Tax debt is at more than double its pre-pandemic levels and up to 2.4 million more taxpayers are in debt to HM Revenue and Customs (HMRC), according to a spending watchdog.
Staffing levels at HM Revenue and Customs (HMRC) are unlikely to be enough to manage the increased workload, with years of tax debts ahead which are potentially far higher than usual, the National Audit Office (NAO) said.
As the UK emerges from the pandemic, HMRC will need to strike a balance between pursuing tax debt while allowing taxpayers time to recover their finances, it added.
The taxman paused most debt collection activity as the UK went into lockdown in March 2020. To support businesses and people, payments of VAT and self-assessment income tax were also deferred.
Tax debt ballooned by £26 billion between January 2020 and September 2021.
Some £42 billion was owed to HMRC in September 2021, up from £16 billion in January 2020.
Total tax debt peaked at £67 billion in August 2020, with some debts being repaid as the economy reopened and extensions for VAT and self-assessment passed.
“HMRC still faces a significant challenge in clearing the backlog,” the report said.
The tax authority forecasts that it will have twice the usual level of debt to manage at the end of March 2022.
It predicts total tax debt will shrink to £33 billion by March 2022, but this assumes the pandemic has not changed repayment behaviour, according to the NAO.
It said that up to 2.4 million more taxpayers are in debt to HMRC, when comparing September 2021 with January 2020.
The average amount taxpayers owe has increased to £6,800. Older debts, which are often more difficult to collect, have increased in value from £2.5 billion in 2019-20 to £4.4 billion in 2020-21.
HMRC has prioritised 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.
Tax debts are normally meant to be cleared before the next tax period, but this may be unrealistic for many of those affected by the pandemic and HMRC has made it easier for taxpayers to make longer repayment arrangements.
The average duration of repayment plans increased from around five months pre-pandemic to 12 months in July 2021, the NAO said.
Efficiency drives meant HMRC cut the number of staff working on debt management by 18% between March 2014 and March 2020.
It maintained its rate of debt collection at around two-thirds of new debt created each year – which suggests it could have achieved more with greater capacity – the NAO said.
It added that HMRC is unlikely to have enough staff to manage the increased tax debt prompted by the pandemic.
HMRC intends to recruit 1,000 full-time staff in 2021-22, however, it told the NAO that once staff turnover is factored in, this will only address current staffing shortfalls.
The NAO said HMRC should 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.
Gareth Davies, the 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.”
Dame Meg Hillier, chair of the Public Accounts Committee, said: “Covid-19 sent unpaid taxes soaring, which HMRC must now try to recover.
“However, the pandemic had a polarising effect on the taxpayer, with some shoring up their bank balances while others struggled to make ends meet.
“HMRC now faces a careful balancing act. It must quickly recover the unpaid taxes from those that can afford it, yet support those who are struggling to pay.”
An HMRC spokesperson said: “As is recognised in the NAO’s report, we have supported businesses and individuals throughout the pandemic, through debt support such as Time to Pay and VAT deferrals, and inevitably this impacted the debt balance.
“The debt balance is reducing as the economy recovers and we re-engage with customers to understand their circumstances and agree Time to Pay arrangements where appropriate – and we expect it to fall further.
“We have taken, and will continue to take, an understanding and supportive approach to dealing with those who have tax debts or are concerned about their ability to pay their tax.”