There is a strong argument for pumping extra funds into HMRC’s efforts to reduce the tax gap, according to a leading firm of accountants and business advisers.
HMRC announced yesterday that it estimated the tax gap at £35bn for 2009/10, a fall of about £4bn on the previous year. PKF called for ‘greater investment in HMRC to reduce this shortfall more rapidly in the future’.
John Cassidy, tax investigation and dispute resolution partner at PKF, said HMRC’s figure was an educated guess. ‘But progress to date has not been as rapid as it should have been considering the size of the budget deficit.’
| ► Temporary VAT reduction accounts for smaller tax gap, says HMRC |
A raft of new measures announced since the spending review suggest that HMRC recognises this and has made ‘a deliberate effort to pick up the pace’, Cassidy said. But he questioned whether those measures went far enough.
‘HMRC is spending £917m to raise an additional £7bn in revenue each year by 2014/15 which, if successful, will translate into a staggering rate of return on that initial investment. Looking at it in these terms, there is a strong argument for pumping even more funding into HMRC as the resulting benefits – which will accrue each year – far outweigh the one-off costs.
‘Given the estimated size of the tax gap, we are a very long way from seeing diminishing returns on such activity.’
HMRC said in Measuring Tax Gaps 2011 that the £4bn decrease was mainly due to a reduction in the VAT gap since 2008/09, following a temporary reduction in the standard rate of VAT.
But the CIOT said the new estimate suggested that recent government initiatives were having an effect.
‘According to the government, tax evasion and other illegal activity are costing the exchequer three times as much as tax avoidance. The CIOT has long argued that HMRC needs to put more effort into investigating and prosecuting those who seek to evade tax. We support recent announcements of additional resources in this direction,’ said Gary Ashford, who represents the CIOT on the HMRC’s Compliance Reform Forum.
‘The tax gap figures show some £6bn a year being lost to errors and carelessness by taxpayers,’ the CIOT noted.
‘The CIOT believes that this is an area where professional tax advice is part of the solution. Tax advisers support their clients in keeping good records and producing accurate tax returns.’
Adam Craggs, Tax Partner at Reynolds Porter Chamberlain, said the figures suggested that ‘HMRC’s aggressive approach’ to tax evasion over the last few years was starting to pay off. High profile prosecutions may help to reduce the tax gap further over the next few years, he said.
Craggs added: ‘A quick, cheap way to reduce the tax gap further would be to reduce the 50% tax rate, as the higher rate is encouraging a lot of high earners to structure their affairs so as to minimise their tax liability. A reduction in the top rate might bring them back into the fold, increasing overall tax revenue and reducing HMRC’s compliance costs.’
Heather Self, Director at McGrigors, agreed that HMRC had ‘significantly stepped up the pressure’ on tax evaders.
‘It received an additional £900m in the spending review, and it will get 2,250 extra tax inspectors with a view to raising an additional £7bn per annum by the end of this Parliament. We need to start to see evidence that these resources are bearing fruit and that the tax gap is narrowing,’ she said.
‘HMRC needs to ensure that in trying to narrow the tax gap it does not trample on innocent taxpayers. HMRC has become more error-prone and heavy-handed in some respects over the last few years. My fear is that the pressure on HMRC to reduce evasion and avoidance may prompt it to adopt a blunderbuss approach.’
The Public and Commercial Services union claimed that HMRC’s figures ‘massively’ underestimated the problem. The union has maintained that its own research puts the tax gap at around £120bn. Richard Murphy, Director of Tax Research LLP and an adviser to the Tax Justice Network, calculated the PCS figure which has been cited by many anti-avoidance campaigners during the last 12 months.
Murphy argued that HMRC’s methodology on the direct tax gap was ‘simply wrong’. But as Tax Journal reported in March, he has accepted that his own methodology on corporate tax avoidance produces an estimate that inevitably includes an element of ‘legitimate’ tax planning.
There is a strong argument for pumping extra funds into HMRC’s efforts to reduce the tax gap, according to a leading firm of accountants and business advisers.
HMRC announced yesterday that it estimated the tax gap at £35bn for 2009/10, a fall of about £4bn on the previous year. PKF called for ‘greater investment in HMRC to reduce this shortfall more rapidly in the future’.
John Cassidy, tax investigation and dispute resolution partner at PKF, said HMRC’s figure was an educated guess. ‘But progress to date has not been as rapid as it should have been considering the size of the budget deficit.’
| ► Temporary VAT reduction accounts for smaller tax gap, says HMRC |
A raft of new measures announced since the spending review suggest that HMRC recognises this and has made ‘a deliberate effort to pick up the pace’, Cassidy said. But he questioned whether those measures went far enough.
‘HMRC is spending £917m to raise an additional £7bn in revenue each year by 2014/15 which, if successful, will translate into a staggering rate of return on that initial investment. Looking at it in these terms, there is a strong argument for pumping even more funding into HMRC as the resulting benefits – which will accrue each year – far outweigh the one-off costs.
‘Given the estimated size of the tax gap, we are a very long way from seeing diminishing returns on such activity.’
HMRC said in Measuring Tax Gaps 2011 that the £4bn decrease was mainly due to a reduction in the VAT gap since 2008/09, following a temporary reduction in the standard rate of VAT.
But the CIOT said the new estimate suggested that recent government initiatives were having an effect.
‘According to the government, tax evasion and other illegal activity are costing the exchequer three times as much as tax avoidance. The CIOT has long argued that HMRC needs to put more effort into investigating and prosecuting those who seek to evade tax. We support recent announcements of additional resources in this direction,’ said Gary Ashford, who represents the CIOT on the HMRC’s Compliance Reform Forum.
‘The tax gap figures show some £6bn a year being lost to errors and carelessness by taxpayers,’ the CIOT noted.
‘The CIOT believes that this is an area where professional tax advice is part of the solution. Tax advisers support their clients in keeping good records and producing accurate tax returns.’
Adam Craggs, Tax Partner at Reynolds Porter Chamberlain, said the figures suggested that ‘HMRC’s aggressive approach’ to tax evasion over the last few years was starting to pay off. High profile prosecutions may help to reduce the tax gap further over the next few years, he said.
Craggs added: ‘A quick, cheap way to reduce the tax gap further would be to reduce the 50% tax rate, as the higher rate is encouraging a lot of high earners to structure their affairs so as to minimise their tax liability. A reduction in the top rate might bring them back into the fold, increasing overall tax revenue and reducing HMRC’s compliance costs.’
Heather Self, Director at McGrigors, agreed that HMRC had ‘significantly stepped up the pressure’ on tax evaders.
‘It received an additional £900m in the spending review, and it will get 2,250 extra tax inspectors with a view to raising an additional £7bn per annum by the end of this Parliament. We need to start to see evidence that these resources are bearing fruit and that the tax gap is narrowing,’ she said.
‘HMRC needs to ensure that in trying to narrow the tax gap it does not trample on innocent taxpayers. HMRC has become more error-prone and heavy-handed in some respects over the last few years. My fear is that the pressure on HMRC to reduce evasion and avoidance may prompt it to adopt a blunderbuss approach.’
The Public and Commercial Services union claimed that HMRC’s figures ‘massively’ underestimated the problem. The union has maintained that its own research puts the tax gap at around £120bn. Richard Murphy, Director of Tax Research LLP and an adviser to the Tax Justice Network, calculated the PCS figure which has been cited by many anti-avoidance campaigners during the last 12 months.
Murphy argued that HMRC’s methodology on the direct tax gap was ‘simply wrong’. But as Tax Journal reported in March, he has accepted that his own methodology on corporate tax avoidance produces an estimate that inevitably includes an element of ‘legitimate’ tax planning.
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