HMRC expects £12.9bn of tax debt to go uncollected, three times the level recorded before the pandemic, according to a National Audit Office report published today.
The public spending watchdog said the amount of tax debt HMRC did not expect to recover from £4.2bn in 2019-20 to £12.9bn in 2025-26. In the same period, the total amount owed to the tax authority more than doubled, from £19bn to £43.8bn.
According to the NAO, £9.8bn of the £12.9bn, around three-quarters, was made up of write-offs, linked to an increase in company closures and personal bankruptcies. A write-off is recorded when HMRC decides that a debt cannot be recovered because there is no practical way to enforce the liability.
The NAO analysis found that business insolvencies are expected to rise by 39 per cent between 2019-20 and 2025-26.
Part of the increase refers to the courts and HMRC working through a backlog of insolvency and bankruptcy that built up during the pandemic, when the tax office suspended debt collection activities.
HMRC can force companies into liquidation if they are persistently in arrears of tax. The number of petitions secured by HMRC through the courts increased by 185 per cent between 2022-23 and 2025-26, the NAO said.
John Hood, of accountancy firm Moore Kingston Smith, said: “HMRC was reluctant during and after the pandemic to wind up companies, but things have changed over the past 18 months.
“HMRC has increased its resources to enforce debt and where necessary will remove companies that have no real prospect of repaying their debt.”
Annual corporate insolvencies rise from around 14,000 in 2021 to 25,000 in 2023 and around 24,000 in 2025, levels that have been flat since 2024.
Advisers point to a combination of cost pressures on the company. Glen Flannery, of law firm CMS, said: “Formal insolvencies remain at an elevated level.
“What we are seeing now is the cumulative effect of inflation, higher interest rates and rising labor costs at the same time.”
Employers’ National Insurance contributions and the minimum wage both rise after the autumn Budget in 2024. Insolvency specialists have previously cited higher costs, tighter credit and weak demand as the main sources of tension in companies.
Nimesh Shah, of accountancy firm Blick Rothenberg, said: “The UK tax burden is at its highest level in modern peacetime and changes to tax, employment laws and minimum wage increases are adding significant burdens to businesses.
“The irony is that the Government increasing the tax burden has the effect of increasing HMRC’s tax losses.”
The NAO found that 8.2 million taxpayers owed money to HMRC by the end of 2025-26, totaling £43.8bn, equivalent to 4.7 per cent of tax receipts. Half of those loans are more than a year old, watchdogs said.
The NAO report also calls for HMRC to reduce its tax liability from 5.6 per cent of tax receipts in 2022-23 to 4.7 per cent in 2025-26. He said the measures in place from 2021 had generated an additional £10.7bn in revenue.
Gareth Davies, Comptroller and Auditor General, who leads the NAO, said: “HMRC has made good progress on tax debts in the challenging circumstances of the new year, but faces the problem of increasing old debts which are harder to collect.
“HMRC must now focus on preventing avoidable debt and acting quickly when debt is incurred. It has some promising improvements on the railways but must continue its efforts to achieve greater productivity from staff and systems.
A spokesman for HMRC said: “We welcome this report, which recognizes the progress we make in collecting the majority of tax debts while supporting customers who owe tax.
“We make it easy for those who can pay, support those who need help, and act decisively against those who choose not to participate in tax debt.”