£5bn of unpaid tax bills may be written off

Her Majesty's Revenue and Customs may have to write off up to £5bn of unpaid income tax because of administrative chaos in the department, a tax specialist claimed last night.

As ministers cut budgets across Government, HMRC has admitted confusion from "legacy cases" means it will be unable to chase hundreds of millions of pounds that could have been spent on public services.

Up to £1.6bn may never be paid from outstanding debts dating back up to six years, the chief executive of HMRC, Dame Lesley Straithie, admitted at a Commons hearing last week. Officials were unaware the money was owed and when they discovered it was owed after the introduction of a new computer system, it was impractical to claw back much of the money, she told MPs.

Based on her admissions, Ian Liddell-Grainger, a Conservative backbench MP and PAYE specialist, estimated the total amount that may have to be written off from the past six tax years could reach £4bn or £5bn.

"What we don't know is the updated figures because the system isn't fit to tell us," he said. "There is quite likely £4bn or £5bn collectable. Can it be collected? It's dubious."

The scale of unrecovered debts emerged in evidence Dame Lesley gave to the Commons Public Accounts Committee looking into her department's surprise announcement two months ago that a new computer had identified mistakes in the tax affairs of 5.7 million people. For the years 2008/9 and 2009/10 HMRC said it would repay £1.8bn to 4.3 million people and chase £2bn from 1.45 million people. It then emerged hundreds of HMRC officials were ploughing through 17.9 million more "open cases" prior to 2008.

In exchanges with the PAC, Dame Lesley estimated HMRC was unable to collect large sums from those years because it had left them too long. For the years 2004/5, 2005/6 and 2006/7, she estimated her department might fail to recover £650m. For 2007/8, she disclosed it was owed £1bn.

Based on the recovery of debts from earlier years, the PAC's chairwoman Margaret Hodge suggested the amount that would be paid back from 2007/8 would be only £50m. Dame Lesley replied: "It's absolutely possible."

She said revenue officials had to weigh up the difficulties of contacting people who may have moved employer or address, and the challenges those taxpayers could make to HMRC given that HMRC had all the information it needed but had not acted.

Instead, she suggested, officials were concentrating on arranging refunds to those who had overpaid and chasing debts from more recent years.

Mr Liddell-Grainger, MP for Bridgwater, has been calling for a PAYE system where employers automatically update employees' pay in "real time" rather than at the end of the year.