Corporate report

HMRC compliance yield: technical note

Published 17 July 2023

This note provides an explanation of the different components that are included in the reported amount of compliance yield. It includes commentary on the trends over time and an explanation on what drives any uncertainty within each component. It also provides an update on how HMRC reports Future Revenue Benefit for 2022 to 2023 and provides HMRC’s customer compliance yield split by business area.

Trends within components of compliance yield and levels of uncertainty

Explanation of compliance yield components

Compliance yield is the estimate of revenues that would otherwise have been lost if not for HMRC’s compliance activity and the impact of policy changes to address non-compliance.

The main components of compliance yield are:

Cash Expected

The amount of additional revenue due when we identify past non-compliance and that we reasonably expect to collect (note: Cash Expected includes tax geared interest plus penalties. A 10% reduction is also applied in some circumstances to reflect revenue that we estimate may not be collected after the compliance check is complete (see the sensitivity analysis section below for further detail).

Future Revenue Benefit (FRB)

The estimated impacts of our compliance work on customers’ future compliance. FRB is estimated for each year we expect continued compliance from the customer to impact the Exchequer.

Revenue Loss Prevented (RLP)

Revenue that we prevented from being lost to the Exchequer through our compliance work. RLP recognises the compliance yield where a fraudulent or erroneous claim to a relief or repayment is either reduced or refused. RLP also recognises the estimated value of refused registrations, disruption of criminal activity and the revenue value of seized goods.

Upstream Product and Process Yield

The estimated annual impact on net tax receipts of legislative changes to close tax loopholes and changes to our processes which reduce opportunities to avoid or evade tax.

Upstream Operational Yield

The estimated impact of operational activities undertaken to promote compliance and prevent non-compliance before it occurs, for example, through a range of activities such as education, nudges and prompt campaigns. This does not include compliance yield from legislative or process changes. This was categorised with Cash Expected until 2019 to 2020.

Examples of how compliance yield components relate to compliance activity can be found in the technical note: The tax gap and compliance yield – what they are and how they relate.

We have robust governance and assurance processes in place intended to check compliance yield claims are accurate, including a dedicated assurance team established in 2016 to support the quality of compliance work and yield claims. Additionally, we have updated our governance processes for challenging and assuring how upstream yield claims are estimated, focusing on the key assumptions and overall methodology for each claim.

Trends within compliance yield components

The total compliance yield reported across different components varies each year depending on the nature of non-compliance we have identified, and the tax or duty we expect to collect or protect.

We calculate and report the compliance yield in the year that a compliance risk is resolved and we recognise the impact of some compliance yield components on the Exchequer in the current year (Cash Expected and Revenue Loss Prevented). Where some yield components have a future impact, while we calculate the yield impact in the year the risk is resolved, we report the yield in the year we expect our activity will impact the Exchequer. Trends in compliance yield components can therefore reflect compliance activity to tackle risks that concluded in earlier years.

HMRC’s strategic approach to compliance includes an ambition to move more compliance activity upstream. Upstream compliance activities aim to stop non-compliance from occurring in the first place, whereas downstream compliance activity deals with non-compliance after it has occurred. Our compliance yield from upstream activity (upstream product and process yield and upstream operational yield) grew as a proportion of total compliance yield from 22% in 2019 to 2020 to 30% in 2021 to 2022 before decreasing to 25% in 2022 to 2023. The proportion of compliance yield from upstream compliance was higher in 2020 to 2021 and 2021 to 2022, with lower levels of downstream yield as a result of reduced operational compliance activity during the pandemic. Upstream compliance yield can naturally vary as a proportion of our total compliance yield from year to year as it can be affected by the precise timing of particular interventions. For example, upstream product and process changes which close tax loopholes or reduce opportunities to avoid or evade tax can result in large amounts of upstream compliance yield as this impacts many taxpayers. Longer term, our aspiration is that 25% of compliance yield will be from upstream compliance activity.

There are some factors which can cause variation across multiple components of compliance yield, for example, we invested in recruiting over 4,000 new compliance officers in 2021 to 2022, providing a strong foundation for future years that will help us in maintaining a stable tax gap – but has contributed to our performance challenge as we redeployed experienced staff to train and support our new officers. In some years, variations can also reflect the impact of large, one-off cases, for example where a case finalised through litigation impacts multiple taxpayers and so has an exceptionally large impact.

As explained in the main body of the Annual Report and Accounts, compliance yield in any particular year is impacted by revenue effects from our interventions in earlier years. We are still seeing the effects of restrictions on operational activity during the COVID-19 pandemic on 2022 to 2023 performance, through lower Future Revenue Benefit yield.

Compliance yield components over time (£ billion)

	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023
Cash Expected	13.1	9.0	7.4	6	10.1
Revenue Loss Prevented	9.3	10.6	8.2	10.3	10.6
Future Revenue Benefit	7.6	9.0	5.9	5.2	4.7
Accelerated Payments	0.3	0.1	0.0	-	-
Upstream operational	-	4.1	3.1	3.9	5.3
Upstream product and process	3.7	4.2	5.9	5.4	3.3
Total	34.1	36.9	30.4	30.8	34.0

Note: Figures may not sum due to rounding

Cash Expected

Cash Expected decreased in 2020 to 2021 and 2021 to 2022 as a result of restrictions on compliance activity during the pandemic, the redeployment of compliance staff to support Covid schemes and the training of over 4,000 new compliance staff. Whilst we prioritised supporting our customers and the Covid schemes through the pandemic and addressing serious non-compliance, fewer compliance checks overall were opened and so the amount of additional liabilities identified on past returns was temporarily lower as a proportion of the total compliance yield. Cash Expected increased in 2022 to 2023 as we opened and closed more compliance checks after pandemic restrictions ended and as redeployed staff returned to operational casework. Upstream operational yield was reported within Cash Expected until 2019 to 2020 and therefore 2018 to 2019 Cash Expected totals appear higher. This is now reported as a separate category.

Revenue Loss Prevented

Revenue Loss Prevented totals have remained comparatively stable over the past 5 years. RLP totals reflect diverse compliance activity, with 2018 to 2019 and 2019 to 2020 compliance yield totals including two exceptionally large settlements which were spread across Revenue Loss Prevented and Future Revenue Benefit. In 2021 to 2022 and 2022 to 2023 we identified and responded to significant criminal attacks on the ITSA and VAT systems and the continued high levels of RLP reflect the impact of our compliance activity to prevent fraudulent repayments.

Future Revenue Benefit

Future Revenue Benefit has decreased significantly since 2019 to 2020. From 2016 to 2017, in response to an NAO recommendation, we started recording FRB for the future year(s) in which it has an impact on Exchequer receipts, rather than the year in which we completed the compliance intervention. This means that some of our FRB relates to compliance activity completed in earlier years. The reduction in compliance activity during 2020 to 2021 and 2021 to 2022 meant that we opened and closed fewer compliance cases. As a result, the amount of FRB we reported for 2022 to 2023 from interventions closed in past financial years was £1.8 billion lower than the average from 2018 to 2019 to 2020 to 2021. This lower level of FRB scored from compliance interventions completed in earlier years will impact business results for the next few years.

Additionally, the two large cases that were exceptional in their value that closed in 2018 to 2019 and 2019 to 2020 included some FRB that impacted later years. As the FRB from these cases decreased with time, according to the time limits we apply, overall FRB totals also decreased. More detail on the time limits we apply is covered in the next section.

Upstream Operational yield

Upstream Operational yield has grown as a percentage of our total yield over the past 5 years, in line with our strategy to prevent non-compliance before it occurs and promote good compliance. We started reporting Upstream Operational Yield as a separate yield category from 2019 to 2020, whereas previously it was reported as part of our Cash Expected totals. In line with our strategy to move more of our compliance activity upstream, our Upstream Operational Yield has increased from 11% of total compliance yield in 2019 to 2020 to 16% of total compliance yield in 2022 to 2023.

Upstream Product and Process yield

Upstream Product and Process yield is driven by legislative changes to close tax loopholes and changes to our processes which reduce opportunities to avoid or evade tax. Measures are typically scored for a maximum of 5 years, although in certain circumstances this can be extended. The decrease in Upstream Product and Process Yield in 2022 to 2023 is as a result of some measures reaching the end of the 5-year scoring period.

Explanation of the drivers of uncertainty within the compliance yield estimate:

Cash Expected

While the amount of tax due from these cases is very clear as it derives from investigations carried out by our compliance officers, there remains uncertainty around the final amounts paid. Compliance yield is calculated and reported at the point the compliance check is closed and final payment may sometimes take place sometime after this, for example where there are Time to Pay arrangements in place. In addition, payments of liabilities can include both the additional liability identified through our compliance activity and the payments of liabilities that arise through voluntary compliance, making it difficult to track every compliance assessment through to final payment.

For some customer groups, such as Large Business, there tends to be higher levels of financial stability and so we have higher levels of confidence that full payment of additional liabilities identified will be received. For ‘mass market’ interventions (for example, interventions on small businesses and individuals) there is less certainty that the payment will be made in full. A central discount of 10% is therefore applied to reflect the fact that some of the amounts that we identify will not be collected, for example where a business subsequently becomes insolvent after the compliance check has been completed. The discount is assumption based and subject to uncertainty.

If at the point of closure, the evidence gathered by a compliance officer shows that we cannot reasonably expect to collect the full additional liability identified through our compliance activity, then the amount of Cash Expected is adjusted accordingly and reduced to a smaller amount or even to nil, for example if the customer has, or will shortly, become insolvent.

Revenue Loss Prevented

Where we stop or reduce repayment claims as a result of error or fraud, we have a high level of certainty over the RLP generated as we know the value of the claim made. Where we disrupt criminal activity, we estimate what would have been the continued losses to the Exchequer if we had not intervened and score this as RLP. This estimate is subject to a much higher level of uncertainty than the RLP from repayment claims that we prevent or reduce, as the estimate includes assumptions around future behaviour and the associated tax or duty impacts.

RLP from disrupting criminal activity is scored for up to 12 months following the intervention.

Future Revenue Benefit

FRB is an estimate of the impact of the compliance check on the behaviour of the taxpayer following the compliance check. FRB is scored for up to 2 years for most taxpayers. For some customer groups, such as Large Business, we may score up to 5 years FRB. This is because these customer groups typically demonstrate higher levels of financial stability, and the Customer Compliance Manager model means we have more evidence to support an enduring impact from the compliance check. Although we limit the time that FRB can be scored based on assumptions about how long the behavioural impact will last for most taxpayers – in some instances the behavioural impact will last longer than the period of time we have reported the FRB for.

When a compliance check concludes, compliance officers consider multiple factors when estimating the future impact, including the behaviour that gave rise to the error, the compliance action taken to address it and whether tax or duty liability still remains. Where the error was one-off in nature, or where there is no reasonable expectation that the customer will file correct returns in future, no FRB can be claimed.

While there is uncertainty in estimates that are based on future customer behaviour, there are consistent factors that compliance officers must consider and incorporate into their estimates.

Upstream Product and Process yield

This component covers the estimated annual impact on net tax receipts of legislative changes to close tax loopholes, as well as changes to our processes which reduce opportunities to avoid or evade tax. The estimation methods for measures that make up this component are subject to independent scrutiny by the Office for Budget Responsibility.

Upstream Operational yield

This component estimates the impact of operational activities undertaken to prevent non-compliance and promote compliance through a range of activities such as education, nudges and prompt campaigns. The compliance yield impact of Upstream Operational compliance activity is assessed using an evaluation framework which considers the reliability of the estimate before we report compliance yield.

Sensitivity analysis

There is the possibility that circumstances unknown at the point of case settlement may result in the taxpayer being unable to pay and a further discount on the amount recorded as intervention yield is applied to account for this in specific circumstances. The discount assumption is currently set at 10% and was based on the best available evidence when it was set at Spending Review 2010. The use of this assumption means that we have a transparent, established rule for scoring Cash Expected compliance yield which has been consistently applied and HMRC’s compliance activity can therefore be compared on a like-for-like basis over time. We have reviewed the evidence available for this assumption and 10% remains our best estimate.

We have carried out sensitivity analysis of our Cash Expected compliance yield by providing some hypothetical adjustments to this central discount of 10%. The proportion of our total compliance yield discounted is currently 0.6% in 2022 to 2023 – reducing the discount rate to 5% results in a 0.3% discount applied to total compliance yield and doubling this rate to 20% would result in a 1.1% discount to our total compliance yield.

Impact of varying Cash Expected discount rate

	Central discount rate of 10% for Cash Expected (£m)	Impact of varying Cash Expected discount rate to 5% (£m)	Impact of varying Cash Expected discount rate to 15% (£m)	Impact of varying Cash Expected discount rate to 20% (£m)
Total HMRC compliance yield (undiscounted)	34,224	34,224	34,224	34,224
Cash Expected discount rates	10%	5%	15%	20%
Reduction in compliance yield	-193	-96	-289	-386
Total HMRC compliance yield (discounted)	34,031	34,128	33,935	33,838
Discounted amount as a % of total HMRC compliance yield	0.60%	0.30%	0.80%	1.10%

HMRC’s compliance yield: How HMRC reports Future Revenue Benefit – an update for 2022 to 2023

Introduction

Since 2011, and in line with the Organisation for Economic Co-operation and Development (OECD) best practice, we have included FRB across all HMRC’s compliance work, helping us to reflect and understand the full impact of our compliance work and informing how we resource to areas of highest risk.

In their 2014 to 2015 Standard Report, the National Audit Office (NAO) said that there were inconsistencies between how we recorded FRB and Product and Process yield. FRB was reported in the year the compliance intervention concluded, whereas Product and Process yield is reported when the product or process change impacts Exchequer receipts.

A technical paper accompanied our 2015 to 2016 Annual Report and Accounts explaining how HMRC planned to change how it reports FRB and the impact of the change compared to the original method. This technical paper provides an update on that reporting approach for FRB.

Changes to our FRB methodology

From 2011 to 2012 to 2015 to 2016, we reported FRB in the year in which we completed each compliance intervention. At the beginning of the Spending Review 2015 period (2016 to 2017 to 2019 to 2020), responding to the NAO’s recommendation, we started recording FRB for the future year(s) in which it has an impact on Exchequer receipts rather than the year in which we completed the compliance intervention.

Total amounts of FRB generated between 2011 to 2012 and 2022 to 2023 can be found in the data file FRB technical annex tables 2022 to 2023. The rows in Figure 1 show the total FRB generated by the previous reporting method (scoring in year of activity) and the columns show how FRB impacts on the Exchequer in each year under the current reporting methodology (scoring in year of impact).

Adjustments to FRB for COVID-19

When estimating the impact of our compliance checks on future years’ liabilities, we estimate how much additional tax the taxpayer will pay in each future year as a result of the corrected tax position. This FRB estimate assumes that overall tax receipts in those future years are relatively stable and the taxpayer’s circumstances remain similar. However, tax receipts were impacted by the pandemic in a way we could not have foreseen at the time we calculated the Future Revenue Benefit, meaning we would have overestimated the impact of our investigations. To account for this, we made an adjustment to the FRB brought forward from previous years to 2020 to 2021 in line with the reduction in tax receipts compared to the Office for Budget Responsibility’s (OBR) pre-COVID-19 forecasts. The 9% adjustment reduced FRB assessed from previous years, impacting in 2020 to 2021, from £5,517 million to £5,020 million.

Tax receipts have since recovered and we have assessed that this will not have had a material impact on FRB brought forward from previous years. As such, no adjustment has been made to FRB assessed in previous years impacting in 2021 to 2022 onwards.

How HMRC’s customer compliance yield is split by business area and tax regime

Compliance yield breakdown in 2022 to 2023

Large Business Directorate

Tax regime	2022 to 2023 (£ million)
Corporation Tax	2,557
Excise	468
Income Tax	27
VAT	5,142
Other compliance interventions	411
Total	8,606

Wealthy and Mid-Sized Business Compliance Directorate

Tax regime	2022 to 2023 (£ million)
Corporation Tax	579
Excise	-
Income Tax	2,683
VAT	1,622
Other compliance interventions	1,018
Total	5,902

Individuals and Small Business Compliance Directorate

Tax regime	2022 to 2023 (£ million)
Corporation Tax	109
Excise	179
Income Tax	1,475
VAT	2,084
Other compliance interventions	905
Total	4,753

Counter-Avoidance Directorate

Tax regime	2022 to 2023 (£ million)
Corporation Tax	36
Income tax	737
Other compliance interventions	445
Total	1,219

Fraud Investigation Service

Tax regime	2022 to 2023 (£ million)
Corporation Tax	223
Excise	2,340
Income Tax	173
VAT	1,028
Other compliance interventions	302
Total	4,066

Risk and Intelligence Service Directorate

Tax regime	2022 to 2023 (£ million)
Excise	770
Income tax	893
VAT	1,499
Total	3,164

Other customer group activities

This includes other activities in relation to Upstream Product and Process change, Debt Collection work and other tax compliance activity.

	2022 to 2023 (£ million)
Other compliance activities	6,321
Total	34,031