Tax Writer Taxwriter Ltd
Columnist
Share this content
MTD VAT gap
istock_MTDgap_erhui1979

MTD fails to reduce the tax gap

by

The gap between amount of VAT paid and VAT expected to be paid has increased by £2.3bn during the first year of MTD for VAT, undermining a key justification for the MTD programme.

20th Sep 2021
Tax Writer Taxwriter Ltd
Columnist
Share this content

The tax gap is the difference between the amount of tax that should be paid to HMRC, and what is actually paid. The theoretical “should be paid” figure is open to interpretation, and therein lies the crux of the problem in estimating the total tax gap. 

HMRC has produced a tax gap report every year since at least 2009, but each year the comparison figures reported for prior years are adjusted, as data from earlier periods (eg from settled compliance cases) becomes available. It is therefore difficult to draw conclusions from apparent trends as the figures are always imprecise and retrospectively altered.

As Wendy Bradley has pointed out the methodology used in complying the tax gap report still leaves something to be desired. For example, HMRC is still using the US Internal Revenue Service research for creating multipliers to apply to UK data (see sources of error in methodological annex), which is derived from a very different tax system. Most UK taxpayers do not submit a self-assessment tax return which is available to audit for errors and mistakes, but almost everyone submits a tax return in the USA. 

Latest trends

The HMRC report into measuring the tax gaps for 2019/20 reveals that after five consecutive years of a falling rate of the tax gap, there have been a slight uptick in 2019/20. The data for year’s report comes from the period immediately before the COVID pandemic, and the amounts of tax collected have been adjusted for the tax which was deferred at the end of March 2020. 

The total tax underpaid or missing is estimated at £35 billion which is 5.3% of total tax liabilities. This figure was 5.0% of total tax due in 2018/19, and that percentage has proportionately fallen for the previous five years, from 7.1% in 2013/14.

Breaking the data down

The tax gap total is broken down by the perceived causes categorised by these behaviours:

Behaviour: Tax gap

£bn

Percentage of total liability
Carelessness 6.7 1.0%
Criminal attacks 5.2 0.8%
Evasion 5.5 0.8%
Legal interpretation 5.8 0.9%
Non payment 4.0 0.6%
Hidden economy 3.0 0.4%
Error 3.7 0.5%
Avoidance 1.5 0.2%
 Total 35 5.3%

The avoidance category is further analysed into the type of tax, but the other behaviour categories are not.

VAT matters

The VAT gap has risen from £10bn to £12.3bn over 2019/20, lifting the total VAT gap from 7% to 8.4% of total VAT receipts. Table 1.6 of the tax gap tables shows that the amount of VAT lost through tax avoidance is £0.1 bn, and this amount has remained steady at that level over the last six years.

How has the additional £2.3bn of VAT been lost in 2019/20?

As this year saw the introduction of MTD for VAT the amount of VAT lost through taxpayer error and carelessness should surely reduce. In the MTD policy paper HMRC justified the MTD program by saying that it would “reduce the amount of tax lost to avoidable errors”.  

However, HMRC has not highlighted any reduction in the level of VAT lost to taxpayer error, nor has it broken down the total of the tax gap due to carelessness or to taxpayer error, into the different taxes. In fact the amount of tax lost to carelessness has increased significantly from £6.1bn to £6.7bn, and the amount lost through taxpayer error has also increased from £3.1bn to £3.7bn.

John Barnett, Chair of CIOT’s Technical Policy and Oversight Committee, commented: “Whilst we recognise that we are in the early days of MTD and the published tax gap data doesn’t allow a granular analysis, we are surprised to see such a significant increase in these elements of the tax gap. MTD is supposed to reduce the tax lost from these behaviours and bring in hundreds of millions of pounds of additional revenue. So far there is no clear sign that this is happening.”

Barnett added: “These figures back up what CIOT have heard from our members – that MTD is unlikely to reduce the amount of taxpayer error and may even in some situations be increasing it.”

The CIOT has also called for HMRC to thoroughly assess the effectiveness of MTD, as well as whether the administrative burden it is imposing on business is reasonable, before it expands the MTD program further.

Replies (80)

Please login or register to join the discussion.

avatar
By DMBAcc
22nd Sep 2021 09:57

It’s pretty obvious to any sentient being with a single brain cell that the HMRC calculation of expected VAT receipts is pure guess work. MTD is a dogma of HMRC and nothing else. They will push it through with lies if they have to. Only following the behaviour of their political masters after all.

Thanks (6)
avatar
By Rgab1947
22nd Sep 2021 09:59

Once you go into software you lose oversight.

One reason why spreadsheets are so popular.

But I still support the use of software and MTD. Implementation and the extend of, it in a rush? No!

Thanks (0)
Replying to Rgab1947:
RLI
By lionofludesch
22nd Sep 2021 20:03

Rgab1947 wrote:

Once you go into software you lose oversight.

So, so true.

Thanks (0)
avatar
By Alanpryan
22nd Sep 2021 10:03

HMRC sold their soul (ha) to the software houses, who now run tv ads telling taxpayers that the software will complete their tax return and VAT if they just bung all the data on. This has emboldened many people to dispense with book-keepers/ accountants and simply allow the software to do the business. Often this includes horrendous errors (including CIS refund claims) that just sail through. There must be eye watering amounts of tax disappearing - but, as long as it's digital then HMRC seem to be happy

Thanks (8)
avatar
By AdShawBPR
22nd Sep 2021 10:09

Backs up the old phrase 'To err is human; to really foul things up requires a computer!"

Thanks (8)
avatar
By HMRC Escapee
22nd Sep 2021 10:29

It was never likely to.

Error, which MTD was targeted at is a small proportion of the overall tax gap. It's also worth noting that an element of 'error' will relate to more serious behaviours that HMRC chose not to investigate whether as a result of inadequate resources, a skills gap following their 'Tax Superstore' roll out, or the absence of evidence in individual cases. This further reduces the 'error' proportion of the overall tax gap, though I suspect they are aware of this.

The results so far indicate little gain for the Public Purse but a serious imposition on business.

One could be forgiven for wondering why HMRC have chosen to invest so much money in this particular category and in the way they have?

Unfortunately I've seen this before... the answer is technology being relied upon to achieve workforce reduction. Such change is usually accompanied by a slogan announcing that the change is necessary to deliver a tax system fit for the 21st century.

Where aspirations are concerned HMRC would appear to have a 'reverse Midas touch!'

Thanks (4)
avatar
By AmandaElliott
22nd Sep 2021 10:44

Just another instance of failed government modelling - surely nobody other than the Gov is surprised by this given the debacle of the last 18 months….

Thanks (3)
avatar
By Terry Hyman
22nd Sep 2021 10:49

It's no good just moaning on AW. This info needs to go into the press in a big way and TV and all social media. It's about time HMRC was shamed into telling the truth that MTD does not do the job it somehow believed that it would. As for all the software houses jumping on the bandwagon, words fail me! Cancel MTD and go back to the old systems that worked better.

Thanks (10)
Replying to Terry Hyman:
avatar
By tedbuck
22nd Sep 2021 13:32

This is 100% right - until it is in the open and the media have at it no-one will take any notice. No-one I have so far spoken to about MTD for ITSA has actually heard of it and all are shocked at what they are likely to have to do - all are thinking they will get their accountant to do it so the stuff will surely hit the fan at the last minute.

It really does need the newspapers and media to get out there and shout about it before HMRC swamp the media with a lot of Bull s**t about how wonderful, easy and cheap it is going to be.

Judging by the efforts I have seen on 'Superbooks on the cloud' they will really get a load of rubbish and the tax gap will increase. Then, of course, being convinced by HMRC that this is wonderful and correct they can just push another button and submit it to HMRC and Companies House. They look pretty and how will HMRC know they are rubbish because they will accord with the junk submitted quarterly.

Great fun and yes the penalties are a new form of taxation levied on the unwitting as well as the dodgers - and it doesn't break an election pledge.

No wonder politicians are held in contempt and HMRC are dashing to join them - in fact probably have already.

And they don't listen if you write to them just re-iterate the same old, same old.

Thanks (2)
Replying to Terry Hyman:
avatar
By alialdabawi
22nd Sep 2021 16:53

How do we get this to happen? You are correct in that we cannot continue to raise these issues on Aweb, or to our MPs who parrot meaningless 'PR-of-why-MTD-will-work' answers back to us, or someone or other making yet another petition which ends up with a sad little sub-100 signatories and therefore fizzles out into the ether - but the question remains: how do we make happen, what we think will work in making the MTD-obsessed numpties see sense in many respects.

Even then, if a damning assessment of an upcoming MTD rollout by the House of Lords cannot make a smidgen of impact on the timescale, scope or methodology of the rollout, what chance has any other method of feeding all these sentiments back to HMRC's MTD numpties?

Maybe GHarr needs to step up as the head of HMRC and we may see Making Tax Doable being restored.

At times it seems to me that the cohort who frequent on AccountingWeb's forums and who comment on articles - pro & anti MTD combined, could replace all of HMRC and OTS staff and still make a positive impact on taxpayers, agents, the knowledge gap and the tax gap.

In all seriousness - what will it take to make this 'project''s visionaries open their minds to all the feedback?

And to concur with another poster: 'No sh17, Sherlock' was my verbatim response to this article's headline.

Thanks (0)
Replying to alialdabawi:
avatar
By djtax
23rd Sep 2021 09:56

I share your sense of despair. I am trying to push the professional bodies to voice our opinions more strongly but it takes larger numbers to get HMRC to take notice and sadly the vast majority of our fellow accountants (AWeb contributors aside) do not wish and/or do not have the time to become actively involved in these debates.

Thanks (0)
Replying to djtax:
avatar
By johnjenkins
23rd Sep 2021 10:22

I have written to sky news to see if they will take up the case, purely for the quarterly updates as I think we stand more of a chance there. So if any of you feel the need to write also, I'm sure they will then think, hang on this could be a good thread.

Thanks (0)
Replying to Terry Hyman:
RLI
By lionofludesch
22nd Sep 2021 20:12

Terry Hyman wrote:

It's no good just moaning on AW.

No good moaning anywhere in my experience.

The juggernaut is rolling and can't be stopped.

Folk tell us it's worked elsewhere and why wouldn't it here? Maybe HMRC counterparts overseas have better trained staff. Who knows?

Thanks (0)
avatar
By Ammie
22nd Sep 2021 11:02

Let the wisdom of the HMRC take its course and then they can deal with the aftermath.

Brandishing the "fines and penalties" stick will not in itself help much.

The system instigators are deluded and will need to come up with some answers or resource a few years of problem solving.

Thanks (0)
avatar
By Michael C Feltham
22nd Sep 2021 11:06

Of course, HMRC cannot include in their stats, VAT lost because an increasing number of traders reject such idiocy (and cost!) of the serious increase in cost they faced and simply trade "on the black" for cash.

Who can really blame them?

The next step in avoiding such overblown Stasi type authority will be an increasing number of people merely trying to survive, using barter to both sell their own services and purchase what they need.

UK Government have an outstanding record in fouling up the application of moving manual systems to ICT: mainly since there are no suitably qualified system specifiers employed by any Government department.

In order to roll out quantum leap system changes, the organisation letting the contract firstly needs the services of a qualified System Architect: then they need both Project Managers (for each segment) and an overall Programme Manager for the whole job.

The two silly women (names escape me) in charge of the MTD project, in the beginning totally believed the snake oil from smartphone system sellers: if you remember, Joe/Joanne the Plumber could take pictures of bills and invoices on the fly and upload to his/her chosen cloud purveyor and voila! Out would pop a complete and accurate set of books!

Yeah right...

Clearly, not one of these HMRC clowns had actually bothered to look at the crumpled bits of tatty paper Joe/Joanne had kicking around his/her van, many being on the floor, at the end of the day. Plus, the legibility of POS printers was and is all dependent upon whether of not the POS operator had bothered to replace the inking module!

HMRC's track record on letting major ICT contracts is perhaps exemplified by the first major re-organisation, to a bunch of the usual suspects, EDS, BT and Anderson Consulting. The project ran well over time and suffered horrendous cost over-runs. So HMRC cancelled the programme. When the moment of divorce came, to their horror, HMRC discovered that they had failed to retain the IPR (Intellectual Property Rights) which were vested in Anderson!

Who demanded massive annual license fees or HMRC would have to junk ALL systems and software and start again from the beginning!

So they paid up and are probably still paying now...

Thanks (4)
Replying to Michael C Feltham:
avatar
By Latinaid
22nd Sep 2021 12:15

Michael C Feltham wrote:

Clearly, not one of these HMRC clowns had actually bothered to look at the crumpled bits of tatty paper Joe/Joanne had kicking around his/her van, many being on the floor, at the end of the day.

Never mind on the floor at the end of the day - what about the ones which have been on the dashboard for months and are faded beyond legibility? And how does the magic software deal with the fuel station receipt for £20.01 diesel, a KitKat and a coffee? Presumably it all goes through as a business expense.

Thanks (4)
avatar
By ClaireR75
22nd Sep 2021 11:30

So glad that the £28.00 a month I pay to xero - having previously used a spreadsheet for free - is so worthwhile !!!!!

Thanks (0)
avatar
By Paul FD
22nd Sep 2021 15:53

When I recently told a business man whose books I had been asked to review that they were total garbage he expressed great surprise because the nice man on tv had told him that all he had to do was install the software and his books would be perfect. I wonder how many in the field contacted their MPs to express their converns about MTD - I did and received the standard reply - probably written by David Gauke. He sould hang his head in shame. It is easy to blame the government of the day as some have here - but isn't the real problem that the machinery of government is so large that stuff like this is department led. How is an MP supposed to fight back if some big-wig in the treasury tells him or her that MTD or whatever will solve all the problems.

Thanks (0)
Replying to Paul FD:
avatar
By johnjenkins
22nd Sep 2021 16:02

So what is the point of having an MP. We might just as well vote for the party we think will do the least damage and let them sort their own mess.

Thanks (2)
Replying to johnjenkins:
paddle steamer
By DJKL
22nd Sep 2021 16:29

Pretty much how I have operated for years, I dislike all of them so it has always been which is the least worst, catch is that the traditionally safer choicer (from my financial position/perspective) has usually been the Conservatives but recently, since 2010, they have demonstrated that they are even more dangerous than the others.

Thanks (1)
Replying to johnjenkins:
avatar
By johnjenkins
22nd Sep 2021 16:53

Both the main parties seem hell bent on destroying the one man band and small business, first with GB then GO.

Thanks (1)
Replying to johnjenkins:
avatar
By djtax
22nd Sep 2021 17:34

I have written to my local MP in the past - total waste of time as all he does is forward it to the relevant gov dept who then merely spout the party line - usually ignoring the specific issues I raised.

Thanks (1)
avatar
By Paul Crowley
22nd Sep 2021 16:50

Error 3.7 0.5%
Avoidance 1.5 0.2%
Total 35 5.3%

AVOIDANCE is in the list. Why?

Thanks (2)
Replying to Paul Crowley:
avatar
By Hugo Fair
22nd Sep 2021 18:16

Because HMRC decided, about 10 years ago and entirely on their own, that there was no difference between evasion and avoidance - as both mean they receive less than they wanted!
On the other hand ... if they can quantify the 'value' of tax evasion then they must know where it's happening (and the approximate scale) - so why don't they do something about it, instead of making life ever harder for compliant taxpayers?

Thanks (2)
avatar
By GHarr497688
22nd Sep 2021 20:17

The more I read the threads of fellow Accountants ( all of which echo mine) the more pleased I feel that retirement will happen at 5th April 2022. The tax system will crumble as this all pans out. Less Accountants , less tax inspectors and more idiotic software being used by those with no Accountancy skills = increased tax gap and chaos.

Thanks (0)
Replying to GHarr497688:
RLI
By lionofludesch
22nd Sep 2021 20:24

GHarr497688 wrote:

The more I read the threads of fellow Accountants ( all of which echo mine) the more pleased I feel that retirement will happen at 5th April 2022. The tax system will crumble as this all pans out. Less Accountants , less tax inspectors and more idiotic software being used by those with no Accountancy skills = increased tax gap and chaos.

Crumble is overstating it a bit but it won't be good, that's for sure.

Thanks (1)
Replying to lionofludesch:
avatar
By johnjenkins
23rd Sep 2021 09:16

It's already crumbling. I actually think HMRC are totally overloaded with no one being able to organise anything and after working from home during the pandemic, probably no one cares. At the moment the whole world has gone [***] up. Since when do we have a shortage of lorry drivers? Doctors won't do face to face unless it's life threatening, but then how do you know without a face to face. Dentists aren't doing routine checks until October, Protesters allowed to block the M25 et al. Gas prices going through the roof. The world leaders (no i'm not blaming them for HMRC or protestors) need to get with the program and come together otherwise society as we know it will collapse. Never mind we've got plenty of money to send people in space with a view to destroying another planet.
Rant over.

Thanks (0)
Replying to johnjenkins:
paddle steamer
By DJKL
23rd Sep 2021 17:20

My dentist is operating as normal, (with safeguards and appointments further apart for cleaning) I was actually supposed to be there today for my 6 month clean with the hygienist (though it did get cancelled by the surgery but not for any Covid reasons)

Then again we pay for cover for the family (well I do, to be precise) so it is private provision

Thanks (0)
Replying to DJKL:
avatar
By johnjenkins
24th Sep 2021 09:30

Because my wife has no bone in her upper gum she has all her treatment done privately and I must admit they have looked after her. However I'm normal national health and my dentist has said nothing until October (doesn't that coincide with furlough ending).

Thanks (0)
avatar
By AndrewV12
23rd Sep 2021 10:54

Carelessness 6.7 1.0%
Criminal attacks 5.2 0.8%
Evasion 5.5 0.8%
Legal interpretation 5.8 0.9%
Non payment 4.0 0.6%
Hidden economy 3.0 0.4%
Error 3.7 0.5%
Avoidance 1.5 0.2%
Total 35 5.3%

Funny how being careless and making Errors, are nearly always in the taxpayers favour, funny that, who would have thought.

Thanks (0)

Pages