Corporate report

HMRC compliance yield: technical note

Published 30 July 2024

This note will cover:

• trends within the components of compliance yield and levels of uncertainty
• an explanation of the relationship between compliance yield and the tax gap
• how HMRC’s customer compliance yield is 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 penalties plus interest). 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 was categorised with Cash Expected until 2019 to 2020.

Illustrative examples of compliance yield components can be found in: The Tax Gap and Compliance Yield Technical Note.

We have robust governance and assurance processes, including a dedicated assurance team, to check compliance yield claims are accurate. From 2023 to 2024 this includes looking at a sample of upstream yield claims.

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.

Our well-established compliance approach is based on doing three things:

• firstly, preventing non-compliance by improving policies, services and systems to stop customers being able to get things wrong

• secondly, promoting good compliance by supporting our customers and increasing their understanding of what they need to do

• thirdly, stepping in to help customers get their tax affairs in order and ensure the tax system is operating fairly

With a sustained focus in 2023 to 2024 on growing our upstream compliance activity, our upstream compliance yield increased as a proportion of our total compliance yield target from 24% in 2022 to 2023 to 34% in 2023 to 2024. 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.

There are some factors which can cause variation across multiple components of compliance yield, for example, we invested in more than 4,000 new recruits in our compliance function who have completed their initial training and are continuing their professional development and building experience. This is helping us maintain a stable tax gap – but contributed to our performance challenge, in particular in 2021 to 2022 and 2022 to 2023, as we redeployed experienced staff to train and support our new officers in earlier years. 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. 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 2023 to 2024 performance, through lower Future Revenue Benefit yield, although to a lesser extent than previous years.

Compliance yield components over time (£ billion)

	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024
Cash Expected	9.0	7.4	6.0	10.1	12.4
Revenue Loss Prevented	10.6	8.2	10.3	10.6	10.9
Future Revenue Benefit	9.0	5.9	5.2	4.7	4.8
Accelerated Payments	0.1	0	0	0	0
Upstream operational	4.1	3.1	3.9	5.3	10.2
Upstream product and process	4.2	5.9	5.4	3.3	3.5
Total	36.9	30.4	30.8	34.0	41.8

Note: Figures may not sum due to rounding

Cash Expected

In 2023 to 2024, Cash Expected increased to the highest level in the past 5 years. Our largest downstream compliance cases this year had high proportions of Cash Expected. The profile of our downstream compliance yield will change each year depending on the nature and value of the risks we tackle.

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.

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 (RLP) 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 RLP and FRB. In 2021 to 2022 and 2022 to 2023 we identified and responded to significant criminal attacks on the ITSA and VAT systems, increasing the amount of RLP reflecting the impact of our compliance activity to prevent fraudulent repayments. We continue to close off opportunities for criminal attacks on our systems, preventing further revenue losses.

Future Revenue Benefit

Future Revenue Benefit (FRB) 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. This resulted in a 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.

As we move more of our compliance activity upstream, we expect that trends in downstream compliance yield will also change. With common taxpayer errors addressed more frequently in advance of an incorrect return being filed, we may not return to the high levels of FRB reported in earlier years.

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 2023 to 2024, the value increased significantly, as we focused on moving more of our compliance activity upstream, whether by preventing errors through educating taxpayers to get it right first time or deterring taxpayers from non-compliance.

Notable increases in the Upstream Operational Yield scored to recognise the deterrent impact achieved by securing certainty of tax treatment at litigation meant that the yield impact of deterring taxpayers from non-compliance more than doubled this year compared to last year. While there is often a wider deterrent impact to HMRC compliance activity, this cannot always be measured. The success at litigation for some of our cases this year meant that many other taxpayers in those sectors were deterred from pursuing the same tax arrangements, preventing major losses to the Exchequer. Our Upstream Operational Yield has increased from 11% of total compliance yield in 2019 to 2020 to 24% of total compliance yield in 2023 to 2024.

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. In 2022 to 2023 Upstream Product and Process compliance yield decreased compared to earlier years as a result of some measures reaching the end of the 5-year scoring period, and it remained at a similar level in 2023 to 2024.

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 0.54% in 2023 to 2024 – reducing the discount rate to 5% results in a 0.27% discount applied to total compliance yield and doubling this rate to 20% would result in a 1.09% 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)	42,007	42,007	42,007	42,007
Cash Expected Discount Rates	10%	5%	15%	20%
Reduction in Compliance Yield	-228	-114	-343	-456
Total HMRC Compliance Yield (Discounted)	41,780	41,893	41,666	41,552
Discounted amount as a % of total HMRC Compliance Yield	0.54%	0.27%	0.81%	1.09%

The relationship between Compliance yield and the Tax Gap

The Tax Gap

The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and the amount that is actually paid.

The ‘theoretical tax liability’ is the amount of tax that should, in theory, be paid if all individuals, businesses and companies complied with the letter of the law and HMRC’s interpretation of Parliament’s intention in setting the law (referred to as the ‘spirit’ of the law). The total ‘theoretical tax liability’ is the sum of the tax gap, plus the amount of tax receipts received by HMRC.

Read our tax gap publication on GOV.UK.

Compliance yield and the Tax Gap

HMRC measure the effectiveness of its enforcement and compliance activities through compliance yield. As explained above, compliance yield includes additional revenue due when we identify past non-compliance (Cash Expected) and also an estimate of the amount of revenue we prevent from being lost, together with the impact of legislative changes, process improvements and our current compliance activity on future customer behaviour.

The components of compliance yield impact the tax gap in different ways.

Cash Expected

This reduces the cash value of the tax gap in the tax year when HMRC receives the payment of the additional revenue due.

Future Revenue Benefit (FRB)

This is tax gap reducing since it represents an approximation of revenue that otherwise may not have been paid. The impact on the tax gap is uncertain because FRB is an estimate of the effects our compliance interventions on customers’ future behaviour.

Revenue Loss Prevented (RLP)

This yield measure prevents the tax gap from increasing by stopping, for example, tax repayment fraud.

Upstream Product and Process yield

This is tax gap reducing since it represents an approximation of revenue that otherwise may not have been paid. The impact on the tax gap is uncertain because it is an estimate of the effects of legislative changes to close tax loopholes and changes to our processes which aim to reduce opportunities to avoid or evade tax.

Upstream Operational yield

This is tax gap reducing since it represents an approximation of revenue that otherwise may not have been paid.

The tax gap and amount of compliance yield are connected but the impact of compliance yield on the tax gap is not straightforward is because of several factors including:

1. Methods used to estimate the tax gap – there are numerous approaches to measuring tax gaps. Whilst tax gaps are estimated net of compliance yield, each tax gap methodology for different types of tax may adjust for compliance receipts differently. As a result, it is difficult to compare the overall tax gap directly to compliance receipts in a given tax year. The tax gap are our best estimates based on the information available, but there are many sources of uncertainty and potential error. For this reason, it is best to focus on the trend in the results rather than the absolute numbers when interpreting findings.

2. The different components of compliance yield – different types of compliance yield have different relationships with the tax gap. For example, if the volume of organised criminal attacks on a tax repayment system increases and HMRC is successful in preventing these fraudulent claims, compliance yield would increase (as more RLP would be scored) but the tax gap would stay the same. This is because this RLP stops the tax gap from increasing, rather than decreases it. The refused claims would not affect the total theoretical liability or receipts but preventing the repayment would increase compliance yield. The components of compliance yield impact the tax gap in different ways.

3. Wider deterrent effects – as well as compliance yield, there is also a deterrent effect that applies to many of our tax policy and process design, and risk-based work to tackle non-compliance. Deterrence occurs when there is a change in taxpayers’ behaviour, that leads to additional tax revenue, as a result of HMRC activity, but without direct contact from HMRC. Measuring the wider deterrent effect is complicated and depends upon variable factors. In most cases, HMRC does not measure the wider deterrent effect, although it helps to increase the amount of voluntary receipts and thereby reduce the tax gap.

4. Timing differences – the cash expected element of compliance yield represents additional tax liabilities due from taxpayers after HMRC activities to tackle past non-compliance. Cash expected is tax gap closing and is part of the tax gap calculation because the payment of additional liabilities is included in receipts before the tax gap is estimated. Because the tax gap reflects a single tax year, and some compliance cases can cover multiple tax years, the year in which cash expected is recorded as compliance yield (and paid) is rarely the same as the year to which liabilities relate. Therefore, in a given tax gap year, it is possible that the amount of compliance yield HMRC secures might increase while the percentage tax gap remains unchanged.

5. Factors outside HMRC’s control – a range of factors outside of HMRC’s control affect the tax gap estimate. The tax gap estimate may change because of economic growth and tax policy that impacts both total receipts as well as a taxpayers’ compliance. For example, in a growing economy where the tax base is increasing, even if the percentage tax gap remained level, the tax gap cash figure would grow. The effects may not be uniform, different factors, such as the number of new businesses, new customers and customer behaviours affecting the levels of voluntary compliance all affect the tax gap.

Read more on the tax gap and compliance yield – what they are and how they relate on GOV.UK.

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

Compliance yield breakdown in 2023 to 2024

Large Business Directorate

Tax regime	2023 to 2024 (£ million)
Corporation Tax	3,190
Excise	474
Income Tax	258
VAT	5,787
Other compliance interventions	1,739
Total	11,447

Wealthy and Mid-Sized Business Compliance Directorate

Tax regime	2023 to 2024 (£ million)
Corporation Tax	1,676
Excise	0
Income Tax	4,218
VAT	2,249
Other compliance interventions	1,221
Total	9,365

Individuals and Small Business Compliance Directorate

Tax regime	2023 to 2024 (£ million)
Corporation Tax	401
Excise	270
Income Tax	1,601
VAT	1,788
Other compliance interventions	1,234
Total	5,294

Fraud Investigation Service

Tax regime	2023 to 2024 (£ million)
Corporation Tax	762
Excise	1,593
Income Tax	1,099
VAT	1,074
Other compliance interventions	440
Total	4,968

Risk and Intelligence Service Directorate

Tax regime	2023 to 2024 (£ million)
Corporation Tax	9
Excise	685
Income Tax	1,050
VAT	377
Other compliance interventions	430
Total	2,552

Counter-Avoidance Directorate

Tax regime	2023 to 2024 (£ million)
Corporation Tax	51
Income tax	737
Other compliance interventions	246
Total	1,034

Other customer group activities

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

Tax regime	2023 to 2024 (£ million)
Other compliance activities	7,119
Total	41,780