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HMRC defend tax gap estimates

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Estimating the tax gap provides an important tool in understanding the causes of non-compliance and helping HMRC to focus on ways of reducing it, Dave Hartnett told the Treasury Sub-Committee yesterday.

‘It’s a bit like a long term health check for us ... [The tax gap] is the difference between what the government expects to receive and actually does receive. Unlike some other countries we include avoidance,’ he said.

 ‘What concerns me about this whole debate is that we find ourselves stigmatising people for doing something perfectly logical, reasonable and inevitable, and we have to be very careful in this debate to avoid ending up there.’

Andrew Tyrie MP

HMRC’s Permanent Secretary for Tax acknowledged that measuring an avoidance element in line with the spirit of the law was a ‘slightly contentious issue ... what might the intention of Parliament be?’

He confirmed that last year’s £42bn estimate will be updated later this month.

That estimate was HMRC’s ‘best shot’, Hartnett said. Some of ‘the larger estimates around’ included some of the reliefs and deductions that Parliament said taxpayers should have.

Melanie Dawes, HMRC’s Director General, Business Tax, said HMRC were very clear that some of the ‘very big’ estimates, around £120bn, were ‘way out of range’. But £42bn was ‘at the lower end of international estimates’.

Legal interpretation

Some professional bodies had argued that HMRC’s estimate was inflated because it contained an element of ‘legitimate disagreements over legal interpretation’, Stewart Hosie MP said. Others said it was inadequate because of a lack of information.

On legal interpretation, Hartnett said the focus was on situations where HMRC lose an argument and receive less tax than expected. ‘We recognise that legitimate debate, contention around issues, will always happen’ he said.

Dawes told the committee that, where HMRC resolve an issue and agree with the taxpayer’s interpretation, ‘we do not record that as [part of] the tax gap’.

Strategic tool

Asked what more could be done to get the estimate ‘right’, Dawes said the National Audit Office and the Commons Public Accounts Committee had asked HMRC to keep publishing tax gap estimates.

‘We think it’s a very useful strategic tool. We’ve used it to get a feel for the big areas of risk ... It’s very helpful,’ she said.

‘The important thing is not to use it in the wrong way. We’re not using it for performance targets, to measure our actual operational performance.’

Tyrie challenged HMRC’s mission to ‘close’ the tax gap. ‘You’re not going to close the tax gap are you, you’re going to reduce the tax gap.’

Hartnett said there had been much debate as to whether ‘close’ meant ‘close so that the door is aligned with the frame’ or ‘the process of closing’.

‘It is the second of those that we’re doing,’ he said. In a reference to Sir Humphrey Appleby, the fictional character from the TV series Yes Minister, Tyrie said that was a ‘classic Sir Humphrey reply’.


‘What is a tax gap? It’s like trying to get hold of smoke’

Chas Roy-Chowdhury, the ACCA’s Head of Taxation, told the Treasury Sub-Committee on 13 July:

‘To what extent are [HMRC] going to close the part about legal interpretation, about avoidance, about failure to take reasonable care? The failure to take reasonable care you can do something about. Evasion you can do something about. But the 15% relating to legal interpretation or the 17.5% relating to avoidance, that is just their opinion.

‘There is a big definitional problem and, I think, "What is a tax gap?" It’s like trying to get hold of smoke. There is no proper idea what that is and then we are trying to close it ... We should be going after the tax evaders rather than having these kind of fairly esoteric difficult-to-define ideas within the tax gap, which no one can really ever agree on.’


‘Avoidance is not illegal’

Andrew Tyrie MP asked Hartnett: ‘Is it right or wrong that individuals and companies should structure their arrangements to minimise tax?’

Hartnett said the answer depended on whether the question was a legal or a moral one. The Duke of Westminster case established that it was ‘perfectly right’ for individuals and companies to ‘do that’.

‘Our challenge is to make sure they’ve done it properly,’ he said. HMRC examine and challenge avoidance, he said, but ‘avoidance is not illegal’.

Asked whether the best way to reduce the tax gap was to simplify the system so that people knew whether they were avoiding or evading tax, he said HMRC and the Office of Tax Simplification were focused on simplification, which ‘we regard as very important, particularly for [unrepresented taxpayers]’.

But simplification at the other end of the scale – the tax treatment of repos for banks, for example – was ‘a jolly difficult proposition’.


Tyrie said: ‘What concerns me about this whole debate is that we find ourselves stigmatising people for doing something that's perfectly logical, reasonable and inevitable, and we have to be very careful in this debate to avoid ending up there.’

That was ‘absolutely right’, Hartnett said, for individuals who did not set about avoidance that is complex, or hidden, or convoluted. But some forms of avoidance were ‘reprehensible’.