Source · Select Committees · Public Accounts Committee
Twentieth Report - Tackling the tax gap
Public Accounts Committee
HC 650
Published 16 October 2020
Conclusions (20)
2
Conclusion
HMRC does not know the relative size of tax gaps in the four nations of the UK or across different industries. HMRC already publishes breakdowns of the tax gap by taxpayer group, tax type and behaviour. However, HMRC does not calculate or publish estimates of the tax gap for each …
20
Conclusion
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 …
3
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 …
4
Conclusion
Although HMRC has yet to see the full effects of COVID-19 on taxpayer compliance, it is already estimating up to £3.5 billion of fraud and error in furlough payments and has seen a significant drop in compliance yield in the first quarter of 2020–21.1 HMRC’s COVID-19 support schemes have led …
5
Conclusion
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 …
6
Conclusion
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). …
1
Conclusion
On the basis of a Report by the Comptroller and Auditor General, we took evidence from HM Revenue & Customs (the Department) and HM Treasury on tackling the tax gap.2
7
Conclusion
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 …
8
Conclusion
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, …
9
Conclusion
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 …
10
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 …
11
Conclusion
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, …
12
Conclusion
The COVID-19 pandemic may increase the risks of non-payment of taxes and more people may operate in the deliberately hidden part of the economy.26 We asked HMRC about its assessment of the impact of the pandemic on the size of the tax gap and compliance yield. The Department told us …
13
Conclusion
During the pandemic, HMRC told us that it had to redeploy its resources from frontline activities, such as collection of tax, to work supporting taxpayers through the COVID support schemes. HMRC expects a reduction on compliance yield in 2020–21 compared with previous years.30 HMRC’s compliance yield dropped by 51% in …
14
Conclusion
HMRC explained to us that its overall approach to ensuring taxpayers’ compliance with the tax laws is predicated on promoting voluntary compliance through promoting trust in the tax system and supporting taxpayers that want to comply. It aims to deter those that may not want to comply by highlighting the …
15
Conclusion
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 …
16
Conclusion
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 …
17
Conclusion
We also received written evidence from the Chartered Institute of Taxation, which highlighted the findings of a survey of businesses and agents with an interest in the programme that they had carried out jointly with the Association of Taxation Technicians during December 2019 and January 2020.40 The findings of the …
18
Conclusion
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, …
19
Conclusion
We asked HMRC whether it is doing enough to tackle small businesses that operate in the hidden economy and deliberately evade their responsibilities. HMRC told us that about 8,000 of its staff concentrate on ensuring compliance in the small business sector, including those businesses active in the hidden economy. It …