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Revenue & Customs’ Debt Recovery Doubt

HM Revenue and Customs’ ability to recover £2bn from people who have paid too little tax has been thrown into question after it emerged it has written off more than £40bn it had expected to collect during the past five years.

The sum – equivalent to four times the Home Office’s annual budget – is revealed in the last five years of HMRC’s accounts, which show provision for bad or “doubtful” debts has been rising dramatically since 2005.

In the last financial year Revenue and Customs has estimated that it will be unable to recover some £10.9bn it expected to claim from taxpayers, up from £5.1bn in 2005, and taking its total provision for uncollected bad debts to £41.6bn over the last five years.

Lord Oakeshott, the Liberal Democrat Treasury spokesman, described the figures as shocking. “This rising torrent of tax bad debt in good times and bad is a shocking indictment of management failure at HMRC and grossly unfair to honest taxpayers,” he said. “HMRC landed every family in Britain with an extra £400 on their tax bill last year because they couldn’t collect the tax that defaulters owed.”

According to HMRC’s accounts, it has had to increase its provision for “doubtful debt” because of a range of factors, including the downturn, an increase in debtors, falling debt-collection rates and anticipated increases in corporate and personal insolvencies.

Experts have criticised it for failing to anticipate how a deterioriating economy would affect its ability to collect tax.

“If you’re not right on top of your debt collection, you will lose far more when your debtors finally go down than you should,” Oakeshott said.

Last year Amyas Morse, head of the National Audit Office, warned Revenue and Customs that “during the economic downturn, not only is there less tax to collect but the process of collecting that tax is more challenging.

“It is essential that HM Revenue and Customs actively manages tax debt and takes positive steps… so that taxpayers have certainty about their liabilities.”

But the current fiasco surrounding HMRC’s new PAYE computer system, which has resulted in six million people paying incorrect tax, raises questions about whether the taxman has heeded the audit office’s warning.

The fiasco has meant that around 4.3 million people are in line for rebates because they overpaid £1.8bn in tax between 2008 and April this year. But 1.4 million are being pursued for unpaid tax.

Yesterday Dave Hartnett, the permanent secretary at Revenue and Customs, said: “I’m not sure I see a need to apologise”, adding: “I’ve read the papers, listened to the media and heard stories of HMRC blunders and IT failure – neither of those are true.”

But Oakeshott said that Hartnett was “in denial”. He added: “HMRC have lost control of debt collection – any private business with this cash collection record would go to the wall within weeks.”