Source · Select Committees · Public Accounts Committee
Recommendation 3
3
HMRC does not include sophisticated and undesirable tax planning by the wealthy and large businesses...
Conclusion
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.
Government Response
Not Addressed
HM Government
Not Addressed
3.1 The government agrees with the Committee’s recommendation. Recommendation implemented 3.2 The department already provides an estimate of revenue loss that results when taxpayers do not follow the spirit of the law, this is the avoidance tax gap. In the department’s Measuring tax gaps publication, tax avoidance is defined as “bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter, but not the spirit, of the law.” The estimate of the avoidance tax gap represents losses that can be addressed under UK law. The latest estimates of the avoidance tax gap are presented on page 14 of Measuring tax gaps 2020 edition.