ICAS ICAS logo

Quicklinks

  1. About Us

    Find out about who we are and what we do here at ICAS.

  2. Find a CA

    Search our directory of individual CAs and Member organisations by name, location and professional criteria.

  3. CA Magazine

    View the latest issues of the dedicated magazine for ICAS Chartered Accountants.

  4. Contact Us

    Get in touch with ICAS by phone, email or post, with dedicated contacts for Members, Students and firms.

Login
  • Annual renewal
  • About us
  • Contact us
  • Find a CA
  1. About us
    1. Governance
  2. Members
    1. Become a member
    2. Newly qualified
    3. Manage my membership
    4. Benefits of membership
    5. Careers support
    6. Mentoring
    7. CA Wellbeing
    8. More for Members
    9. Area networks
    10. International communities
    11. Get involved
    12. Top Young CAs
    13. Career breaks
    14. ICAS podcast
    15. Newly admitted members 2022
    16. Newly admitted members 2023
  3. CA Students
    1. Student information
    2. Student resources
    3. Learning requirements
    4. Learning updates
    5. Learning blog
    6. Totum Pro | Student discount card
    7. CA Student wellbeing
  4. Become a CA
    1. How to become a CA
    2. Routes to becoming a CA
    3. CA Stories
    4. Find a training agreement
    5. Why become a CA
    6. Qualification information
    7. University exemptions
  5. Employers
    1. Become an Authorised Training Office
    2. Resources for Authorised Training Offices
    3. Professional entry
    4. Apprenticeships
  6. Find a CA
  7. ICAS events
    1. CA Summit
  8. CA magazine
  9. Insight
    1. Finance + Trust
    2. Finance + Technology
    3. Finance + EDI
    4. Finance + Mental Fitness
    5. Finance + Leadership
    6. Finance + Sustainability
  10. Professional resources
    1. Anti-money laundering
    2. Audit and assurance
    3. Brexit
    4. Business and governance
    5. Charities
    6. Coronavirus
    7. Corporate and financial reporting
    8. Cyber security
    9. Ethics
    10. Insolvency
    11. ICAS Research
    12. Pensions
    13. Practice
    14. Public sector
    15. Sustainability
    16. Tax
  11. CPD - professional development
    1. CPD courses and qualifications
    2. CPD news and updates
    3. CPD support and advice
  12. Regulation
    1. Complaints and sanctions
    2. Regulatory authorisations
    3. Guidance and help sheets
    4. Regulatory monitoring
  13. CA jobs
    1. CA jobs partner: Rutherford Cross
    2. Resources for your job search
    3. Advertise with CA jobs
    4. Hays | A Trusted ICAS CA Jobs Partner
    5. Azets | What's your ambition?
  14. Work at ICAS
    1. Business centres
    2. Meet our team
    3. Benefits
    4. Vacancies
    5. Imagine your career at ICAS
  15. Contact us
    1. Technical and regulation queries
    2. ICAS logo request

HMRC spin their annual tax gap yarn

  • LinkedIn (opens new window)
  • Twitter (opens new window)
Donald-Drysdale By Donald Drysdale for ICAS

16 July 2018

Main Points

  • Predictably, HMRC have estimated the tax gap for 2016/17 at its usual annual level.

  • This time they have blamed much of the gap on small businesses, perhaps in an attempt to justify Making Tax Digital.

  • Governments and politicians should be accountable for failing to create tax laws that work.

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

London bridge big ben scene

Tax: HMRC's new priorities revealed

By Donald Drysdale for ICAS

10 May 2018

Networked-City-Concept

Will MTD improve tax compliance?

2-23-marsh 2-23-marsh
ICAS logo

Footer links

  • Contact us
  • Terms and conditions
  • Modern slavery statement
  • Privacy notice
  • CA magazine

Connect with ICAS

  • Facebook (opens new window) Facebook Icon
  • Twitter (opens new window) Twitter Icon
  • LinkedIn (opens new window) LinkedIn Icon
  • Instagram (opens new window) Instagram Icon

ICAS is a member of the following bodies

  • Consultative Committee of Accountancy Bodies (opens new window) Consultative Committee of Accountancy Bodies logo
  • Chartered Accountants Worldwide (opens new window) Chartered Accountants Worldwide logo
  • Global Accounting Alliance (opens new window) Global Accounting Alliance
  • International Federation of Accountants (opens new window) IFAC
  • Access Accountancy (opens new window) Access Acountancy

Charities

  • ICAS Foundation (opens new window) ICAS Foundation
  • SCABA (opens new window) scaba

Accreditations

  • ISO 9001 - RGB (opens new window)
© ICAS 2022

The mark and designation “CA” is a registered trade mark of The Institute of Chartered Accountants of Scotland (ICAS), and is available for use in the UK and EU only to members of ICAS. If you are not a member of ICAS, you should not use the “CA” mark and designation in the UK or EU in relation to accountancy, tax or insolvency services. The mark and designation “Chartered Accountant” is a registered trade mark of ICAS, the Institute of Chartered Accountants of England and Wales and Chartered Accountants Ireland. If you are not a member of one of these organisations, you should not use the “Chartered Accountant” mark and designation in the UK or EU in relation to these services. Further restrictions on the use of these marks also apply where you are a member.

ICAS logo

Our cookie policy

ICAS.com uses cookies which are essential for our website to work. We would also like to use analytical cookies to help us improve our website and your user experience. Any data collected is anonymised. Please have a look at the further information in our cookie policy and confirm if you are happy for us to use analytical cookies: