Recommendations & Conclusions
5 items
20
Recommendation
Twentieth Report - Tackling the tax gap
Rejected
In addition, HMRC does not publish any tax gap analysis for different types of industry. For example, HMRC has not published an estimated tax gap for the construction industry despite introducing the construction industry scheme to deal with high levels of non-compliance. Recommendation: HMRC should include analysis of the tax …
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In addition, HMRC does not publish any tax gap analysis for different types of industry. For example, HMRC has not published an estimated tax gap for the construction industry despite introducing the construction industry scheme to deal with high levels of non-compliance. Recommendation: HMRC should include analysis of the tax gaps for each industrial sector in its future publications of the tax gap. In its Treasury Minute response to this report, HMRC should also set out what the benefits and challenges are of doing a similar analysis about the tax gaps in the four nations of the UK.
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Government response AI summary
The government rejects the recommendation to include tax gap analysis by industrial sector due to data and modelling limitations, feasibility issues, and the high level of assumption required, and implicitly rejects analysis for the four nations for similar reasons.
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HM Treasury
7
Conclusion
Twentieth Report - Tackling the tax gap
Rejected
HMRC measures the additional amount it generates by tackling tax avoidance, evasion and non-compliance, known as compliance yield. In its 2018–19 Annual Report, HMRC reported £34.1 billion of compliance yield, compared with £30.3 billion in the previous year.12 HMRC confirmed to us that it does not provide confidence intervals for …
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HMRC measures the additional amount it generates by tackling tax avoidance, evasion and non-compliance, known as compliance yield. In its 2018–19 Annual Report, HMRC reported £34.1 billion of compliance yield, compared with £30.3 billion in the previous year.12 HMRC confirmed to us that it does not provide confidence intervals for its reported compliance yield.13 We asked the Department about the relationship between its tax gap and compliance yield estimates. HMRC explained to us that there are a number of reasons why it is “incredibly difficult to create an equivalence between the tax gap and the current compliance yield”. Cases that HMRC investigates can have yield going back over a number of years, whereas the tax gap estimates only relate to the year under consideration. There are also other factors that will impact the size of the tax gap, such as, economic conditions and the size of the taxpaying population.14 We also asked the Department about the level of uncertainty associated with its reported costs of compliance activities. HMRC explained to us that it is unable to measure the indirect effect of many of its activities, such as customer services, in promoting voluntary compliance. It therefore only includes the direct costs associated with the compliance part of the Department in its reported cost figures.15 Limitations of HMRC’s tax gap analysis
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Government response AI summary
The government rejects the implicit suggestion of providing confidence intervals for compliance yield, explaining that due to complexity and varied methodologies, a robust method would be complex, assumption-based, and of limited insight.
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HM Treasury
8
Conclusion
Twentieth Report - Tackling the tax gap
Rejected
HMRC publishes a breakdown of the tax gap by taxpayer group, tax type and behaviour.16 HMRC told us that it uses the outcomes of its tax gap analysis as indicators 7 Q 23; C&AG’s Report, para 1.12 8 Qq 23–25 9 C&AG’s Report, para 1.14 10 Q 23; C&AG’s Report, …
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HMRC publishes a breakdown of the tax gap by taxpayer group, tax type and behaviour.16 HMRC told us that it uses the outcomes of its tax gap analysis as indicators 7 Q 23; C&AG’s Report, para 1.12 8 Qq 23–25 9 C&AG’s Report, para 1.14 10 Q 23; C&AG’s Report, para 1.13 11 Qq 23, 25; C&AG’s Report, para 1.19 12 Q 26; C&AG’s Report, Figure 11 13 Q 28 14 Q 19; C&AG’s Report, paras 2.24–2.25 15 Qq 29–30; C&AG’s Report, Figure 14 16 Q 24; C&AG’s Report, para 1.5 Tackling the tax gap 11 of trends in its performance, which allow it to consider its track record in tackling non- compliance in relation to specific behaviour types and taxpayer groups. HMRC, however, confirmed to us that it does not measure the tax gap in each of the four nations of the UK. HMRC told us that it could attribute a proportion of the total tax gap to each of the four nations based on factors such as, the size of the economy and the number of small businesses in different parts of the UK, and assuming that taxpayer behaviours are broadly consistent across the different regions. But it had not undertaken such an analysis.17 HMRC acknowledged that such an analysis could be beneficial, particularly in the context of the devolution of Income Tax powers to Scotland and Wales in 2016–17 and 2019–20 respectively. HMRC told us that the Scottish and Welsh Governments have an interest in how much combined yield it collects and its attribution to them. It said it has a formula to make sure that the yield compliance directorates recover for income tax is shared between Scotland, Wales and the rest of the UK.18
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Government response AI summary
The government rejects the implicit recommendation for tax gap analysis in the four nations due to data and modelling limitations, stating that current methods do not comprehensively allow for such subgroup analysis, though it disaggregates the oils tax gap for Northern Ireland where feasible.
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HM Treasury
9
Conclusion
Twentieth Report - Tackling the tax gap
Rejected
It also transpired, when we questioned the Department about the size of the tax gap in the construction industry, that HMRC does not assess and publish the relative size of the tax gap across different industries. The construction industry has traditionally had quite high levels of non-compliance. HMRC introduced the …
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It also transpired, when we questioned the Department about the size of the tax gap in the construction industry, that HMRC does not assess and publish the relative size of the tax gap across different industries. The construction industry has traditionally had quite high levels of non-compliance. HMRC introduced the Construction Industry Scheme to tackle the risks in the construction sector but it has not assessed the tax gap in the sector since.19 Notwithstanding the lack of a tax gap estimate for different industries, HMRC has intelligence on the levels of non-compliance in different sectors, such as in the case of buy-to-let landlords.20 HMRC uses such intelligence to inform the targeting of its campaigns, where it contacts large numbers of taxpayers in a specific sector and invites them to revise their tax filings. A number of taxpayers that do not take action will then be subject to HMRC investigations.21 The completeness of the tax gap
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Government response AI summary
The government disagrees with the implied recommendation to assess and publish the tax gap across different industries, explaining that current models, data, and resources do not allow for comprehensive or precise industry-specific analysis.
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HM Treasury
11
Conclusion
Twentieth Report - Tackling the tax gap
Rejected
HMRC’s tax gap does not capture the ‘policy gap’, which HMRC characterised as the tax loss that is not due, but which might be due if the tax rules could be tightened up. HMRC confirmed to us that there is more “taxable capacity” in multinationals than the 17 Qq 19, …
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HMRC’s tax gap does not capture the ‘policy gap’, which HMRC characterised as the tax loss that is not due, but which might be due if the tax rules could be tightened up. HMRC confirmed to us that there is more “taxable capacity” in multinationals than the 17 Qq 19, 35 18 Q 36; National Audit Office, HM Revenue & Customs: Departmental Overview 2019, slide 6 19 Qq 37–38 20 Q 68 21 Q 20 22 Q 31; C&AG’s Report, Figure 1 23 Q 31 12 Tackling the tax gap current law ensures.24 We questioned the Department about the extent to which its tax gap estimates underestimate the true scale of non-compliance, particularly in relation to the wealthy individuals and multinational companies, who tend to have the most capacity to arrange their financial affairs to avoid paying their taxes in a way that does not fall into the scope of HMRC’s tax gap estimate. HMRC confirmed that the wealthy individuals and large businesses are the taxpayer groups with the most capacity to partake in “sophisticated tax planning”. HMRC records such tax planning arrangements in its estimate of the tax gap where they are, in its view, non-compliant because they are deemed to be a form of tax avoidance or because HMRC deems them to be incorrect interpretations of the tax laws. But any sophisticated tax planning that is effective in legally achieving its objectives, will not be part of the tax gap no matter how undesirable it is from a policy point of view. If HMRC measured, in addition to the compliance gap, how much tax is not paid as a result of effective, legal tax planning, that however from a policy point of view is undesirable, it would produce another figure.25 24 Q 31 25 Q 32 Tackling the tax gap 13 2 HMRC’s plans to tackle the tax gap The impact of COVID-19 on taxpayers’ compliance
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Government response AI summary
The government rejects the idea of measuring tax loss from 'undesirable sophisticated tax planning' due to definitional and feasibility issues, though it states it already estimates the avoidance tax gap (bending rules, not the spirit of the law).
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HM Treasury