While HM Treasury has accepted that HM Revenue & Customs should make it clearer that tax gap estimates are highly uncertain, it said any published confidence interval for “compliance yield” would be heavily based on assumptions.
The U.K. government’s response to the House of Commons Public Accounts Committee's October 2020 report on “tackling the tax gap” was set out in Treasury minutes published on January 14.
There is a long-term downward trend in the tax gap, and more than 95 percent of tax due was paid in the 2018-2019 tax year, HMRC said when it released its latest estimate in July 2020.
HMRC Chief Executive Jim Harra gave evidence to the committee’s inquiry in September 2020. In an October 15, 2020, letter, Harra wrote to Committee Chair Meg Hillier, expressing concern because the committee’s report described HMRC’s presentation of the tax gap figures as misleading and the committee’s release had called on HMRC to present “a more honest picture” regarding the tax gap.
Harra pointed out that HMRC's estimates are official statistics produced in accordance with the code of practice for statistics, which “assures objectivity and integrity.”
The tax gap method “has been intensively reviewed and given a clean bill of health by the International Monetary Fund and reviewed by the Office for Statistics Regulation, [which] stated that, ‘HMRC is world-leading in measuring tax gaps and is setting the bar for others to follow,’” Harra wrote, adding that he found the committee’s characterization of HMRC’s work in this area to be “wholly unfair and unsubstantiated.”
‘A Complex Task’
Compliance yield is an estimate of the impact of HMRC activity to collect or protect revenues that would have otherwise been lost through tax avoidance, evasion, and other noncompliance, Treasury said. “The department uses different methodologies to estimate the various elements of compliance yield, so establishing a robust and consistent method for estimating a range around the reported compliance yield would be a complex task,” it added.
Treasury disagreed with the committee’s call for an analysis of the tax gap for each industrial sector, but it said HMRC would seek to provide estimates “where it is feasible” of the magnitude of risks emerging in specific industries, regions, or tax regimes.
The committee concluded that HMRC “does not include sophisticated and undesirable tax planning by the wealthy and large businesses” in its estimates of the tax gap and recommended that HMRC should seek to measure “tax planning that is legal but undesirable from a policy perspective.”
Treasury noted that HMRC already provides an estimate of the revenue loss that results when taxpayers do not follow the spirit of the law, adding that “this is the avoidance tax gap.” That estimate “represents losses that can be addressed under U.K. law,” it said, adding that “there is no generally accepted definition of what tax planning is deemed ‘undesirable’ from a policy perspective, and the department has no objective way of assessing this.”
Clifford Chance partner Dan Neidle told Tax Notes in October 2020 that the committee appeared to have adopted a new definition of the term “policy gap.” While the National Audit Office had noted that HMRC does not measure the policy gap, which “would include the effect of tax reliefs,” the committee’s release identified as a “knowledge gap” the exclusion of “technically legal, but highly undesirable, tax measures” used by the wealthy and large businesses. “If the committee is aware of specific instances of successful [tax] planning that HMRC doesn't challenge, they should say so — otherwise, it's unclear how this ‘gap’ can be assessed,” Neidle said.
Making Tax Digital
Treasury said it agreed with the committee’s recommendation that, in piloting future rounds of the Making Tax Digital (MTD) program, HMRC should “assess whether the administrative burden it is imposing on taxpayers is reasonable and affordable before proceeding with further national rollouts.”
The committee found that it was not clear that MTD would help reduce the tax gap or taxpayer costs “at a time when individual taxpayers and small businesses are under considerable pressure.”
MTD “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,” the committee said. “Some of these businesses may be less able to afford the changes since COVID-19.”
Treasury said MTD helps to reduce avoidable mistakes, which “cost over £8.5 billion in 2018-19.” It enables businesses to see a real-time picture of their finances and facilitates increased productivity, it argued.
“Businesses using MTD VAT software are already benefiting from improved working practices as well as wider productivity gains and reductions in input errors,” Treasury said, adding that many have turned to digital tools during the pandemic. HMRC will do all it can to minimize costs, and revised estimates will be published in due course, Treasury said.
COVID-19 Pressures
HMRC recognizes “that COVID-19 is having a huge effect on small businesses, leaving a significant number in an extremely difficult position,” Treasury said in response to the committee’s note of the need to balance efforts to tackle the tax gap with the support that businesses need to survive the impact of the pandemic.
HMRC is “committed to supporting viable businesses to cope with the impact of the pandemic, both by making it easy for them to receive key COVID-19 business support grants to which they are entitled and by administering the tax system in a way that takes account of their ability to meet their obligations to file their returns and pay their tax bills on time,” Treasury said.
The House of Commons Treasury Committee’s “tax after coronavirus” inquiry will hear evidence on January 18 from Financial Secretary to the Treasury Jesse Norman; Mike Williams, Treasury’s director of business and international tax; and Beth Russell, Treasury’s director general of tax and welfare. A U.K. corporation tax roadmap would give companies a sense of the likely direction of tax policy while a broader roadmap could help to improve the policymaking process, the committee heard during a December 2020 evidence session.
On January 20 the committee’s inquiry into the economic impact of the coronavirus will hear evidence from Glenn Collins, head of technical advisory and policy at the Association of Chartered Certified Accountants; Caroline Miskin, tax practitioner support manager at the Institute of Chartered Accountants in England and Wales; and Richard Wild, head of the tax technical team at the Chartered Institute of Taxation.
The committee indicated that the witnesses will be questioned on gaps in the coronavirus support schemes. Northern Ireland’s Economy Minister Diane Dodds announced on January 14 a new scheme to support company directors.