Tax collection plans are ambitious but more help needed for taxpayers

The Chancellor announced measures today which it is estimated will bring in an additional £1,055 million a year (£715 million of that in improved debt collection) by the end of the forecast period. Added to measures announced in the Autumn Budget this means the government is projecting its tax compliance and debt collection policies will bring in more than £7.5 billion a year extra by 2029-30¹.

Ellen Milner, CIOT Director of Public Policy, said: 

“This is a considerable investment in tackling the tax gap, but there is inevitably a great deal of uncertainty around how much it will ultimately yield. 

“The Office for Budget Responsibility project that this effort will reduce the tax gap by 0.4% of the total tax due – that is by less than 10% of the tax gap. To make a bigger dent in the tax gap the government need to do more to help taxpayers who are trying to be compliant. 

“Almost half of the tax gap relates to taxpayers not getting things right through error or a failure to take reasonable care. The government need to do more to understand the drivers of these problems, and continue to work closely with professional bodies and other to stakeholders who have a mutual desire for an effective tax system and can provide insight into where things are going wrong.” 

Tax Debt 

The government has said it will invest a total of £201m over the next five years in HMRC to collect more unpaid tax debts, including recruiting an additional 600 debt management staff and boosting existing partnerships with private sector debt collection agencies², which is forecast to bring in an additional £2.8bn in tax over the next five years³.  

Ellen Milner commented:  

“This is an ambitious target. Time will tell whether it is achievable, and indeed whether all of that debt pile is actually collectable. 

“Whilst we have no sympathy with those taxpayers who are refusing to pay what they owe and we support the government’s attempts to tackle them, there will also be people who are struggling to pay and those who are legitimately disputing HMRC’s figures. Using debt collectors in those situations is unlikely to be appropriate or successful. Instead, HMRC will need to provide these people with the right support and help so that their debt issues can be resolved in a timely and efficient fashion.  In short, the solution to tackling the overall level of unpaid tax debt demands a holistic approach from HMRC. We would like to see this emerge over the coming months and years”. 

Interest and Penalties 

The Chancellor also announced⁴ increases to late payment penalties, to 3% (currently 2%) of the tax outstanding where tax is overdue by 15 days, plus a further 3% (currently 2%) where tax is overdue by 30 days, plus a charge of 10% per annum (currently 4%) where tax is overdue by 31 days or more. These increases will take effect for VAT and income tax self assessment taxpayers as they join Making Tax Digital, from April 2025 onwards. The government had previously announced a 1.5% increase in the late payment interest rate to take effect from April 2025. 

Ellen Milner said: 

“HMRC continue to deter people from treating them like a bank and a means of cheap borrowing. From April 2025 the cost of paying taxes late will be at an unprecedented level. These latest increases further widen the differential between what taxpayers who pay their taxes late must pay in interest and penalties, and what HMRC pay on late repayments. When the total cost is considered, HMRC could be charging taxpayers who owe them money nearly twelve times⁵ the amount that HMRC pay to taxpayers on monies which have been overpaid.  

“It is important that HMRC recognise the impact on cashflow where repayments are not paid out quickly. And in cases where taxpayers pay late, HMRC must have robust processes in place to understand the reasons why and provide support where necessary. For those struggling to pay, simply increasing the amount owed may do nothing but increase the barrier to settling their debt, leaving everyone worse off.” 

Notes  

1. Across the Autumn Budget and Spring Statement the government’s plans to reduce the tax gap project raising the following net amounts by 2029-30 (end of the forecasting period) – 

Improved tax debt collection	£2,745 million
Additional HMRC compliance staff	£2,820 million
Modernising HMRC systems and data	£700 million
Tackling tax non-compliance in umbrella companies	£500 million
Increased late payment penalties and interest	£340 million
Making Tax Digital rollout for lower earners	£120 million
Other new policy to tackle the tax gap	£310 million
Total	£7,535 million

Sources: CP1298 – Spring Statement 2025 (p32-33) and Autumn Budget 2024 – HC 295 (p116-117) 

2. Source: Spring Statement 2025, 3.15 and 3.16 

3. Source: Spring Statement 2025, p32 

4. Source: Spring Statement 2025, p36

5. Illustration: 

Company A submits its VAT return for the quarter ended 31 March 2026 on 30 April 2026, claiming a repayment of £10,000. HMRC makes some enquires into the return but, satisfied it is correct, releases the repayment on 31 July 2026. 

Based on current interest rates, HMRC will pay repayment interest of £81, ie 3.5% of £10,000, for the period from 8 May 2026 (the day after the due date for the VAT return) to 31 July 2026.

Company B submits its VAT return for the quarter ended 31 March 2026 on 30 April 2026, showing a liability of £10,000. The company experiences cash flow difficulties, but makes the payment in full on 31 July 2026. 

Based on current interest rates, plus the 1.5% increase from April 2025, HMRC will charge late payment interest of £196, ie 8.5% of £10,000, for the equivalent period as above. 

Assuming Company B had not (or could not) agree a time to pay arrangement with HMRC in a timely fashion, HMRC would also charge a first late payment penalty of £600 (being 3% outstanding at day 15, plus 3% outstanding at day 30), PLUS a second late penalty of £147, calculated daily at the equivalent of 10% per annum of £10,000 for the period from 8 June 2026 (31 days after the due date) to 31 July 2026. The total interest and penalties payable by Company B is therefore £943, nearly 12 times as much as that payable by HMRC to Company A. 

ENDS