HMRC spin their annual tax gap yarn
By Donald Drysdale for ICAS
16 July 2018
As HMRC report once again on measuring how much tax has not been collected, Donald Drysdale sees the tax gap as a massive cost we cannot afford.
Why we can’t afford the tax gap
In June, HMRC published their annual report on Measuring tax gaps. Predictably, this estimated the total UK tax gap for the fiscal year 2016/17 at £33 billion.
I say “predictably” because, since 2005/06 when HMRC first estimated and published the tax gap, they have quantified it unfailingly within the range £27 billion to £35 billion each year. Never higher and never lower.
Over 12 years the cumulative tax gap has reportedly amounted to an astonishing £370 billion. In relation to the nation’s finances, that’s a colossal figure, amounting to more than one-sixth of current UK government borrowing of £1.78 trillion.
What is the tax gap?
The total tax gap, and the component tax gaps making up that total, are differences between the amounts of tax collected and those which should be collected. The official statistics published each year by HMRC are simply their estimates of those differences, based on a range of internal and external data and various analytical techniques. Other commentators have suggested alternative sums – very much higher in some cases.
HMRC admit that the total tax gap is difficult to measure and there are many sources of uncertainty and error. However, they suggest that it gives an indication of their long-term performance, arguing that the tax gap has decreased since 2005/06. In spite of this purported downward trend, the tax gap has actually risen over the five years since 2011/12 – in both monetary terms and as a percentage of total tax liabilities.
HMRC claim that the UK tax gap is one of the lowest in the world, having remained at a consistently low level for a decade. Their annual report on measuring tax gaps has become something of a public relations exercise, vindicating their strategies, excusing their failures and putting blame firmly on others.
Breakdown of the tax gap
The report analyses the tax gap in different ways. When considered by individual taxes, £13.5 billion (40% of the total tax gap) is ascribed to income tax, national insurance contributions and capital gains tax, and £11.7 billion (35%) to VAT.
A surprisingly small slice of only £3.5 billion (11%) is attributed to corporation tax, with nearly half of this relating to small companies. Any base erosion and profit shifting (BEPS) strategies, for example by high profile multinational enterprises which attract widespread public condemnation, don’t feature as part of the tax gap.
The report also breaks down the tax gap purportedly by “customer group”, and I find it astonishing that criminals are now included as a specific category of “customer”. When it comes to terminology, HMRC need to think about their messaging.
In April 2014 HMRC changed their focus from SMEs, large and complex businesses and their large business service. They now categorise business taxpayers as small businesses, mid-sized businesses or the top 2,000 largest and most complex businesses.
This change in presentation has allowed them to attribute a tax cost of £13.7 billion (over 40% of the tax gap) to small businesses, and only £7.0 billion (21%) and £3.9 billion (12%) to large and mid-sized businesses respectively. Should we accept this? It seems remarkably convenient, politically, at a time when they wish to quell widespread opposition to the controversial imposition of Making Tax Digital on small businesses.
Behavioural analysis
HMRC regard tax avoidance as exploiting the tax rules to gain a tax advantage that Parliament never intended. Within this category, they do not include tax planning, nor international tax arrangements like BEPS.
HMRC and other governmental pronouncements and independent press reports all lead us to believe that tax avoidance is the major problem. It, therefore, comes as a surprise to discover that the estimated £1.7 billion cost of such activity for 2016/17, while significant in absolute terms, accounts for only 5% of the total tax gap.
Tax lost of £9.1 billion (28%) is attributed to taxpayers’ careless or negligent behaviour and to errors. As such failings might be expected to result in both underpayments and overpayments of tax, the total reported by HMRC seem scarcely credible.
By contrast, tax lost through evasion, the hidden economy and criminal attacks on the tax system add up to £13.9 billion (42%), and it is on reading this statistic that I begin to question whether HMRC are equal to the task of administering our existing tax regime, warts and all.
Whose fault is it anyway?
It is tempting to blame HMRC for failing to collect all tax due. Indeed, during their frequent appearances before the House of Commons Public Accounts Committee, it is clear that HMRC’s senior executives are the favourite whipping boys for such shortcomings. But is this fair?
UK tax laws are too complex for taxpayers to comprehend and are even too convoluted for HMRC’s software engineers to program. New tax laws, and changes to existing provisions, are promoted by governments and their Chancellors and MPs, many of whom fail to understand their true implications.
All too often, Parliamentary debates on Finance Bill proposals fail to resolve apparent deficiencies, in spite of clear warnings given to HM Treasury and HMRC by ICAS and other professional bodies. Sometimes the time devoted to such debate is curtailed unreasonably. In most cases the Office of Tax Simplification (OTS) has little or no opportunity to input on tax laws before they become enshrined in statute.
As evidence of excessive complexity, HMRC consider that a massive tax cost of £5.3 billion (16% of the tax gap) relates to instances where taxpayers’ and HMRC’s interpretations of tax laws differ. They measure the tax gap by reference to the theoretical tax liability that would be paid if all taxpayers complied with both the letter of the law and HMRC’s interpretation of Parliament’s intention. And we know how obscure that intention may be to decipher.
Hardworking taxpayers are now being told that tax increases will be necessary to raise additional funding for the NHS and other public expenditure. As a quid pro quo, our broken tax system needs to be mended so that it operates more fairly. Governments and politicians must take a large slice of the blame for their serial failure to create tax laws which can be enforced.
Article supplied by Taxing Words Ltd