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Tax gap figures increase pressure on HMRC

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16th Oct 2014
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The UK’s tax gap in 2012/13 was 6.8% of tax liabilities or £34bn, according to HMRC’s latest estimate.

The estimate for 2011/12 was reduced from £35bn to £33bn, or 6.6%, reflecting “continued improvements in reporting and updated data”.

“The long-term trend is downward, with the tax gap falling from 8.5% in 2005/06, HMRC said.

The department defines the tax gap as “the difference between the of tax that should, in theory, be collected by HMRC, against what is actually collected”.

David Gauke, financial secretary to the Treasury, said: “Since 2010/11 the percentage tax gap has stayed lower than at any point under the previous government, saving the country £4bn. Today’s figures show that there’s still more work to do but our continued drive to tackle avoidance means that avoidance is down.”

Pressure

George Bull, senior tax partner at Baker Tilly, said disappointing income tax receipts so far this year, and a rise in the tax gap for the first time since 2005, would “pile further pressure on HMRC to maximise recoveries from taxpayers”.

Bull added: “We’ve recently seen that the Italian economy has narrowly avoided recession due to its booming organised crime sector, and interestingly, HMRC suggests that in the UK £5.9bn – 17% of the total tax gap – is lost due to the hidden economy. But who is to know whether this is correct, as the reality is that this can only ever be a finger-in-the-wind estimate.”

The Chartered Institute of Taxation noted that HMRC’s total includes an estimated £3.1bn lost to tax avoidance, down from £3.4bn for 2011/12. The original estimate for 2011/12 was £4bn.

“However, £5.4bn was lost to criminal attacks, £4.1bn to evasion and £5.9bn to the ‘hidden economy’, a total of £15.4bn from illegal activity,” the CIOT said.

“These figures suggest that tax evasion and other illegal activity are costing the exchequer nearly five times as much as tax avoidance, said CIOT tax policy director Patrick Stevens. “The CIOT has long argued that HMRC needs to put more effort into investigating and prosecuting those who seek to evade tax. The government are right to have put extra resources in this direction, as well as tackling artificial and abusive attempts to avoid tax.”

Stevens noted the “small uptick” after years of the tax gap figure falling, but suggested that the figure still compared well to other jurisdictions including the US.

Corporation tax

Stephen Herring, head of taxation at the Institute of Directors, observed that HMRC estimated the corporation tax element of the tax gap at £3.9bn, or 9% of corporation tax liabilities.

HMRC’s analysis (at page 58) showed the tax gap for Large Business Service taxpayers at 5% of theoretical liabilities, and the tax gap for Local Compliance Large and Complex taxpayers at 9% of theoretical liabilities.

Herring told AccountingWEB that these first two categories “probably reflect a growing disenchantment in those sectors with cookie-cutter (and generally technically unsound) packaged tax products”.

For the third category, small and medium-sized businesses (SMEs), HMRC’s estimate of the tax gap had reduced from 17% of theoretical liabilities in 2005/06 to 11% in 2012/13.

This significant fall in the percentage tax gap for SMEs was “more likely to reflect a reduction in the number of incorrect returns (deliberate or otherwise)”, Herring said.

HMRC’s report said the proportion of SMEs submitting an incorrect return leading to a loss of tax “declined from 41% in 2005/06 to 24% by 2009/10, before rising to 28% in 2010/11.”

Methodologies

Tax campaigner Richard Murphy claimed that HMRC continued to “seriously underestimate” the tax gap because its estimates were based on tax returns received.

Murphy’s report for the Public and Commercial Services Union (PCS), published last month, estimated the tax gap for 2013/14 at £119.4bn. An HMRC spokesperson told AccountingWEB that the PCS estimate was “over-inflated, flawed and muddled”, and that the IMF had endorsed HMRC’s analysis.

The IMF’s assessment published in August 2013 said: “In general, the models and methodologies used by HMRC to estimate the tax gap across taxes are sound and consistent with the general approaches used by other countries.” The IMF found that “HMRC’s tax gap analysis program is comprehensive in tax coverage [and] effectively addresses its multiple dimensions, and work is ongoing to enhance its support to HMRC management”.

Earlier this week the Financial Times reported that the number of criminal prosecutions for tax evasion jumped by nearly a third last year: “Prosecutions rose from 617 in 2012/13 to 795 in 2013/14, an increase of 29%, according to figures obtained by data provider Thomson Reuters.”

Related articles:

Tax evasion is rife, accountant warns

HMRC dismisses PCS tax gap estimate

Replies (17)

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By Vaughan Blake1
16th Oct 2014 14:14

Meaningless!

£33bn, £34bn or £35bn.  These figures are 'derived' using such academic assumptions that they are rendered meaningless. Suffice to say the tax gap is a lot, a very, very lot in fact. That's all you need to know.  Please, therefore HMRC stop wasting time and effort estimating this and get on with finding the 'hidden economy' and tax evaders, and get some money off them. Apply a little imagination, given the amount of electronic data out there the grey and black economies should be easier to find than ever.

Let's also suspend arguments about whether folks should be taxed as 'employed' or 'self-employed' and concentrate more effort on those in 'black self-employment' ie not paying any tax at all!  'Low hanging fruit' is always the most tempting, but let's give the branches with the more difficult to reach fruit a good shake.  Not only will it collect some tax directly, but if done properly,  it will also have a deterrent effect generally. 

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Replying to memyself-eye:
paddle steamer
By DJKL
17th Oct 2014 15:07

Quantum Tax

Vaughan Blake1 wrote:

 Suffice to say the tax gap is a lot, a very, very lot in fact. 

Above  for some reason reminded me a bit of Douglas Adams:

"Space is big. You just won't believe how vastly, hugely, mind- bogglingly big it is. I mean, you may think it's a long way down the road to the chemist's, but that's just peanuts to space."

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Replying to memyself-eye:
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By Rusty Irons
22nd Oct 2014 20:40

Meaninngless!

Agreed but this seems to be more than an HMRC problem. They might be the cutting edge but I think there is a need for other agencies to bring their information to the table in an effort to make it more difficult for those in the hidden economy. I think all businesses want is a level playing field and as long as society continues to support the 'cash' no VAT traders and the direct taxes they fail to declare that is difficult to stop. But its not just that level of business. There seems to be multiple levels of threat. I attended about 10 years ago an HM Customs & Excise Open Day in Edinburgh. I was impressed by the agencies that attended proving support for business but I was shocked by some of the presentations by that department which were frank outlining the levels of criminal activity especially when questions were pitched from the floor. What angers me is some on this forum who snipe and criticise HMRC officers, some of whom are qualified accountants and specialists who do from my experience a professional job. I'm sure there are qualified ICAS members who would agree some of them perhaps on this forum.

 Well Said!   

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By AndrewV12
20th Oct 2014 11:46

Criminal attacks, what criminal attacks.

Extract above

“However, £5.4bn was lost to criminal attacks, £4.1bn to evasion and £5.9bn to the ‘hidden economy’, a total of £15.4bn from illegal activity,” the CIOT said.

 

£5.4 bn is lost due to criminal ATTACKS, I am unsure what form these take, I suppose HMRC have to give out as little detail as possible on these attacks, or we might all join in.

I do not know which way to jump on he 5.90 BN lost to the hidden economy, is it small traders not declaring all of their income, or is it something else, if it is the small guy its not to bad as all their income is spent  by the end of the month, and thus has been injected back in the overall economy.

 

 

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By johnjenkins
20th Oct 2014 12:28

HMRC are a little

like the banks. My local bank had 5 counters with mostly 3 working until customers complained because the queue at times was outside the door. So big refurbishment, plenty of space inside, but only 3 counters. No more complaints as to put more people on counter. Just loads of tuts.

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By Ian McTernan CTA
20th Oct 2014 12:39

Murphy and responsibility?

If the tax gap is the £110b+ that Murphy says it is, aren't the members of the PCS largely responsible for this?  Surely they are responsible for the collection of taxes, so if they are that staggeringly imcompetent we should sack the lot of them?

This is similar to the 'we've had no pay rise for the last three years' arguments, which totally ignore the 3% per annum spine increases large numbers of those people got (for doing nothing other than being in the job with their gold plated pensions).

Out in the real world pay increases don't just happen on a spine, you have to work for it, justify it, and the company has to be able to afford it (and you need to provide for your own money purchase pension pot).

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Replying to Wilson Philips:
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By menamal
20th Oct 2014 13:41

Another cheap shot at HMRC and PCS members, Mr McTernan?  In the REAL WORLD, our pay has been frozen for ages, our pension contributions have gone up and more is demanded every month from ever fewer resources (people included).  If it's as good as you say it is then I'm surprised you haven't been on our side of the fence for the past few years narrowing the tax gap, enhancing your golden pension egg and reducing our staggering incompetence quotient by one at the very least!

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Replying to SouthCoastAcc:
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By User deleted
20th Oct 2014 22:15

Not first April is it?

menamal wrote:

Another cheap shot at HMRC and PCS members, Mr McTernan?  In the REAL WORLD, our pay has been frozen for ages, our pension contributions have gone up and more is demanded every month from ever fewer resources (people included).  If it's as good as you say it is then I'm surprised you haven't been on our side of the fence for the past few years narrowing the tax gap, enhancing your golden pension egg and reducing our staggering incompetence quotient by one at the very least!

... "The real world" - ha ha ha, where High Street multi-nationals force hard- working entrepreneurs to the wall by whole-scale tax evasion and profit shifting allowing them to under-cut and wipe out all competition,  whilst doing sweetheart deals with the tax man, leaving HMRC the "easy targets" to screw to the wall with their guilty until proven innocent government sponsored extortion racket.

You may have had pay freezes and had to put more in you pensions, ah, poor darlings, you expect sympathy? Dream on. Us in the real world have seen real incomes drop, pensions looted by the state and pointless petty bureaucracy stifle the ecoomy. Any recovery is despite not because of gorvernment policy.

Easy way to cut the tax gap is lower taxes, simplify taxation and install proper immigration controls!

Oh yeah, and stop doling out money to scroungers then you won't need so much tax coming in anyway.

 

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Replying to Wilson Philips:
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By Rusty Irons
20th Oct 2014 16:37

Sack the lot of them

try thinking out of he box and pay them a bonus for tax collected just like our banker friends. They woudn't need the pensions you speak of and only clerical staff/admin would need the pension which could be well enhanced. You can bet the money would just roll in!

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By David Gordon FCCA
20th Oct 2014 12:42

Yet again Soviet statistics

 

 I really object to Mr Gauke's reference to Tax Avoidance.

 Yet again the official accountancy bodies allow Treasury and HMRC to get away with this Orwellian Newspeak.

 Avoidance is the legitimate use of legislation, by the taxpayer, of whatever ilk, to pay the minimum tax due under and in accordance with law.

 "What should be collected" cannot therefore be affected by successful "Tax avoidance", because according to regulation it was not collectible in the first place.

 If Treasury and or HMRC think the law is in error, then their target should be the MPs who regularly authorise obfuscatory legislation straight out of the oracle at Delphi.

 Evasion is an entirely different matter.

Unfortunately by whinging on about "Avoidance" HM Treasury with HMRC significantly damage their credibility when it comes to evasion.

 My small practice may be exceptional, but I do not think so. Within the preceding two years at least a third of moneys originally demanded by HMRC have turned out not to be due, 

 Our system is based on trust between taxpayers, and could not function except and unless 99.95% of taxpayers paid up as required.  I guess we may all name places where they think our habit of paying our taxes is insane.

 "Might as well be hung for a sheep as  for a lamb" springs to mind.

If you insult people for long enough, even a saint will eventually tell you to take a long walk off a short pier. 

 

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Replying to richking04:
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By Rusty Irons
20th Oct 2014 16:50

Avoid Tax Accoring to the Law?

Thats a contradiction for starters. Tax plans to minimise tax liablility is fine if lawful but get your plan wrong and many have done so then your client pays the bill so its not really 'Avoidance' its just duff advisors getting their clients into hot water with HMRC. This I would think is a major cause of concern for HMRC as their evidence must be strong with the errors they find in say VAT 'Partial Exemption'

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By Pdw1968
20th Oct 2014 14:25

I agree with everything said above, but would like to add further fuel to the flames, I am not trying to generalise here, but feel that it is a valid point no the less, the Treasuries Tax collections go towards paying benefits to those out of work or those who claim to be unable to work. So who is carrying out the work and being "paid" for the work within the dark economy? I would put it that quite a few are draining additional resources (which requires more tax to be collected) from the system and using the excuse that "it doesn't pay to work", well in their cases it obviously does.

I am not trying to undermine or belittle those with genuine cases, but it has always looked like  a win-win position for those who keep their heads below the parapet and decide to opt out of the UK Tax system! "Risk over Return", with good odds!!

I know when we take on a new client at start up level, one of the reasons why they appoint us and instruct us to register their businesses with HMRC is to help them ensure that they comply with legislation and pay the "correct" amounts of tax due.

Clients make mistakes, and lets be honest we can all make these, given the fact that our tax laws are so damned complex, even simple processes can appear difficult to a client. The fact still remains, "most" of these individuals are trying to comply and pay the correct amounts of tax due and have chosen to opt into the UK Tax system!!

Is it any wonder, given the fact that they are now facing penalties for not doing this, not filing by a certain date, paying this late, that many may consider "opting out" especially if HMRC do not appear to be actively chasing the individuals who chose not to play the game, what kind of message I this sending out? The wrong one!!

Unfortunately the truth remains that HMRC do not appear to have the resources nor the appetite to chase these particular "tax evaders", because it is deemed to be too time consuming and difficult to get funds from these people, I am sorry but the whole system seems wrong to me, and I know I am not the only one who feels this way!!

HMRC should be praising those who "opt in" and try their hardest to comply as it is they who have put themselves forward to be gunned down!! ITS A BIT LIKE RUSSIAN ROULETTE, you chose to play the game, you take the consequences. (by the way the rules of he game are complex and are set to trip you up, p.s. there is more than one live bullet in the gun!!).

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By johnjenkins
20th Oct 2014 18:35

If there is

a plan which contains anything artificial then it is Evasion, not rocket science. However setting up your company somewhere where corp tax is lower, then it is avoidance, again not rocket science. What HMRC try to do with their figures is to make them both the same, then wonder why they don't get the money in. Do they offset what Ltd's owe in corp tax against what they are owed in CIS refunds? I doubt it.

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By Vinoo
20th Oct 2014 22:11

Tax Gap is like trying to figure out something that is invisible

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By David Gordon FCCA
21st Oct 2014 17:49

Gentlemen be Gentlemen

 

 Please fellows, let us have less of vituperative cod politics. Stick to facts, you are accountants

 It is proper for HMG to attempt to estimate the so-called Black economy.

 It is not proper for MPs and civil servants to take gratuitous swipes at all and sundry because of the failings of Parliamentarians.

 The fact is that the executive officers are civil servants pure and simple. A few months ago I "Googled" the top twenty names per HMRC website.

 Not one of them had done any time as a tax officer or tax professional.

 We know you cannot run a restaurant if you do not know how to cook, because whoever you hire as a chef will eventually take the mickey out of you. It is human nature. 

Contrariwise, if the customer says the food is "Wrong", the executive will not appreciate that cutting the garlic instead of crushing it, makes a difference.

 It is worse than that.

 Joe/ Josephine Soap, tax officer, knows that he or she no matter how long or hard they work for HMRC will never get the chance to be a "Director". Those of us who have had some experience of a mega-large organisation know that this possibility is an important factor in driving the best staff forward.

 It is as much a management disaster for HMRC as the sale of Commissions was for the Army , a century or so ago. It was only fixed when Haldane instituted promotion by merit and experience.

 Being purely civil servants, it is beyond their nature to simply tell HMG to clean up its act.

 

 

 

 

 

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By johnjenkins
22nd Oct 2014 09:30

@David

Most people don't have high aspirations. They have comfortable aspirations. They like to work in a friendly environment and have the occasional perk.

Since John Majors' regime the work place has deteriorated very slowly. HMG want us to be perfect, stick to deadlines etc. while they find short cuts for their incompetency.

It is not proper for HMG to attempt any estimate on the "so-called" black economy as Vinoo states. All it means is that HMRC get their money a bit slower, but they still get it.

The working people are so restricted that we are stagnant. The only reason why we have a slight upturn in the economy is because more money is being pumped in and will continue to be pumped in till after the election (the outcome of which is going to be a big shock for the big 3).

So instead of bandying about figures that don't mean anything, let's have a true figure of what could be collected (without stupid assessments and penalties etc.), then a plan of action (including monthly payments over 3 years if necessary) can be put into place to reduce the real gap.

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