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HMRC narrows the tax gap

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20th Oct 2016
Editor AccountingWEB
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HMRC has measured the tax gap for 2014 -15 as £36bn, which is 6.5% of theoretical tax liabilities – one of the lowest tax gaps in the world.

As summarised in Measuring tax gaps 2016, the difference between tax that should be collected and what is actually collected has reduced from 6.9% in 2013-14, and continues the downward trend from 8.3% in 2005-06.

Breaking the tax gap down by behaviour reveals that £5.2bn (15%) is actually due through “legal interpretation”. It also reveals a rise in inadvertent non-compliance, with error contributing to £3.2bn and failure to take reasonable care blamed for £5.5bn. All of these added together amounts to 39% of the tax gap.

Meanwhile, SMEs have contributed the most towards the tax gap, being responsible for £18.3bn (51%) of the tax gap, while large businesses are held responsible for £9.5bn (25%).

However, HMRC’s chief executive Jon Thompson has set his sights on the highest non-payment culprits: criminal attacks and evasion.

Thompson said HMRC will further close the tax gap by “relentlessly pursuing the small minority who seek to cheat their taxes through evasion, aggressive avoidance and organised crime”.

Revenue ‘should focus on customer service’

While the CIOT’s tax policy director John Cullinane applauds HMRC’s progress in managing the tax gap and putting extra resources into artificial and abusive attempts to avoid tax, he suggests HMRC should focus on customer service as direct way to “help large numbers of fairly ordinary taxpayers who find themselves confronted by an ever more complex tax law and increasing compliance obligations.”

After all, he continues: “A billion pounds more is lost in errors than in tax avoidance. If the tax authority needs more resources to directly help taxpayers to pay the correct sums, then we suggest taxpayers think they should get it.”

One of the measures financial secretary Jane Ellison anticipates will close the tax gap further and alleviate errors is through HMRC’s £1.3bn investment in “digital tools”.

For example, HMRC believes the effectiveness of digital tools such as RTI has “significantly contributed” to reducing the PAYE tax gap from £4bn in 2013-14 to £2.8bn in 2014-15. The hope is that its Making Tax Digital plans will be able to close the tax gap attributed to SMEs.

HMRC explained in its Bringing business tax into the digital age consultation how “nudges and prompts” will “flag to the business any areas where a potential inconsistency or error is being made”.

RSM’s senior tax partner George Bull accepts the impact of RTI in reducing the tax gap, and expects HMRC’s digital plans will be able to contribute towards tackling the gap caused by evasion and crime when the fully digital system is rolled out in full by 2020.  

“It’s important, however, that HMRC implements digitalisation as something which is primarily there to meet the needs of honest taxpayers,” Bull warns, “rather than a weapon against evaders and criminals which may cause problems for citizens who wish to fully comply with their tax obligations with the minimum of fuss and bother.”

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By gordo
21st Oct 2016 09:39

I just think it is wonderful that we were able to revise last years figures upwards so that the trend now shows as downwards and just in time before attendance at Public Accounts Committee next week as we will be able to show the % trend. We will not need to mention that the actual quantum is unchanged over the 10 year period shown. It is also wonderful that this years figures appear to show the increase in 'error' and 'failure to take reasonable care', which proves that we must need MTD in order to do the right thing by the taxpayer and help them to get it right, again we will be able to explain that to PAC. Finally, it is wonderful that the figures also prove we have been doing the right thing in attacking avoidance which has now apparently fallen. Hurrah HMRC. The Public Accounts Committee will be very pleased.

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By RobertD
21st Oct 2016 10:24

The unfortunate truth is that digital record keeping will not produce a reduction in the tax gap. Once businesses find that they can claim for washing machines, chiropractors, all of the HP payments and parking fines the revenue will soon reduce. Accounting software does not reduce errors and as soon as the Government realise this instead of trotting out the sales pitches fed to them by Xero and the rest of them the better. Total revenue will of course reduce as a result of those traders that decide that they can't be bothered with MTD and resort to retirement or cash only. Perhaps time to listen to the people who really know!

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Replying to RobertD:
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By Paul_S
21st Oct 2016 13:35

RobertD wrote:

The unfortunate truth is that digital record keeping will not produce a reduction in the tax gap.

One of the first lessons that used to be taught about computerisation was that you should first look at the manual system to see if it could be improved.

The result from converting an unwieldy manual system to a computerised one is usually another unwieldy system.

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By Echo761
21st Oct 2016 12:17

It is interesting that part of the tax gap is due to errors, some £3.2Bn. Is this "customer " error or HMRC's error? I suspect HMRC's errors are not included - or quantified.
Is part of the "success" of reducing the theoretical tax gap not due in part to issuing accelerated payments notices, i.e. getting the money up front then proving you are right - this will be a one off hit.
It is also interesting the see the tax gap for VAT at some £12bn.... a very high figure. In large part due to the shambolic attempts of untrained (or poorly trained) staff trying to resolve complex issues and failing. Following "scripts" rather than using common sense and questioning what they actually see, rather than what the scripts tell them to ask.
Overall the £36Bn is a massive sum and surely if you invest more to recover this it would benefit everyone, or is it that the £36Bn only exists on a treasury spreadsheet....
If HMRC spent more time on training staff to answer questions that tax payers have and provide the right answers then a large part of the tax gap would disappear.
... and finally, the £9.5Bn gap from Large Business - how many businesses does this represent and what is being done to close this? Rather than have cosy meetings and shying away from the "big boys" they should be going after them as they know who they are and where they live. :)

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By ruth.julian
21st Oct 2016 13:37

How much of the tax gap has been closed by counting "future revenue benefit" when HMRC issues assessments? This can be up to 3 times the additional tax assessed?

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Replying to ruth.julian:
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By Echo761
24th Oct 2016 08:39

Yes future revenue benefit is a nonsense figure. It is designed to anticipate the amount of revenue that would have been lost had the error not been found....

But...

It was found... therefore the benefit is the ACTUAL tax assessed for and collected. Not the Tesco style of accounting, actual tax assessed for and paid/collected should be the measure.

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By gordo
21st Oct 2016 14:00

Of course HMRC haven't actually lowered the tax gap at all.

First of all the figures are entirely "theoretical" (described as "estimated" in last years report) and if you ignore the percentages, then the actual tax gap, the amount uncollected, the quantum, is estimated to be £36 billion, pretty much the same as the nine years before it.
However, it suits HMRC's marketing spin to declare it as success.

I don't know how they have incorporated the APN figures, but I do know that despite APNs surely being a payment on account of an amount in dispute, the Government have recorded 90% as Income in the Government Accounts. Their justification presumably being along the lines of HMRC's claim that they win 80% of cases (which interestingly HMRC have started to claim as 90%). That claim does not appear to stand up to scrutiny, but is sufficient for the Government's purposes.

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By mikefleming3028
21st Oct 2016 14:53

Below is an extract from HMRC`s 2016 Annual Report which ,reading between the lines, says HMRC`s figures have little factual evidence base :-
1.33 In its April 2016 report on tackling tax fraud, the Committee of Public Accounts
concluded the way HMRC reported its performance was too confusing and that the impact
HMRC claimed for its work far exceeded any reduction in the tax gap. The Committee of
Public Accounts recommended that “HMRC should clearly set out in its annual reports
the relationship between its compliance yields and changes in the tax gap. It should
also publish this information in a way that is accessible for everyone to understand”.21
HMRC has not yet formally responded to this recommendation. However, its Annual
Report includes a section covering both compliance yield and the tax gap, and explains
how they interact.22 It is not straightforward to link compliance yield to the tax gap and
HMRC describes some of the reasons for this. HMRC also provides an example that
describes the relationship between the tax gap and compliance yield for a specific case.
This is a useful step in explaining the relationship, but it will take longer-term work to
address the issues raised by the Committee of Public Accounts about how HMRC’s
reported headline performance measures relate to each other.
21 HC Committee of Public Accounts, Tackling tax fraud, Thirty-fourth Report of Session 2015-16, HC 674, April 2016.

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By Kate Upcraft
22nd Oct 2016 10:21

I'm fascinated that the 'success' of RTI is claimed to have heralded these alleged statistical improvements. HMRC staff themselves tell agents and employers every day that no one can rely on the figures shown on business tax accounts as they bear no relation to the figures submitted through RTI, nor the payments made to HMRC by employers so I'd love to know how these figures are compiled. To me it's a fiction based on a fairytale. Given the tax receipts are supposed to dictate the Public Sector Borrowing Requirement I don't know how the Treasury sleep at night as I'd like to think by now they know how poor the PAYE data is. Of course it's the same PAYE data that is being used to close down tax credit clams and flex Universal Credit. Businesses, and the agents that support them, will step up to the mark and make MTD work from their end just as they have with RTI, the big question is will HMRC's systems be up to the job as recent history says not. If I hear one more mention of 'prompts and nudges' being the future of tax I think I'll scream, what we need is well constructed and tested central government systems that have been designed by practitioners not IT specialists.

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Replying to bassett1:
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By Echo761
24th Oct 2016 08:44

Yes "Prompts and nudges" should not be mentioned as some form of thinly veiled threat. They should be seen as "timely reminders to encourage people who are busy with their business and not able to focus solely on tax". Rather than.... oooo we know what you are doing! so fess up (when in fact they have no clue what you are up to)

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Replying to Echo761:
By DotasScandalDotOrg
26th Oct 2016 11:17

Ah, if it was only "thinly-veiled threats". Please come see what things look like in APN-land. HMRC has now moved to sending strong "encouragements" to voluntarily settle tax unprovoved to be due, based on arguments untested in court, relying solely on the threat of a possible future retroactive law that does not yet exist, and is merely at consultation stage (cf. http://tinyurl.com/zeuhoe6)
A whole new frontier of "maximization of tax collected".

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