Tackling the £31 billion tax gap
The government released official data last month with headline figures revealing a ‘tax gap’ of £31 billion, equivalent of around 5% of tax liabilities in 2018/19.
The ‘tax gap’ as you would expect measures the difference between the amount that should be paid to HMRC and what actually is paid. At just under 5%, HMRC has declared that this is actually the lowest recorded rate for the tax gap showing a downward trend, especially when compared to the rate of 7.5% in 2005/06.
HMRC has pledged, nonetheless, to tackle tax evasion and non-compliance with additional HMRC compliance employees and new technology aiming to raise additional tax revenue of £4.4 billion by 2024/25.
But given the COVID-19 economic impact and predictions of a severe recession, it will prove difficult to reduce the tax gap. This is however a good option for the treasury to increase tax revenue versus increase taxes, at a time when they are looking to stimulate economic growth.
Offshore focus
An area of focus for HMRC to increase tax revenues and simultaneously decrease the tax gap is in the use of the international bank data that is now automatically exchanged between global tax authorities, known as the Common Reporting Standard.
The amount of international data exchanged almost doubled last year where nearly 100 countries exchanged data on 84 million financial accounts totalling £9.1 billion in offshore assets. In comparison, data on 47 million financial accounts totalling €5 billion was shared in 2018.
The data also revealed that 1 in 10 adults in the UK has an offshore financial interest. Hence we can see why HMRC continues to run a campaign to tackle offshore non-compliance, including sending ‘nudge’ letters to individuals suspected to have offshore assets to prompt disclosure and open tax investigations.
Big increase in HMRC resources
For HMRC to further close the tax gap, we expect they will increase recruitment of compliance teams and fine tune their internal processes.
We see much open discussion around HMRC’s current restructuring plans including the ‘Building our Future’ campaign, with the idea being to move to regional centres including the closure of many local tax offices. As a result, many experienced tax investigators are leaving and HMRC are upskilling existing HMRC tax investigators whilst increasing recruitment.
Tax Avoidance and wealth
The HMRC fight against ‘tax avoidance’ has been an area of persistent focus since 2010 and is often described as ‘artificial’ tax arrangements with ‘contrived’ outcomes, coming with a health warning that ‘if it sounds too good to be true, then it probably is’.
Interestingly, the latest statistics show that only 4% of the tax gap actually relates to tax avoidance which suggests the investment in HMRC’s Counter Avoidance strategy plus the government focus to clamp down on this area of tax loss, is making substantial progress.
This is the first year a specific tax gap for wealthy taxpayers is included in the report. A wealthy taxpayer is defined as someone with an income that exceeds £200,000 or assets worth over £2m.
HMRC estimates that the tax gap for wealthy individuals is £1.7 billion, equal to the tax gap caused by tax avoidance. No surprise then that HMRC has a specific customer service team focused on recouping tax revenue from wealthy taxpayers and we expect an increase in recruitment in this team also.
Small Business is at greatest risk
In terms of the type of behaviour that leads to unpaid tax, the ‘failure to take reasonable care’ and ‘legal interpretation’ account for the largest proportions of the tax gap.
By type of taxpayer, the amounts not paid from small businesses is £13.4 billion, large businesses £5.3 billion and criminals £4.5 billion and shows where HMRC will be keen to focus its attention.
It is likely that HMRC will use its powers and standard tax return enquiry processes to challenge and collect tax revenue from small businesses.
The covid-19 gap
With new reliefs and support payments flowing from the government Covid-19 economic package comes new opportunities for underpayment of UK tax.
This may be for a wide range of reasons, from genuine mistakes to organised criminals looking to abuse the support payments paid out by HMRC.
The Coronavirus Job Retention Scheme (CJRS) is seeing a huge volume of complex claims filed with HMRC. To 12 July 2020, 1.2 million employers have claimed a total of £28.7 billon from HMRC.
There are reportedly 4,000-plus reports from whistle blowers of potential fraud relating to the CJRS or furlough scheme.
The government said it is committed to ‘extensive post payment reviews of stimulus and support payments, to find fraud and recover money for the taxpayer’. The new inspectors it will take to recoup covid-19 payments taken fraudulently or carelessly may heap added pressure on HMRC when it is already working to close the tax gap but this does not outweigh the risk that Covid-19 support payments will increase the tax gap even further in future years.
Non-payment of taxes has increase
£4.1 billion of the tax gap is simple non-payment of taxes. Will this now increase as result of Covid-19? Certainly, tax deferral and Time To Pay arrangements are key parts of HMRC’s support for businesses and individuals at this time but for example, the amount of deferred VAT alone at 15 July 2020 stood at £27.5 billion. Therefore, and sadly, we think the answer may well be yes to further increases in non-payment.
It remains to be seen whether HMRC can close the £1 billion tax gap whilst juggling the threat of new types of tax fraud, alongside increasing and training new staff and potential investment constraints.
