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Government pledges action to reduce ‘staggering’ tax gap

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The ‘tax gap’ increased to £42 billion in 2008/09, according to HMRC’s latest estimate. In ‘Measuring Tax Gaps 2010’ the department reported that the total tax gap, defined as the difference between tax collected and ‘the theoretical liability’, comprised £22.5 billion of direct taxes and £19 billion of indirect taxes. The figures include the estimated impact of avoidance schemes.

‘The theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law),’ HMRC said.

A ‘time series’ of the tax gap from 2004/05 to 2008/09 showed that, over the period, the gap ‘has remained fairly stable, at around £40 billion, with a small increase between 2007/08 and 2008/09 from £38 billion to £42 billion’.

David Gauke, Exchequer Secretary to the Treasury, said: ‘The tax gap number is staggering and this Government is committed to taking the necessary action to bring it down – taking steps to reduce tax avoidance and evasion, including by the richest people in our society, so that everyone pays their fair share and we reduce the tax gap over the coming years.’

Speaking at the Liberal Democrat conference, Danny Alexander, Chief Secretary to the Treasury, announced a package of measures to tackle ‘tax avoidance and evasion’.

Alexander promised an extra £900 million of funding for HMRC which will allow ‘the creation of a new dedicated team of investigators to crack down on offshore evasion’ and ‘the creation of bespoke cyber crime teams and online specialists’.

Those who are subject to the 50p higher rate of income tax will also face scrutiny. Further detail set out in a Treasury press release provides that private debt collection agencies will be used to recover up to £1bn per year of ‘tax debt’, and that ‘in-house debt collection’ will be improved.

The Treasury also indicates that the funding will allow the ‘deployment of dedicated tax experts to extend HMRC’s coverage of large businesses, focused on providing resources to tackle high-risk areas’.

The funding will be available for the four-year period covered by the spending review and the Treasury estimates that the measures will raise ‘around £7 billion per annum by 2014/15 in additional tax revenues’.

Welcoming the move, John Whiting, CIOT Tax Policy Director said that ‘the desire to further tackle avoidance ... should be put into the context of all the changes made in recent years, including the disclosure regime and effective “Targeted Anti-Avoidance Rules”.

Ever more complex rules risk becoming administratively burdensome for all concerned and even creating further loopholes.’

Accountancy firm PKF noted that thousands of offshore account holders could be hit by the announcement. John Cassidy, tax investigation and dispute resolution partner at PKF, commented that ‘an awful lot of people who don’t take the chance to put their tax arrears right now will be paying very large tax bills.’

The firm believes the new funding should enable HMRC to ‘finally get its act together and aggressively pursue those who have spurned chances to use either of the past amnesties’ but notes the irony that the ‘crackdown will hit just as the most beneficial tax amnesty yet gets into full swing.’

The Liechtenstein disclosure facility allows individuals to settle their tax affairs by paying penalties of 10%, whereas undeclared offshore income could otherwise attract penalties of up to 200%.

Responding to the publication of the tax gap statistics, the Public and Commercial Services union (PCS), however, argued that ‘the total amount of uncollected tax is in fact closer to £130 billion’, pointing out that ‘in the five years since HMRC was formed, 30,000 jobs have been cut, the majority of which were directly responsible for tax collection’.

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