The UK tax system is a pile of pants
This is the rather surprising conclusion Wendy Bradley draws from the latest attempt to quantify the tax gap. In this column, she explains why those who have looked at HMRC’s tax gap report are all in agreement on this point.
No one uses exactly those words, but reading between the lines it's clear the National Audit Office (NAO), the Public Accounts Committee (PAC) and the Chartered Institute of Taxation (CIOT) would all agree.
The NAO reported on HMRC's latest tax gap figures in July and made the polite observations that:
- The tax gap figures are revised each year (as further data, eg from settled compliance cases, becomes available) so apparent trends in one year can suddenly be reversed in the next year.
- There seems to be a wacky relationship between compliance yield and the tax gap – the yield can go up without the gap going down, and vice versa.
- There is a clear relationship between spending on compliance (eg number of staff allocated to compliance work) and the yield from it, but no apparent attempt by HMRC to capitalise on this by allocating resources accordingly.
The NAO reports to the PAC, which met in September to question HMRC about the content of the NAO report.
The PAC extracted from HMRC the information that:
- Explicitly the HMRC strategy is to "restrict the one to one engagement" with small businesses (old style tax investigations) in favour of "one to many" campaigns.
- Losses to the UK revenue from BEPS and overseas domicile etc are not included in the UK tax gap, as those taxpayers are considered to be compliant with UK legislation.
- MTD is moving taxpayers into a world of "algorithm and ping". The algorithm will tell you what kind of taxable profits are expected from this kind of business and then ping an alert if you are outside the parameters.
Whether having a computer algorithm determine what is an acceptable profit level is a good thing, depends on your point of view.
The CIOT's response to the PAC's work takes up the point that the tax gap does not capture the amount that, arguably, incenses most people.
This “anger point” is the revenue that escapes tax in the UK because it does not come within UK legislation. This is of course a policy gap rather than an HMRC compliance responsibility, but it is where work needs to be done, particularly for the Base Erosion and Profit Shifting flows (BEPS), non-domicile and offshore assets in general.
Complexity leads to errors
The CIOT points out that mistakes, errors, and failure to take reasonable care can be "over-egged" in HMRC's tax gap work. It believes the biggest issue behind this portion of the tax gap is the complexity of the tax system itself.
CIOT has a lot to say in this area.
- New guidance: it's no good putting out guidance after the relevant provision has come into effect.
- Old guidance: not helpful to remove guidance after it's been superseded if you have to deal with a period when the relevant provision was in effect.
- Reading comprehension: either its over simplified to the point of inaccuracy or over complicated to the point of incomprehensibility.
- Indexation and search facilities for guidance are just appalling.
The CIOT gave a devastating critique of the practicalities of MTD. It reports that there is apparently little quality control on the software packages listed on the gov.uk site, including packages which return clearly incorrect results.
The CIOT is rightly concerned that small businesses will assume that, having used a software package endorsed by being on the HMRC website, the results from that software must be correct. These businesses may dispense with the expense of employing an agent, leaving software-induced errors in their accounts undiscovered.
What do the bodies conclude?
There is general agreement there are four broad issues:
- the tax system is too complex
- HMRC guidance isn't adequately leading taxpayers through the tax system,
- computerising it will bake in more errors and cut out advisors who might spot them; and
- there are too many offshore shenanigans.
What to do about it?
If we want to avoid a tax system where the only answer is "computer says 'no'", then we must make our views known and soon.