A report by the NAO states that even though HMRC intends to recruit 1,000 full-time staff in 2021-22 to tackle debt collection, the tax authority has confirmed that this will only address the current staff shortfall once turnover is factored in. The current shortfall is expected to be around 300 full-time staff.

Between March 2014 and March 2020 HMRC cut the number of staff working on debt management by 18%, around 880 full-time staff, going from a team of 4,857 to 3,975.

In the years leading up to the Covid-19 pandemic, HMRC claimed that it made ‘efficiency gains’ with the new telephony system and business process reengineering helping it deliver efficiencies equivalent to over 900 staff.

With this, the tax authority maintained its rate of debt collection at around two-thirds of new debt created each year. However, the NAO highlighted that HMRC has written off more tax debt as uncollectable in recent years, over the two years from 2018-19 and 2019-20, it wrote off or remitted around £9bn, around £1bn more than over the previous two years.

HMRC forecasts show that by the end of March 2022 tax debt will be around £33bn, after it reached £42bn in September 2021 and peaked at £67bn in August 2020. The level of tax debt in January 2020 was half of the predicted figure for March at £16bn.

The NAO report stated that this suggested that HMRC could have achieved more with a greater capacity of staff, however at this current level HMRC ‘still faces a significant challenge in clearing the backlog’.

The NAO has estimated that up to 2.4m more taxpayers are in debt to HMRC, when comparing September 2021 with January 2020 the average amount taxpayers owed increased to £6,800 from £4,300. Older debts, which are often more difficult to collect, have increased in value from £2.5bn in 2019-20 to £4.4bn in 2020-21.

Gareth Davies, head of the NAO, said: ‘HMRC faces several years of managing a far greater level of tax debt than it has seen in recent times, as a result of the Covid-19 pandemic.

‘Some debtors have already been able to repay their tax debt quickly, but an unknown number of taxpayers have been badly affected and will struggle to do so. HMRC needs to significantly increase its capacity if it is to meet the changed scale and nature of the challenge.’

An HMRC spokesperson told Accountancy Daily: ‘We are pleased the NAO report recognises how HMRC has supported businesses and individuals in debt throughout the pandemic, such as offering affordable instalment arrangements.

‘Debt to HMRC grew significantly during 2020 to a peak of £72bn in August as a result of the various factors including the economic impact of the pandemic and the government’s decision to support businesses by deferring VAT liabilities.

‘Debt has fallen significantly since the peak to £44bn in September 2021, of which around £4.6bn is already in Time to Pay instalment arrangements.

‘We expect it to fall further as HMRC is recruiting over 1,000 people this year to work in our debt management function and we will continue to take, an understanding and supportive approach to dealing with businesses and individuals in debt to pay back what they owe in an affordable way.’

The NAO said that HMRC ‘lacks a sufficiently detailed understanding of its activity to identify the resources needed to optimise debt collection’.

It added that the tax office does not have a ‘comprehensive breakdown’ of the effectiveness or return on investment of different debt management activities which means that HMRC is ‘unable to identify’ which resources have the most impact.

The tax authority has recognised that it needs to improve its understanding and is currently developing a tool that will help it identify how long each stage of contact with taxpayers takes and what the outcomes are.

HMRC has stated that it plans to prioritise which debts to chase based on the likely impact of the pandemic on the ability to pay. However, those whose ability to pay was considered the least impacted often had larger debts, the NAO said.

The NAO added that HMRC urgently needs to develop a ‘revised strategy for recovering tax debt’ which would consider the varying impacts of the pandemic on different taxpayers and identify which are more able to pay and those most severely affected.

The report also states that new debtors will ‘require more support in the short term to agree on payment plans’ and that HMRC needs to maintain regular contact with these taxpayers with the NAO describing it as ‘a critical factor in recovering debt’.

HMRC stated that it is currently developing better data analytics and has stronger legal powers for collection, including preferential creditor status for some taxes.

These new tools and powers are expected to help it bring in around £300m a year in debt between 2021-22 and 2023-24 and plans to increase the capacity are expected to bring in over £1.2bn a year between 2021-22 and 2023-24. HMRC states that this will be due to ‘making greater use of private sector partners’.

However, even with these improvements HMRC’s estimates of the additional debt it will collect fall far short of the increase in debt from the pandemic.