Recommendations & Conclusions
7 items
3
Recommendation
Twentieth Report - Tackling the tax gap
Accepted
HMRC does not include sophisticated and undesirable tax planning by the wealthy and large businesses in its estimates of the tax gap. HMRC’s tax gap measures the uncollected revenue due to taxpayers’ non-compliance with existing rules. HMRC does not assess the gap where taxpayers make lawful use of tax allowances …
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HMRC does not include sophisticated and undesirable tax planning by the wealthy and large businesses in its estimates of the tax gap. HMRC’s tax gap measures the uncollected revenue due to taxpayers’ non-compliance with existing rules. HMRC does not assess the gap where taxpayers make lawful use of tax allowances and reliefs but which are not desirable from a policy perspective (sometimes referred to as the ‘policy gap’) although this is something that policy makers and Government often express concern about. We recognise that HMRC’s Tackling the tax gap 7 compliance team is focused on non-compliance with tax law and not the policy gap. But our Committee and its predecessors have long been concerned that the wealthy and large businesses can employ specialist tax advisers to engage in sophisticated tax planning arrangements which are not readily available to most taxpayers. These sophisticated practices are legal and HMRC can only challenge them through changes in tax law or multinational agreements. HMRC would need a separate calculation if it was to measure how much tax is not being paid as a result of tax planning that is effective and not illegal but that, from a policy point of view, might be undesirable, in addition to the compliance gap. This is something that Government may wish to assess and Government has changed the law to close this perceived policy gap in the past. Recommendation: Parliament needs to know when taxpayers do not follow the spirit of the rules, and how much tax revenue is lost as a result. In addition to the tax gap, HMRC should look at ways to measure and report the estimated scale of sophisticated tax planning that is legal but undesirable from a policy perspective by tax type and taxpayer group each year.
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Government response AI summary
The government states it agrees with the recommendation and claims it is implemented, explaining that it already provides an estimate of the 'avoidance tax gap' for revenue loss when taxpayers do not follow the spirit of the law, as detailed in its publication.
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HM Treasury
5
Recommendation
Twentieth Report - Tackling the tax gap
Accepted
It is not clear that Making Tax Digital will help reduce the tax gap or taxpayer costs at a time when individual taxpayers and small businesses are under considerable pressure. HMRC’s primary objective for the ‘Making Tax Digital’ programme is to help reduce the tax gap attributable to small businesses …
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It is not clear that Making Tax Digital will help reduce the tax gap or taxpayer costs at a time when individual taxpayers and small businesses are under considerable pressure. HMRC’s primary objective for the ‘Making Tax Digital’ programme is to help reduce the tax gap attributable to small businesses caused by error and failure to take reasonable care. The effectiveness of the programme is not yet known but HMRC is confident that it will achieve its aims: improving compliance rates, increasing productivity of businesses and allowing HMRC to realise savings. HMRC tells us that the Office for Budget Responsibility supports its view that the programme will help to close the tax gap, but we are not convinced that for all businesses there will be the benefits to them or tax collection that HMRC envisages. For example, the findings of a survey of businesses and agents, carried out 1 Since the Committee’s evidence session HMRC is reported to have announced that companies and other bodies had voluntarily returned more than £215 million to the government in furlough scheme payments they did not need or took in error. 8 Tackling the tax gap by the Chartered Institute of Taxation and the Association of Taxation Technicians during December 2019 and January 2020, raised doubts about the effectiveness of Making Tax Digital in reducing errors and increasing productivity as expected by the government. The survey findings also suggest costs to business of complying with the programme far exceed government estimates. The Making Tax Digital programme is a logical plan in a world where more and more activity is carried out digitally, but it will impose extra, and possibly unreasonable, costs on some individual taxpayers and small businesses, and may be disproportionate to the gain to HMRC. Some of these businesses may be less able to afford the changes since COVID-19. Recommendation: HMRC should, as part of piloting future rounds of MTD, assess whether the administrative burden it is
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Government response AI summary
The government agrees with the recommendation with a target implementation date of Summer 2021, and HMRC is engaging with stakeholders to understand and minimise MTD costs, with revised estimates to be published.
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HM Treasury
6
Recommendation
Twentieth Report - Tackling the tax gap
Accepted
HMRC’s plans to tackle the part of the tax gap attributable to small businesses are made more difficult by the need to help those businesses survive the impact of the COVID-19 pandemic. HMRC estimates that 43% of the tax gap in 2018– 19 was attributable to small businesses (£13.4 billion). …
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HMRC’s plans to tackle the part of the tax gap attributable to small businesses are made more difficult by the need to help those businesses survive the impact of the COVID-19 pandemic. HMRC estimates that 43% of the tax gap in 2018– 19 was attributable to small businesses (£13.4 billion). In response to COVID-19, HMRC paid out billions of pounds to support small businesses. In August 2020, HMRC published a document setting out how it will support taxpayers and the economy against the background of COVID-19. To support taxpayers, especially small businesses, and increase the efficiency of its compliance approach, HMRC is increasingly adopting a “one to many approach” in its compliance checks rather than the more traditional investigations of individual taxpayers. This may not provide the tailored support small businesses need through the pandemic and HMRC needs to adapt. The Committee is disappointed that, so long after the beginning of the pandemic, HMRC has still not made sufficient use of its data to identify small businesses which have been left out of previous support packages, and therefore maximise taxpayer eligibility for grant support. Recommendation: HMRC should write to us within one month of this report explaining how it plans to balance its efforts to tackle the tax gap in small businesses with the support that those businesses will need to survive the impact of COVID-19. Tackling the tax gap 9 1 HM Revenue & Customs’ tax gap estimates
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Government response AI summary
The government accepts the recommendation, confirming that HMRC wrote to the Committee on 10 November 2020, explaining its approach to balancing tax gap efforts with supporting small businesses impacted by COVID-19, and published an issue briefing detailing this.
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HM Treasury
10
Conclusion
Twentieth Report - Tackling the tax gap
Accepted
HMRC’s estimate of the tax gap includes both non-compliance with the letter of the law, such as tax evasion, and non-compliance with the spirit of the law, such as tax avoidance.22 We asked the Department the extent to which the practice of ‘base erosion and profit shifting’ is captured in …
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HMRC’s estimate of the tax gap includes both non-compliance with the letter of the law, such as tax evasion, and non-compliance with the spirit of the law, such as tax avoidance.22 We asked the Department the extent to which the practice of ‘base erosion and profit shifting’ is captured in HMRC’s estimates of the tax gap. These are arrangements by which multinational companies are able to, via financial transactions, shift their profits to countries where the tax rates are lower than the country where the profits were generated. HMRC explained that the tax gap is a measure of non-compliance with the UK tax law, and it therefore includes the costs to the Exchequer of multinationals shifting their profits in breach of the UK tax law. It acknowledged, however, that tackling this risk to ensure companies pay more of their fair share of tax to the right jurisdictions requires the reform of international rules. The Organisation for Economic Co-operation and Development is taking the lead in this area.23
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Government response AI summary
The government confirms that it already provides an estimate of the 'avoidance tax gap,' defined as revenue loss from taxpayers not following the spirit of the law, detailing how this is captured in its publications.
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HM Treasury
15
Conclusion
Twentieth Report - Tackling the tax gap
Accepted
HMRC is implementing an ambitious initiative, Making Tax Digital, to help tackle error and failure to take reasonable care, particularly in the small business population. Small businesses accounted for the largest share of the tax gap (£13.4 billion; 43%) in 2018–19.35 They will be required to use accounting software to …
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HMRC is implementing an ambitious initiative, Making Tax Digital, to help tackle error and failure to take reasonable care, particularly in the small business population. Small businesses accounted for the largest share of the tax gap (£13.4 billion; 43%) in 2018–19.35 They will be required to use accounting software to keep accurate and up-to- date records, and the software will produce filings that will feed into HMRC’s systems.36 HMRC has introduced Making Tax Digital for VAT.37 In July, the government announced an extension of the programme, throughout 2022 and 2023, to other taxpayers and tax types. The government plans to extend the programme, from April 2022, to all VAT payers and then from April 2023 to businesses and landlords with income over £10,000 per annum which are liable for Income Tax.38
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Government response AI summary
The government agrees with the committee's observation, reiterating its existing plans to expand Making Tax Digital to all VAT payers from April 2022 and to businesses/landlords with income over £10,000 from April 2023, while noting ongoing stakeholder engagement to minimise costs.
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HM Treasury
16
Conclusion
Twentieth Report - Tackling the tax gap
Accepted
We questioned the Department about the effectiveness of Making Tax Digital in closing the tax gap, particularly in tackling tax evasion. HMRC explained that the programme is not designed to tackle tax evasion by small businesses. Other solutions are required to address the risk of tax evasion. The aim of …
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We questioned the Department about the effectiveness of Making Tax Digital in closing the tax gap, particularly in tackling tax evasion. HMRC explained that the programme is not designed to tackle tax evasion by small businesses. Other solutions are required to address the risk of tax evasion. The aim of Making Tax Digital is to reduce the level of error and failure to take reasonable care, including failure to keep good records. HMRC told us that the Office for Budget Responsibility, which is independent of HMRC, has validated its estimates for the extent to which Making Tax Digital for VAT will reduce the VAT tax gap.39
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Government response AI summary
The government agrees and outlines its ongoing plans for the expansion of Making Tax Digital (MTD) to more taxpayers and tax types by April 2023, noting its role in reducing errors and improving productivity, with continued engagement on cost estimates.
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HM Treasury
18
Conclusion
Twentieth Report - Tackling the tax gap
Accepted
Small businesses accounted for the largest share of the tax gap in 2018–19.42 The tax gap attributable to small businesses was 43% (£13.4 billion) of the total tax gap in 2018–19 and has remained fairly stable as a percentage of the total tax gap for a number of years. Furthermore, …
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Small businesses accounted for the largest share of the tax gap in 2018–19.42 The tax gap attributable to small businesses was 43% (£13.4 billion) of the total tax gap in 2018–19 and has remained fairly stable as a percentage of the total tax gap for a number of years. Furthermore, the small business population is constantly growing. HMRC told us that it had grown by about 50% in the last 20 years, and therefore the tax gap is likely to get larger.43 HMRC explained to us that this is why increasingly its strategy is to focus on helping small businesses to get their tax right and make it harder for them to get it wrong. The Department told us that a ‘one-to-one’ approach to ensuring the compliance of all 5.7 million small business is not feasible. It needs to restrict its one-to-one interactions with small businesses to cases of tax evasion, and use more ‘one-to-many’ solutions, such as campaigns targeting specific sectors, for the other aspects of the tax gap.44 We asked HMRC why it had reduced resources allocated to pursuing small businesses for taxes unpaid when small businesses make up the largest share of the tax gap. It told us that its one-to-many activities allow it to reach more businesses with fewer of its staff.45
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Government response AI summary
The government agrees and states it has implemented a strategy to balance tackling the tax gap in small businesses with providing support during COVID-19, having published an issue briefing outlining its approach.
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HM Treasury