Source · Select Committees · Public Accounts Committee
Recommendation 10
10
HMRC’s estimate of the tax gap includes both non-compliance with the letter of the law,...
Conclusion
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
Government Response
Not Addressed
HM Government
Not Addressed
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.