Commons group chief shocked as taxmen write off almost £5.2bn

Meanwhile, HMRC’s accounts for 2011/12 showed it overpaid around £2-£2.5bn in tax credits and underpaid up to £290m as a result of fraud and error, said the report by the National Audit Office. A target of reducing the level of fraud and error to five per cent of tax credit entitlements was missed.

The chairman of the influential House of Commons Public Accounts Committee, Margaret Hodge, said she was shocked by “the sheer scale of waste and mismanagement” at HMRC.

Over the last two years, the report found there had been a “large increase” in the amount of tax which HMRC decided not to pursue – including £756m-worth of income tax in 2011/12 alone. Total tax debts being pursued stood at £13.3bn at the end of March, down from £15bn the year before.

The department met its target of reducing tax credit debts from £4.7bn to £4bn by March this year, but only after writing off old debts totalling £1.7bn. It estimates that £2.3-£4bn of tax credit debt is unlikely ever to be recovered.

The 2011/12 total of £5.17bn in write-offs and remittances – debts which have been dropped because they are too small to be worth pursuing or would cause hardship if collected – included £1.5bn in income tax, £1.9bn in VAT, £653m in National Insurance and £503m in corporation tax.

The figure was down on the £5.5bn write-offs and remittances in 2010/11, but still made up more than one per cent of the total £474.2bn tax collected.

Overall revenue increased by £4.5bn (0.96 per cent) in 2011/12, while the amount raised by VAT increased by £9.3bn, largely because of successive rises in the purchase tax from 15 per cent to 20 per cent between 2010 and 2012. But the Government took in less money from corporation tax.

The NAO also reported progress in tackling problems in the PAYE service which emerged following the introduction of a new administration system in 2009.