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Tax fraud costs the Tory government £16 BILLION a year - more than enough to halt its hated welfare cuts.

MPs will investigate the figure in a damning independent report and said tax collectors must do more to crack down on crime.

National Audit Office experts said cyber-attacks on government computers and smuggling by criminal gangs help create a £34bn tax gap - the difference between money due and what is actually received.

The report suggested criminal attacks cost £5.1bn a year, tax evasion cost £4.4bn and the hidden economy of "ghosts" and "moonlighters" cost £6.2bn.

Yet HM Revenue and Customs - which has the job of cracking down on tax cheats - is facing 21% cuts by 2020 as part of George Osborne's spending review .

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Labour shadow Treasury minister Rebecca Long-Bailey said: "We all knew that George Osborne was all talk when it comes to tackling tax avoidance, but this report is damning."

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"The £16 billion that the NAO claim is going uncollected a year from tax fraud is nearly the equivalent to the budget for the Department of Business," she continued.

"And it is enough money to reverse many of the welfare cuts that he has planned for working families.

"This is why the Chancellor needs to think again with his cuts to HMRC because closing 153 tax offices will only further tie the hands of HMRC – it’s a false economy that cost us all more in lost taxes than we save.

"The simple truth is that it’s the businesses and taxpayers who pay their taxes who have to carry the burden for those who shirk their responsibilities."

The report slammed working practices in HMRC after the department met a target to bring 1,000 prosecutions last year.

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The higher number meant officials had targeted "less complex cases" which yielded less money including income tax and VAT and tobacco duty.

Last year HMRC gained £26.6bn by tackling tax fraud, errors and legal tax avoidance.

But the NAO found there was only partial data on how much of that revenue was from work to tackle fraud, estimating that the proportion was between 30% and 40%, or between £8 and £10.6bn.

Commons Public Accounts Committee chairman Meg Hillier said MPs will be looking into the figures.

"HMRC clearly needs to think harder about how it tackles tax evasion, the hidden economy and criminal attacks," she added.

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"Time and time again we hear that Government departments don't have the data or information that they need to plan or evaluate their activities properly, despite them being responsible for setting up these projects or programmes in the first place. HMRC is no different in this respect.

"HMRC needs to use the powers and sanctions it has to make a public example of those who break the rules."

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Sir Amyas Morse, the head of the National Audit Office, said: "HMRC loses £16 billion a year due to tax fraud, but reducing these losses is not straightforward.

"HMRC has met its targets to raise more tax revenue in the short-term.

"It now needs to consider whether its overall strategy is designed to achieve the best long-term outcomes.

"We will be evaluating HMRC's performance in tackling different types of tax fraud in more depth.

"As we do so, we will be looking for further improvements in the way HMRC uses data and analysis to understand the effect of its actions in both the long and short-term."