Taxpayer debts hit £37.8bn

Taxpayer debts to HMRC swelled by 10% to £37.8bn in just three months as interest rates and inflation continues to rise

The amount of tax debt owed to HMRC has increased by 10% from £34.3bn to £37.8bn in the last three months alone as rising inflation and interest rates see more taxpayers unable to pay their bills, shows analysis by law firm Pinsent Masons.

The growing tax debt is now so overdue that it is subject to immediate debt collection procedures.

It does not include a further £9.1bn owed to HMRC as part of agreements such as Time to Pay arrangements.

Andrew Robertson, partner at Pinsent Masons, said that the rise in unpaid tax would escalate pressure on HMRC to increase its enforcement action to make up for the shortfall.

Robertson said: ‘The last three months have seen a very significant jump in delinquent tax debt – more businesses and individuals are struggling to pay their tax bills as other costs keep climbing.

‘HMRC is in a difficult position where it needs to bring in as much of this delinquent tax as possible without triggering a huge wave of business insolvencies. That’s an unenviably fine line to have to walk.’

HMRC could try to shut down more businesses to settle their tax debts. These winding-up petitions are an area where HMRC stopped almost all activity during the pandemic although it has begun to petition the courts to close more businesses in recent months.

The tax authority is already increasing the number of tax investigations, with 72,000 civil compliance checks opened in the second quarter of 2022, an increase of 22% from the 59,000 checks opened in the first quarter of the year.

Robertson added: ‘We expect to see HMRC first focus on those businesses that have agreed Time to Pay arrangements and later breached them, plus the companies with the biggest unpaid tax debts. That may buy some time for some of the other struggling businesses to recover.

‘Another issue that may save some businesses is capacity restrictions at HMRC. It isn’t clear whether it has enough capacity to handle a significant rise in the number of winding-up petitions required.’

HMRC might also increase its use of debt collection agencies to recover the rapidly growing amount of delinquent tax. Currently, the tax authority uses a roster of debt collection agencies to pursue taxpayers, although it sharply reduced this activity during the Covid-19 pandemic.

Abigail McGregor, legal director at Pinsent Masons, said: ‘Even HMRC is today flagging its concerns about the increase in new debt this quarter. HMRC will need to find ways to recover these funds, which will, inevitably, include increases in investigations into taxpayers’ affairs.

‘While HMRC has been making significant progress on clearing the pandemic-related debt burden, the levels of managed debt still represent a much higher proportion of the overall debt burden than they did pre-pandemic. This will put additional pressure on HMRC resources.’

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