Revealed: taxman is £22bn out of pocket

Huge collapse in government income raises the spectre of bigger tax rises and spending cuts

Tax receipts have plunged by £22bn in 12 months, dramatically increasing the likelihood of large-scale tax rises and spending cuts.

The crisis in business and industry, on the high street and in the property market contributed to a dramatic slump in the money collected by the Treasury. Tax revenues dropped by £21.7bn, a fall of almost 5 per cent, figures from HM Revenue and Customs (HMRC) showed. An extra £3.3bn is likely to be written off in lost taxes and HMRC is fighting legal action over a further £7bn of disputed taxes.

The public spending watchdog, the National Audit Office, said the downturn could have cost the Exchequer up to £32bn last year. HMRC had to be more "efficient" during the downturn.

The slump, combined with the rising bill for easing the pain of the recession, will increase Britain's debt and raise the likelihood of tax increases and cuts in Whitehall budgets.

Taxpayers contributed £435.7bn to Britain's coffers last year, compared with £457.4bn in 2007-08.

The HMRC annual report – one of several released on the eve of the parliamentary summer recess – underlined the effect of the recession across different sectors of national life.

The crisis in the property market cost the Exchequer £6.1bn in stamp duty payments, of which £5.1bn was caused by the haemorrhage in house and business sales and £1bn from the drop in property prices. Another £5bn was lost in corporation tax, mostly from the financial sector which endured its worst crisis for more than half a century.

The Exchequer collected £6.4bn less in VAT, partly because shoppers stayed at home and partly because the rate was cut to 15 per cent in December to breathe life into high streets before Christmas.

Income tax and national insurance contributions fell by £5.7bn because of lower rates and higher allowances and because few staff in the financial sector were paid bonuses.

The Government is setting aside £3.3bn more for "bad debts" and £7.2bn more for legal disputes with taxpayers.

Philip Hammond, the shadow Chief Secretary to the Treasury, said: "A plummeting tax take is the inevitable consequence of Gordon Brown's recession – and it shows how hard families and businesses are being hit.

An HMRC spokesman said: "Collecting tax is more challenging at this time than ever."

But he said that the office had collected almost all debt and was looking for ways of helping individuals and companies experiencing "severe cash flow problems".

The economic pressure on the Treasury was further underlined when the National Audit Office (NAO) delivered an embarrassing rebuke to the department over its handling of the bailout of Britain's high street banks.

It refused to sign off part of the Treasury's annual accounts, because a £24bn insurance scheme granted to Lloyds and Royal Bank of Scotland to cover toxic loans was not approved by Parliament.

The refusal marked the first time in a decade that the Treasury's accounts were qualified.

Edward Leigh, the chairman of the Commons Committee of Public Accounts, said that the two reports highlighted "different, but equally disturbing aspects of the serious state of the UK economy".

The Treasury said its asset protection scheme for the banks had not been approved by Parliament because of the need for speedy action. It said that the qualification of its accounts was "technical".

But Vince Cable, the Liberal Democrat Treasury spokesman, said that the NAO's concerns were "entirely legitimate".

He said: "The Asset Protection Scheme is quite simply a massive fraud on the taxpayer – providing insurance for 'bad' loans but with a huge, open-ended risk.

"With such uncertainty about the amounts of taxpayers' money that will end up being pumped into the banking system, it is entirely reasonable for the NAO to refuse to sign off part of the Treasury's accounts."

Illustrating the extra cost of recession, the HMRC forecast that spending on tax credits will increase by £500m this year as more families can make claims.

The spending watchdog cast doubt over the HMRC's ability to hit its target of limiting fraud and error in tax credit payments to less than 5 per cent by March 2011. It said that the goal was looking increasingly optimistic.

It calculated that the rate of wrongly paid tax credits rose from 7.8 per cent in 2007-08 to 8.6 per cent last year and disclosed that £2.7bn of public money was lost to fraud and mistakes in the benefits system.

The Department for Work and Pensions had its annual accounts qualified by the watchdog for the 20th consecutive year as a result.

The NAO estimated that £900m had been lost to fraud, £900m to "customer" error and £900m to mistakes by officials.

Accounting errors: Questions facing the MoD

*The National Audit Office has found that the Ministry of Defence overpaid a total of £200m in salary and expenses to some staff, while others had been underpaid by £64m. The watchdog also discovered that up to £155m worth of equipment relating to the Bowman communications system – currently being issued to the forces in Afghanistan – has not been accounted for.

The errors have led to the Comptroller and Auditor General, Amyas Morse, to "qualify" the audit for the MoD's annual report instead of endorsing all the figures.

The NAO said that a sample examination of the MoD's Joint Personnel Administration payroll system, which has faced widespread criticism from service personnel, found that 14.7 per cent of the transactions contained an error or could not be substantiated.

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