A report published by the House of Commons Treasury Committee on HMRC’s efforts to close the tax gap states that although progress has been made, there is still work that needs to be done…
The House of Commons Treasury Committee report entitled ‘Closing the Tax Gap: HMRC’s record at ensuring tax compliance’ was printed on 6 March 2012 and is available on the www.parliament.co.uk website.
The report concludes HM Revenue and Custom’s (HMRC’s) operational and administrative record at ensuring tax compliance, HMRC strategies for addressing the UK tax gap and suggestions for improving HMRC’s future strategies.
The Treasury Committee state two reasons for conducting the report:To ensure HMRC collects the right amount of tax:
“If HMRC is able to close the tax gap as it sees it, this will increase revenues for the Exchequer and aid the Government in its deficit reduction strategy. Conversely, if tax payers pay too much tax, or if compliance with their tax obligations creates a costly burden upon them, this could impact negatively on economic growth.” (1.3 Closing the Tax Gap: HMRC’s record at ensuring tax compliance)
Controversy surrounding corporate tax deals by HMRC:
“Secondly, HMRC’s settlement of tax disputes with its large corporate customers has been a source of controversy for some months and it has been suggested that HMRC allowed some of these clients to pay less tax than was due according to the law.” (1.4 Closing the Tax Gap: HMRC’s record at ensuring tax compliance)
What is the Tax Gap?
HMRC define the tax gap as “the difference between tax collected and the tax that should be collected” (2.6 Closing the Tax Gap: HMRC’s record at ensuring tax compliance)
Witnesses interviewed for the Treasury Committee report criticised HMRC’s tax gap figure and said it was ‘inaccurate’, a ‘poor indicator of performance’ and ‘too broad a spectrum on behaviours’.
The Treasury Committee then questions whether the tax gap should be published as a quantifiable measure for determining the UK tax deficit:
“The tax gap can be a useful concept for assessing trends in the amount of possible unpaid tax. We are not, however, convinced that the process of calculating, publishing and publicising an aggregate figure for the tax gap is a sensible use of HMRC’s limited resources. The aggregate tax gap figure is misleading and risks focusing HMRC on the wrong task as it only provides an order of magnitude.” (1.16 Closing the Tax Gap: HMRC’s record at ensuring tax compliance)
Ensuring HMRC collect the right amount of tax
Assessing HMRC’s tactics on compliance activity the Treasury Committee report states that voluntary compliance is the most efficient way of reducing the tax deficit.
Voluntary compliance is described in the Treasury Committee report as:
“A process whereby taxpayers and HMRC work together to ensure that taxpayers voluntarily pay the correct amount of tax, sometimes following negotiation and agreement, is far less costly than the alternative.” (Section 4 Closing the Tax Gap: HMRC’s record at ensuring tax compliance)
The report proposes that in order for HMRC to collect the right amount of tax the following steps must be taken:
Simplification of the tax system;
the public should be properly educated on tax evasion and their tax obligations through easily accessible information, to stop tax evasion happening without being known;
disclosure should be made easier for ‘all taxpayers to access and understand’;
more should be invested in prosecutions for tax evaders and this should be publicised to maximise the ‘deterrent effect’;
HMRC should spend as much focus on identifying those outside of the tax system as it focuses on those already in it during targeted campaigns. E.g. electricians, plumbers, tutors and coaches, doctors and dentists, who have all been offered their own tax amnesty;
during offshore campaigns, such as the Liechtenstein Disclosure opportunity and the Swiss Tax Agreement, those who do not disclose unpaid taxes when offered an offshore campaign should be prosecuted and well publicised to stop others doing so, and
automation technologies adopted by HMRC ‘should be rigorously tested and piloted and reviewed externally before implementation’ to reduce problems and halt accidental notifications occurring.
Restoring public confidence in HMRC’s corporate tax deals
The Treasury committee report addresses the House of Common’s second concern:
“How HMRC works with large businesses and how it settles disputes with these customers” (Section 5 Closing the Tax Gap: HMRC’s record at ensuring tax compliance)
HMRC describe its method of working with large UK businesses as the following:
“HMRC explicitly seeks relationships based on openness and transparency. For the 2000 largest businesses, one-to-one Customer Relationship Managers (CRMs) ensure that HMRC has extensive understanding of tax and avoidance risks in the context of the commercial environment in which customers are operating…” (Treasury Committee, Administration and effectiveness of HM Revenue and Customs, Ev 127, [HMRC])
Recent controversy surrounding tax deals made between HMRC and large businesses has led to a loss of public confidence in HMRC’s governance rules for solving tax disputes with corporate customers. This includes two tax settlements made between HMRC and investment bank, Goldman Sachs, and mobile giant, Vodafone, which allegedly allowed the businesses to avoid millions of pounds in tax; alleged deals which led to the public condemnation of Mr. Hartnett and his subsequent early retirement from HMRC as the Permanent Secretary for Tax.
Section 5 of the Treasury Committee report states that in order to restore public confidence in HMRC and ensure corporate customers receive the same treatment as the everyday taxpayer:
“HMRC should work closely with large businesses to ensure that they fulfil their tax obligations given the sums involved in a single large business’s tax affairs. However, the process by which large tax cases are settled must be in a relationship based on openness and transparency and it is vital that appropriate checks be in place so that other tax payers can be sure that all taxpayers are receiving the same treatment from HMRC.” (5.71 Closing the Tax Gap: HMRC’s record at ensuring tax compliance)
The House of Common’s Treasury Committee recommend that the above can be achieved through implementation of the following:
existing procedures should be applied rigorously where HMRC and customer settlements are complex, rather than seeing it as a opportunity to adopt a new Government procedure;
HMRC ‘should publish the lessons learned’ from mistakes to prevent the same mistake from happening twice and to ensure the public do not lose confidence in HMRC (e.g. the Goldman Sachs tax settlement), and
the same rules should apply to settling tax disputes with both large corporate customers and the average taxpayer.
Other areas HMRC need to improve
Other issues the Treasury Committee acknowledged the need to be addressed in their report ‘Closing the Tax Gap: HMRC’s record at ensuring tax compliance’, but are not included in this inquiry include:
“the legal status of HMRC;
“the power of Ministers to implement change in HMRC where it is needed;
“the need to balance these issues with the need to maintain taxpayer confidentiality, and
“the need to examine HMRC’s corporate governance.”
(5.91 Closing the Tax Gap: HMRC’s record at ensuring tax compliance)
The issues above will be returned to at a later date.
The Treasury Committee report articulates that at this time their main concern is that HMRC have ‘rigorous’ governance procedures in place to ensure tax compliance and as a consequence, reduction of the UK tax gap.
In 2010 the tax gap was estimated by HMRC to be £35 billion pounds. Following a Government funding of £917m pounds, HMRC announced that a new aggressive tax avoidance and tax evasion strategy hoped to close the tax gap by £7bn pounds a year by 2014/2015.
The Treasury Committee show agreement with some of the tax compliance tactics already enforced by HMRC but are undecided on whether calculation of the tax gap ‘serves any useful purpose in HMRCs work’ and welcome further suggestions from both HMRC and tax experts on how calculation of the tax gap can be improved. (2.18 Closing the Tax Gap: HMRC’s record at ensuring tax compliance)
Voluntary compliance is advocated in the report as ‘by far the most efficient way of closing the tax gap’. The Treasury Committee identify many areas for improvement of the Revenue’s compliance activity and hence provide HMRC with a framework to do so.
Kevin Kinsella, of KinsellaTax, said:
“Usual codswallop from MPs, who frankly, want to listen only to the sound of their own voices; HMRC unfortunately comes under huge political pressure which interferes with their ability to get on with the job. Cuts to staff, especially senior staff and the implementation of merging The Inland Revenue and HM Customs and Excise, by our heroic hero, Gordon Brown, did nothing to help the situation.
“As for this band of MPs to point out Dave Hartnett’s public condemnation, which frankly, I believe, was not helped by Margaret Hodge calling him a liar; which is really hypocritical. For all his alleged faults Dave Hartnett served all his working life with the Inland Revenue, later HMRC, and he was not entitled to be called a liar. By the way, I am not Dave Hartnett’s public relations man, I am quite sure he can look after himself. I wonder how many people on the committee have his experience in the tax field?”