HMRC detailed today the estimated tax gap reached £35billion in 2019 to 2020 and of this, Income Tax, National Insurance, Capital Gains Tax and VAT made up the largest share with £12.6billion. Helen Morrissey, a senior pensions and retirement analyst at Hargreaves Lansdown, noted there are many reasons people don’t pay what they should, with some being deliberate and others being errors. Regardless, taxpayers could be leaving themselves open to large fines.
Ms Morrissey said: “There are many reasons why such gaps exist and while some taxpayers knowingly underpay tax, for many others it comes down to genuine error. While the proportion of business taxpayers with an under-declared liability has fallen, the proportion of non-business taxpayers doing the same has risen from 14 percent in 2005/06 to 22 percent in 2017/18.
“Making a mistake leaves you open to being clobbered with large fines from HMRC as well as having to make good the initial under-declared payment. As many people start filling out self-assessment tax returns in the coming months, they should do all they can to ensure they have a clear idea of their potential liabilities. Make sure you have all relevant paperwork to hand and don’t leave it to the last minute as you might leave something out. Also don’t be scared to call HMRC if there’s something you don’t understand as they will be able to help you. It might even make sense to enlist professional help if needed.”
Adam Walkom, the co-founder at Permanent Wealth Partners, commented how the complex nature of tax could be making this a tricky issue to solve.
“These figures show HMRC is heading in the right direction,” he said.
“After all, we all have a legal duty to pay tax. If you don’t pay the tax you owe, you should go to jail. It’s that simple.
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“But remember, we also have the opportunity to structure our financial affairs, in 100 percent legal ways, which minimises the legal amount of tax we have to pay. I am constantly amazed at the number of people who don’t do this. If Governments want us to pay more tax, they should change the law, not try to persuade us with a moral obligation.”
While tax obligations may be unclear or overlooked, HMRC’s intentions for this area remain clear. In recent months HMRC has ramped up its tax evasion efforts. Recently, the Government confirmed it was investigating 153 suspected “enablers of tax evasion” cases. Given the definition of “enablers” – which is wide ranging and includes wealth managers or technology companies that provide software which could be used to distort profits – unsuspecting people may be targeted for investigations, as HMRC clamps down on anyone who aids in tax crimes and not just the perpetrators themselves.
On top of HMRC’s own efforts, taxpayers appear to be willing to help the Government with their investigations. Recently, UHY Hacker Young, the national accountancy group, noted taxpayers made 107,000 reports of suspected tax evasion to HMRC in the last year.
HMRC has also made it clear it will refocus its attention on the furlough scheme as the payments end from October but fraud continues to be an issue.
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While the Government focuses on taking down unscrupulous taxpayers, Shaun Moore, a financial planning and tax expert at Quilter, argued a large part of the problem can be laid at HMRC’s own door.
“Although 94.7 percent of all taxes are collected successfully, the main reason for the tax gap is simply down to innocuous errors which accounts for around a fifth (£6.7billion) of the £35billion tax gap,” he said.
“This illustrates a system that is too complicated and in need of simplification. The overly complex system we currently have costs the government billions each year and is badly in need of change. While the tax gap has reduced over the years, the pace of change has slowed considerably with a tax gap of 5.6 percent posted in 2011 showing that this year’s figure is only a paltry 0.3 percent better in just under a decade. There are clearly holes in our tax system the government have so far not found the means to plug.
“Celebrities found using tax avoidance schemes are rightly lambasted for their involvement in such schemes regularly but they in fact represent the smallest proportion of the tax gap at four percent (£1.5billion). The stats therefore point to the public being happy to pay tax but are stymied by an overly complex system that breeds errors in reporting.
“However, new schemes such as Making Tax Digital should help to streamline the process and make sure that people pay the tax they owe and avoid unintended errors. Making sure all members of society pay tax is an essential part of our system.
“Fixing the nation’s taxation system is going to become increasingly important in the wake of the pandemic and our changing political landscape. This may mean that we find ourselves in harder fiscal times and this can lead to harsher penalties for those found intentionally or unintentionally not paying what they are owed.”
For those who are worried about HMRC knocking on their door, guidance has been issued on what the best practices are for those who are unsure of what they may owe.
Richard Morley, Tax Expert and Partner at accountancy firm HW Fisher, commended HMRC’s efforts thus far: “In an ideal HMRC world, the tax gap would be zero percent but today’s figures released by HMRC reveal a tax gap of 5.3 percent or £35billion. Compare it to the US where the IRS estimates the tax gap to be around 15 percent or $400billion and you can see that HMRC are doing a good job.
“The figures are broadly similar to the last few years so based on this, there is no immediate reason to consider HMRC’s approach to tackling the tax gap will significantly change. HMRC will point to an overall reduction in the tax gap since they started to measure it in 2005/06 so on this basis alone, they are doing a good job. It is after all, in everyone’s interests to ensure that taxes due are paid to ensure a, generally speaking, smooth and efficient running of the economy.”
However, in terms of what the recent tax gap figures mean for UK taxpayers going forwards, Mr Morley warned: “Don’t expect HMRC to let up on their compliance and investigation initiatives, they will continue to strive in getting the tax figure as low as possible.
“Looking behind the numbers, you can see that broadly, the larger elements of the tax gap is split between Personal Taxes of £12.6billion and VAT of £12.3billion. Corporation Tax accounts for £5.7billion of the tax gap and of this, small businesses account for £3.4billion.
“Furthermore, the corporation tax gap for small businesses has increased by 50 percent over the last few years. By ‘customer group’ and across all taxes, small businesses are also responsible for 43 percent of the overall value of the tax gap or £15.1billion. Expect therefore continued activity from HMRC to work on reducing the larger elements of the tax gap which are Personal Taxes and VAT and inevitably, enhanced activity aimed at small businesses.”
Mr Morley concluded: “These figures are of course estimates and figures such as the £2billion tax gap from the hidden economy could if anything be much higher. It is also worth pointing out that they do not incorporate any element of the Governments coronavirus support payments which will be reported separately in the HMRC Annual Report.
“An element of the tax gap relates to non-payments, but these are largely tax debts written-off following insolvency. As at March 31, 2020, HMRC were owed £22billion in outstanding tax debts which do not form part of the tax gap. As we emerge from the pandemic, expect HMRC to up their efforts in collecting any outstanding tax due. The best way for a taxpayer to check if they owe any money to HMRC is to check directly with HMRC.
“They should also ask themselves if to the best of their knowledge and belief, they have correctly declared all sources of income and gains. Again checking with HMRC if you are unsure can help or a qualified professional Accountant or Tax Adviser can be engaged for formal advice.”
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