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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.

9th Oct 2020
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Mind the gap
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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.

NAO review

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.

PAC review

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.

CIOT review

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.

HMRC guidance

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.

MTD issues

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.

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Replies (24)

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By johnjenkins
09th Oct 2020 10:15

Wendy the OTS was set up to iron the pants. One of their first recommendations was to get rid of IR35. HMRC said no. So welcome to our world.

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Replying to johnjenkins:
By Wendy Bradley
09th Oct 2020 15:13

The OTS - like the Admin Burden Advisory Board - is stymied by not having any “ordinary” people on board. Tax muggles, civilians, call them what you will. People who can cut through the “it’s complicated” arguments & say “yes, maybe it’s complicated to decide whether a jaffa cake is a cake or a biscuit, but what daft so-and-so designed a law where that mattered???”

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By AndyC555
09th Oct 2020 11:12

"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..."

More of a "complete failure to understand how tax works" gap.

There seems to be a belief that we could tax foreign companies who sell into the UK without the reverse applying. If we start taxing (say) US companies who sell here, don't be surprised if the US starts taxing UK companies that sell to the US. Whether we'd end up with more or less tax as a result, I don't know but the ideal that we can act unilaterally is absurd.

Tax 'justice' campaigners are always going on about the 'moral' argument that a business should pay profits to help fund our services so why should a US company, with US employees and US factories and offices supported by US infrastructures have a 'moral duty' to pay taxes to fund UK infrastructure? Just because its customers are here?

"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."

Because they aren't part of the tax gap. You might as well say that tax rates could be 100% so let's include all the tax we could collect at 100% rates but don't because rates are lower as part of the tax gap.

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Replying to AndyC555:
By Wendy Bradley
09th Oct 2020 15:34

Don’t be daft. Selling off IR properties to a tax haven company took the rents out of UK tax. Amazon apparently lives in Dublin even when a British person buys something and it’s picked, packed & delivered to their door by a British taxpayer. The owner of a business puts the shares in his wife’s name and she’s domiciled offshore ... You don’t understand why the ordinary taxpayer gets annoyed by shenanigans? Saying that’s tax law isn’t really an answer when the question is couldn’t we make better tax law, surely?

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Replying to wendybradley:
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By AndyC555
11th Oct 2020 12:32

Which of those things do you think should be against the law?

(i) a multinational company choosing to hold its IP in a central location (and of course there would be tax to pay on the sale of the IP)
(ii) A man transferring assets to his wife tax free
(iii) Amazon having offices in Dublin (although I suspect you mean Google).

"Shenanigans". Should companies (and I presume individuals) be required to organise their tax affairs in the least tax efficient manner?

"couldn’t we make better tax law" The law is constantly being changed. Whether for the better or not will depend on your point of view. If you'd like to suggest changes, I'd be interested.

But it isn't as simplistic as some people seem to think.

"Don't be daft". I have a different view from you, that doesn't make it daft. Please don't resort to insults. It doesn't help the conversation.

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Stepurhan
By stepurhan
09th Oct 2020 13:08

Who wrote the subheading that this is a "rather surprising conclusion"? Clearly not someone that has to deal with the tax system on a regular basis.

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Replying to stepurhan:
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By johnjenkins
09th Oct 2020 13:13

You would think an ex tax inspector (retired or not) would know what we have to deal with wouldn't you?

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Replying to johnjenkins:
By Wendy Bradley
09th Oct 2020 15:15

Hey, *I* wasn’t surprised!

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Replying to wendybradley:
Stepurhan
By stepurhan
12th Oct 2020 10:54

I didn't think you were the suprised one, so I was curious who was.

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RLI
By lionofludesch
09th Oct 2020 14:45

Well, I'm amazed.

Not that the tax system is a "pile of pants" but that this should be considered news.

IR35 is a prime example - 20 years in the making and nobody really understands it. It's far too subjective.

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Replying to lionofludesch:
By Wendy Bradley
09th Oct 2020 15:43

But then IR35 is a sticking plaster over the open wound that is false and dubious self-employment. Personally I’d design it out of the system ... but that’s a whole other article!

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Replying to wendybradley:
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By AndyC555
11th Oct 2020 12:51

Tongue in cheek

"...the open wound that is false and dubious self-employment."

"Wendy Bradley is a retired tax inspector, now working as a freelance journalist."

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Replying to wendybradley:
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By johnjenkins
12th Oct 2020 09:00

Wendy, there is no such thing as "dubious self-employment". Unfortunately between the EU (worker) and Gordon Brown's need to get money to pay for his inept running of our finances. our employment status is in this quagmire. Even you should realise that employment status is a commercial choice not something HMRC should get involved with. Governments can always tax accordingly.

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Replying to lionofludesch:
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By AndyC555
11th Oct 2020 12:43

IR35 was a response to a 'terrible tax injustice' which caused 'outrage' among the public and was an attempt to write better tax law.

Like many such attempts, its introduction was heralded as being a money spinner for the exchequer - £300m a year in tax/NIC said HMRC's impact assessment in 1999. A FOI request revealed that in the tax years 2002/03 to 2007/08, IR35 directly raised £9.2 million.

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By Greenslades
09th Oct 2020 15:23

The experience of MTD for VAT particularly since February when HMRC started on a course to make agents authorisation such a complex affair with no guidance on how they were operating it just makes you wonder what sort of mess they are going to create when they start on other taxes!
Having successfully used MTD to file my own practice vat return for 12 months i have just had my authorisation to file MY OWN vat return rescinded. Nobody can tell me why. The only thing I could do was write to HMRC to tell them I am unable due to their actions to file my VAT return.

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Replying to Greenslades:
By Wendy Bradley
09th Oct 2020 15:45

The only possible reply to that is (insert facepalm emoji, or possibly one of those “wtf” gifs!)

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By Greenslades
09th Oct 2020 15:23

The experience of MTD for VAT particularly since February when HMRC started on a course to make agents authorisation such a complex affair with no guidance on how they were operating it just makes you wonder what sort of mess they are going to create when they start on other taxes!
Having successfully used MTD to file my own practice vat return for 12 months i have just had my authorisation to file MY OWN vat return rescinded. Nobody can tell me why. The only thing I could do was write to HMRC to tell them I am unable due to their actions to file my VAT return.

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Hallerud at Easter
By DJKL
09th Oct 2020 16:46

"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."

This is just nonsense, whilst there may be commonality amongst what on paper are similar business entities there are also quite often business entities we think are similar on the surface but in reality, as they actually operate, they may say have very different GP% outcomes. I used to have a licensed grocer client whose tobacco and alcohol sales were really high as a percentage of overall sales, circa 50%, this distinctly distorted the expected GP% (we surely all remember what I think were industry BERs)

How does HMRC have enough categories of business types /knowledge of any particular business to deal with the nuances of a trade. When I worked in retail fashion we had ten shops, one was a Benetton "proper" shop with margins set by Benetton, one was a shop selling previous season designer wear, pricing/margin depending on what we thought was decent reduction from original SP, lastly we had eight Benetton seconds/over productions shops where we bought the stock from Benetton cheaply and could achieve 70 odd percent GP%, only reduced by two annual sales.

Depending on mix year to year, shop type openings etc our GP% could and did vary, in one year we got a pull from HMRC due to GP% drop (we had wholesaled a chunk of stock to A N Other with a 10% margin) , luckily we had vast amounts of data available and I sent them homeward tae think again, but for a business that strays out of the norm re how it operates, throws out differing figures, they are going to continually have to deal with "enquiries" because they operate differently and do not conform to the norms.

I at one had a pharmacist client with really high NHS prescription income but low other item shop sales, why, because it was located in a pretty rough part of Edinburgh with a high drug dependency and dispensed vast amounts of methadone, looking at "stats" one might think shop non prescription sales were depressed, they were not, the area was just not typical . (It was also opposite the doctor's surgery)

I suspect over the years we have all had client's whose figures stepped outside our prior experience, usually for a good reason (what they did/where they did it), are they to all be attacked by computer?

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Replying to DJKL:
By Wendy Bradley
09th Oct 2020 17:08

...which is really my point. If we don’t want to move into a world of “computer says no” we need to make our feelings known, right now. Write to your MP, put something in your client newsletter encouraging them to do the same, lobby your professional association, tweet the everloving heck out of it, whatever.

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Replying to wendybradley:
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By memyself-eye
09th Oct 2020 18:22

That didn't work for MTD, did it?

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Replying to memyself-eye:
RLI
By lionofludesch
09th Oct 2020 18:41

memyself-eye wrote:

That didn't work for MTD, did it?

The problem with MTD is that it (apparently) works in other countries. The difference between HMRC and the tax authorities in other countries is that they have better staff than us, not relying on zero-hours folk recruited to do specific tasks like CJRS disputes, working from some kind of minimal training.

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Replying to lionofludesch:
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By memyself-eye
10th Oct 2020 18:31

The problem with MTD is that it is ill-conceived, badly enacted, clumsy, costly and does nothing to close the 'tax gap'
HMRC were warned on countless occasions not to bring it in but did so anyway (to the delight of the software industry). Now they want to expand it. - Cue a much larger black economy.
Never in the field of human taxation as so much cr*p been inflicted on so many by so few morons.

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Replying to memyself-eye:
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By AndyC555
11th Oct 2020 12:36

"HMRC were warned on countless occasions not to bring it in but did so anyway"

One of HMRC's problems is that its staff seem to think that everyone running a business spends 95% of their time making sure their tax affairs are in order and 5% doing other things, like selling stuff.

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By Forry2626
17th Oct 2020 04:03

Well Wendy I can't really talk about accountant all I'm trying to do here it's just too let people know no from the posting that was on this site in 2012 va a bout my friend Tommy Scragg it has been set up up and imprisoned for 17 years for something he has not done anyway there's more to be said about this and if people want to know no the ins and outs why is in there and the people that have behind it please reply back to me asap thank

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