounts

HMRC calculates that the CJRS saw the highest level of fraud and error with a most likely estimate of £5.3bn or 8.7% of total expenditure on the scheme in 2020-21. This scheme was set up quickly to ensure that payments could go to employers by the end of April 2020, just over a month after the UK entered lockdown. The government’s own guidance on fraud in emergency management and recovery: principles for effective fraud control issued in February 2020 warned that “the provision of emergency relief and services has an inherently high risk of fraud”.

While involving much smaller numbers, Eat Out to Help Out also saw high levels of fraud, at an estimated 8.5% of scheme expenditure. This scheme was designed to encourage people back to restaurants so cannot be considered emergency funding implemented at short notice. Jim Harra, the Permanent Secretary of HMRC, states in his Accounting Officer’s Report section of the annual report that he sought a ministerial direction for this scheme as he could not conclude the Eat Out to Help Out scheme “offered value for money”.

In addition to the support schemes, HMRC’s 2020-21 annual report and accounts show other major impacts from COVID-19. The compliance yield (the additional tax receipts HMRC estimates are generated from its compliance activities) fell by 18% to £30.4bn compared to the 2019-20 levels. The C&AG’s report included in the annual report and accounts states that HMRC explained the reduction relates to “unusually good performance” in 2019-20 and a “deferral of compliance activity” due to COVID-19.

Staff disruption caused by COVID-19 also appears to have also caused a marked reduction in the quality of customer service. An average of 8% of customer service staff were transferred to COVID-19 related activity and the number of customers waiting more than 10 minutes to get through to the HMRC helpline increased from 29.9% in 2019-20 to 44.7% in 2020-21.

The revenue raised by HMRC through taxation is shown in the HMRC Trust Statement included within the annual report and accounts document. This shows that total tax revenue fell by 4.4% to £608.8bn compared to 2019-20. The changing composition of this revenue shows the impact of COVID-19 with VAT seeing a decline of 11.1% as consumers reduced their spending and Air Passenger Duty falling by 91% to only £300m as travel was severely restricted. In contrast, income tax fell by only 1.1% as average wages increased over the year and the CJRS prevented as large a rise in unemployment as had been feared.

Oliver Simms, Manager, Public Sector Audit and Assurance, at ICAEW commented: “The government acted quickly to protect jobs and livelihoods at the start of the pandemic and an increase in fraud and error was an inevitable consequence given there was insufficient time to build in robust controls over the cash being disbursed. 

“Despite that, it is extremely disappointing that more was not done to reduce the estimated 8.7% of the £60.7bn spent on the furlough scheme that appears to have been lost to fraud and error. The high level of fraud in the Eat Out to Help Out scheme is even more disappointing given that there was more time to plan ahead and learn lessons from the furlough scheme.”

David Clarke, chair of the Fraud Advisory Panel, an independent charity, originally founded by ICAEW, said: “It is unfortunate that our early warnings about the risks of fraud to the COVID-19 support schemes were unheeded and that funds intended to support honest businesses have instead lined the pockets of fraudsters and organised crime. HMRC has a big mountain to climb in recovering funds lost to fraud, but every effort must be made. Crucially, we act upon the lessons learnt from the pandemic to reduce fraud in future crises.”

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