24/05/2012 03:30 BST | Updated 17/10/2012 08:25 BST

£1.1bn Tax Went Unpaid After HMRC Cuts, Says Report

Job cuts among revenue officials meant £1.1 billion less unpaid tax was recouped than could have been, a public spending watchdog said.

The influential public accounts committee praised an HM Revenue and Customs crackdown which has brought in an extra £4.32 billion in five years - 11 times what it cost.

But it said the decision to axe 3,300 posts at the same time appeared to have undermined its effectiveness and urged caution over further reductions.

"We are not convinced that the decision to reduce staff numbers working in this area in the past represented value for money for the taxpayer," it said.

HMRC failed to be "sufficiently clear about the marginal rate of return it could achieve from different levels of spending" in budget discussions, it suggested.

The MPs welcomed HMRC's move to reinvest £917 million of the savings in boosting staff numbers to step up its enforcement operations but said lessons had to be learned from the previous experience and benefits better calculated.

"It is essential to take on board the lessons so far if the return on this new investment is to be maximised," the Labour chair of the committee Margaret Hodge said.

"In particular the department needs to be much clearer about the marginal rate of return it could achieve from different levels of spending."

Mark Serwotka, general secretary of the Public and Commercial Services union, said: "The effort to ensure people pay the taxes they owe will continue to be seriously undermined by job cuts.

"The case for investment in our public services could not be starker or more obvious than it is in HMRC, yet the Government is actually planning to cut 10,000 more jobs from the department in the coming years."

The committee also expressed shock today at reports that HMRC officials authorised tax avoidance by senior public sector employees.

MPs said it was "incredible that the department could under any circumstances advise that this was acceptable behaviour for a public servant".

The criticisms by the influential Commons public accounts committee came as the Government launched a crackdown on off-payroll salaries.

A review identified more than 2,400 cases of public sector staff being employed indirectly - some potentially avoiding full income tax for a decade or more.

Since January, 350 such contracts have been ended.

In a report into HMRC's tax compliance regime, the committee said it had been inconsistent in deciding on the appropriateness of allowing such arrangements.

"For example, the department ruled in one public sector case that the use of a managed service company (MSC) was an allowable exception, even though a leading accountancy firm had advised the individual concerned that it was not," it said.

"The department should have a clear and coherent approach to all forms of tax avoidance."

An HMRC spokeswoman said: "PSCs (personal service companies) can be legitimate commercial arrangements, which means we have to consider the details of the arrangement in each individual case.

"However, we are very clear that the use of MSCs are only for the purposes of tax avoidance and are always unacceptable which is why Parliament brought in legislation to prevent this tax avoidance.

"Where PSCs are used purely as tax avoidance vehicles it is always unacceptable and when we have evidence it's happening we stop it."

The HMRC spokeswoman said: "The Government made £917 million available to us in 2010 to target avoidance, evasion and fraud.

"This has been used in part to boost the number of jobs in our enforcement and compliance work.

"The development of e-services, allowing us to move staff into compliance roles, together with new computer systems such as Connect and more effective use of risk profiling, has resulted in a doubling of our compliance take since 2005 to £13.9 billion last year.

"We are set to increase this by a further £7 billion a year by 2014."