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Protecting Tax Revenues 2009: Summary

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14th Dec 2009
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Consultant practice editor Mark Lee offers a detailed breakdown of HMRC’s latest document explaining how the tax gap is being handled.

‘Protecting Tax Revenues 2009’ contains a number of quite illuminating comments and definitions, which will be highlighted later. At first it’s a struggle to determine the document’s real purpose, but at it para 2.8 sets out:

  • How HMRC has developed the evidence base over time and compares the UK tax gap with the available estimates for other countries.
  • How HMRC’s performance in reducing the tax gap is measured.
  • How HMRC uses tax gap analysis to inform its approach to compliance and provides a detailed account of the specific actions HMRC are taking to reduce the size of the tax gap.

A separate statistical based document published alongside this one contains the latest estimates of tax gaps in HMRC administered taxes.

‘Protecting Tax Revenues 2009’ is a very defensive document, reminiscent of the sort of self-assessment personal appraisal that might be prepared by an under-performing employee. In such cases the employee usually fears for the security of their position. How worried is HMRC and who are they trying to convince with this report?

Executive summary
The document states:

“The vast majority contribute their fair share towards funding public services. However, the minority who do not put pressure on the public finances and impose costs, including higher taxes, on others. This undermines fairness and confidence in the tax system.”

In my opinion, so do certain activities of HMRC, and the MPs’ own expenses scandal has lowered the bar as to what the public consider to be unacceptable too.

It continues:

“There have been notable successes, such as significant reductions in fraud and rapid responses to artificial avoidance schemes”.

Many such schemes continue to be promoted by virtue of the fact that HMRC know about them but amending legislation has not been introduced. It also states:

“The government’s goal is to reduce the tax gap as far as possible without placing disproportionate burdens on the majority of businesses and individuals who already pay their fair share.”

It’s clear that many people struggle with the concept of what is ‘fair’ in this context.

A ‘fair’ share
In the introduction, the report states:

“Those who attempt to pay less than their fair share undermine the funding of public services and threaten medium term fiscal consolidation. Therefore, the government is committed to supporting those who seek to pay their fair share and to deterring and challenging those who do not.” 

There’s that word ‘fair’ again.

There’s a welcome recognition of the role played by professional advisers at para 2.2:

“Most customers comply with their tax obligations as far as they are able. HMRC receives a high level of co-operation from businesses, professional advisers and individual customers to help the tax system run smoothly…the government recognises the importance of this and is committed to making it easier for customers to meet their obligations and helping those experiencing financial difficulties.”

Para 2.3 offers an acknowledgement that there are degrees of non-conformity:

“However, some do not readily pay the tax that they should. This reflects a variety of behaviours. In some cases it is a result of errors or lack of care by customers who do not fully understand tax rules. Some use highly artificial avoidance schemes to reduce tax payments. A minority deliberately set out to evade their obligations or to profit through criminal attacks on the tax system.”

Para 2.7 reminds readers:

“HMRC operates a risk based compliance strategy, focusing resources on the areas of highest risk to most effectively secure tax revenues.” 

Does your experience match this aspiration? How does this reference to ‘areas of highest risk’ accord with challenges regarding relatively immaterial figures in clients’ accounts?

Developing the evidence base
This chapter explains HMRC’s methodology for estimating the shortfall in revenue between the tax collected and the tax that which should be collected (the theoretical liability) commonly referred to as the tax gap.

Para 3.2 states:

“The theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC’s interpretation of the intention of parliament in setting law (referred to as the spirit of the law).” 

This phrase, which is repeated later in the document, is an important admission and clearly differs from previous references to ‘parliament’s intention’.

Measuring performance
Here’s the main part of what I described earlier as HMRC’s ‘self-appraisal’. Again, there’s a key admission, taken with credit, from the OECD’s Forum on Tax Administration that:

“Tax administrations will never be able to collect every dollar of tax due. In fact, it can be argued that this should not be the goal since the measures required to do this would be so intrusive as to lead taxpayers to revolt”.

This is followed by another welcome observation:

“The government’s goal is to reduce the tax gap as far as possible without placing disproportionate burdens on businesses and individuals”.

In this context we are reminded that one of HMRC’s key departmental strategic objectives is to:

“Improve the extent to which individuals and businesses pay the tax due and receive the credits and payments to which they are entitled.” 

The key outcomes sought in this regard are to:

  • Increase tax and national insurance contributions actually received relative to the amounts that should be received.
  •  
  • Reduce the level of incorrect tax credit payments as a result of error and fraud as a percentage of finalized entitlement.
  •  
  • Maintain take-up of entitlements to tax credits and child benefit.

Tackling the tax gap
This chapter outlines the actions being taken to ‘protect tax revenues’.

The chapter starts with a pie chart that purports to show what proportion of the tax gap can be attributed to different underlying behaviours – each of which are defined late on. Again, I think it’s very helpful to recognise these differences even if we might be tempted to challenge the percentages:

  • Avoidance 17.5% (Avoidance involves the use of schemes or arrangements that seem to HMRC to have been implemented primarily in order to deliver a tax advantage).
  • Evasion 17.5% (Tax evasion is illegal, and arises where individual or corporate customers deliberately omit, conceal or misrepresent information in order to reduce their tax liabilities.)
  • Legal interpretation 15% (Legal interpretation relates to the potential tax loss from cases where HMRC and customers have different views of how, or whether, the law applies to specific and often complex transactions. Examples include the correct categorisation of an asset for allowances, the allocation of profits within a group of companies, or VAT liability of a particular item.)
  • Failure to take reasonable care 15% (Failure to take reasonable care can lead to tax loss when customers are careless or negligent in dealing with their tax affairs.)
  • Criminal attacks 12.5% (Organised criminal gangs undertake co-ordinated and systematic attacks on the tax system. Examples include Missing Trader Intra-Community (MTIC) fraud and the use of false identities to obtain tax payments.)
  • Hidden economy 7.5% (The hidden economy consists of any undeclared economic activity arising from sources entirely unseen by HMRC. This definition distinguishes the hidden economy from evasion, which is the understatement of liability arising from sources known to the department.)
  • Non-payment 7.5% (‘Non payment’ refers to tax debts that are written off by HMRC and therefore result in a permanent loss of tax – mainly as a result of businesses becoming insolvent. It does not, therefore, include debts that are eventually paid.)
  • Error 7.5% (The error category comprises of tax losses resulting from basic taxpayer mistakes in preparing in tax calculations, completing returns or in supplying other relevant information. These are errors that are made despite customers taking reasonable care.)

To be fair, HMRC accept that it is not able to produce robust statistical elements of the split of the tax gap by behaviour. Therefore the analysis above is based on management assumptions and judgment rather than official statistics.

As indicated earlier it’s hard to discern the real driver behind the publication of this document. I’ll end this review by quoting the final paragraph:

“HMRC is therefore determined to continue to enhance its understanding of the tax gap and is committed to publishing further estimates of the tax gap as more robust methodologies are developed.”

Mark Lee is consultant practice editor on AccountingWeb.co.uk and chairman of the Tax Advice Network.

 

 

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By User deleted
14th Dec 2009 11:10

'Should' and 'fair' have nothing whatsoever to do with Tax Law. If this is going to be the new standard then maybe we should all just throw away Tolley's and take every tax demand on trust...

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By User deleted
15th Dec 2009 10:37

What would you prefer?

'Must' and 'unfair'?

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By johnjenkins
15th Dec 2009 15:40

Piffle

In 45 years of being an Accountant I've not read so much piffle.

The tax system is unfair and unworkable and until a Government does something about it we are never going to hear any different.

It's no good government blaming Tax Payers (oops sorry customers) for their own short comings.

The most "unfair" tax is Employers nic. How can you tax tax payers for having employees??????????

Why should you have to pay tax on a gift???????????????

Why should you have to pay tax on an astute investment???????????????

etc. etc. etc.

Government has been shoring up a system that is outdated and then wonders why it is near to stagnation.

Gordon Brown had a fantastic opportunity to re-vamp the whole of our tax system, which would have guaranteed him at least another 2  terms in parliament.

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