The Tax Gap – Again!

Every week we take a look at what is trending in the accountancy and tax press and share items that we think will interest you. However, these are only outlines and where they relate to tax planning should not be acted upon without looking into them more completely as everyone’s circumstances are particular to them. You need to take specific advice appropriate to your own circumstances.

While every effort is made to deliver accurate, informative and balanced articles this content is general in nature and should not be used as the sole basis for making decisions.

 

The Tax Gap – Again!

Apparently, the tax gap jumped to £39.8bn in 2022-23 with 4.8% of taxes unpaid.

HMRC has also estimated the value of the tax gap by each type of tax in 2022/23:

  • Corporation tax is 13.9% of the theoretical liability, or £13.7bn in absolute terms – no change from the previous year
  • Income tax, national insurance contributions and capital gains tax is 3.0% of the theoretical liability, or £13.7bn in absolute terms
  • VAT is estimated to be 4.9% of theoretical liability, or £8.1bn in absolute terms – no significant change from the previous period.

 

It is reported that once again small businesses were the worst category of tax avoiders and non-payers accounting for 60% of the tax gap at £23.8bn. This is an area where HMRC appears to be failing.

One of the reasons for this failure is the huge number of small businesses and the sheer complexity of the tax system. It is made worse by HMRC’s deteriorating service standards and limited support for small businesses.

There has been a dramatic rise in the amount of corporation tax not being paid by small businesses at £10.9bn, up from £3.7bn just five years ago. On the other hand, compliance by mid and large-sized businesses has improved significantly over the last decade. The balance of the tax gap attributed to small businesses arose from business owners who file under self-assessment.

There has been a slight reduction in  VAT avoidance from £8.4bn to £8.1bn, Compare this to  2019-20 when non-collection of VAT hit a high of £11.6bn. However, Making Tax Digital for VAT has not resulted in any meaningful reduction.

By comparison, the tax lost from criminal activity and fraud was £3.58bn, equal to 9% of the tax gap, a slight improvement on last year’s 10%.

These figures arise when there has been a doubling in the tax take from £437.6bn in 2005-06 to £823.8bn in 2022-23. It rose by £85.1bn to £738.7bn in the last year.

Analysis of the figures on self-assessment returns showed that some of the issues with underpayment relate to small amounts of money, with 19% underpaying by less than £1,000, indicating that the complexity of the tax system might be causing problems when filing returns. In addition, 24% of avoidance was related to employer PAYE problems.

The small business figures reflect big upward revisions from HMRC as a result of a random enquiry programme carried out in 2020-21, which identified greater inaccuracy and non-compliance than previously forecast.

It is thought that failure to take reasonable care and making errors make up nearly half of the small business overall tax gap, and it is reasonable to assume that a lot of this is due to small business owners making mistakes with their taxes.

The amount landing at the door of small businesses has increased in the past few years. As a comparison to other ‘customer’ groups, as shown below:

  • Mid-sized businesses account for 11% of the overall tax gap in 2022/23.
  • Large businesses have fallen from 15% of the overall tax gap in 2018/19 to 11% in 2022/23.
  • The combined share of the tax gaps attributed to wealthy customers and individuals accounts for 9% of the overall tax gap in 2022/23.
  • The amount attributed to criminals has fallen from 15% of the overall tax gap in 2018/ to 9% in 2022/23.

While large businesses and wealthy individuals are often accused of not paying enough tax these figures suggest that their total share of the tax gap is only a quarter of that of small businesses.

The tax gap has played a pivotal part in the economic plans of all the major parties during the general election campaign.

The tax gap statistics will give whichever party gets the overall majority in the election some clues as to where they should look first if they want to reduce the tax gap and clamp down on tax avoidance.

 

 

What is the tax gap?

The tax gap is the difference between the amount of tax HMRC expects to collect and what it actually receives.

HMRC calculates the tax gap for each tax year. The latest year for which figures are available is 2022/23.

The two main causes of the tax gap are criminal behaviour and failure to take reasonable care. Together they amount to approximately 58% of the tax gap.

Criminal behaviour includes evasion, criminal attacks and the hidden economy.

Other causes are:

  • error (15%),
  • non-payment (13%), and
  • differences in legal interpretation (10%),
  • avoidance (4%).

HMRC calculates the tax gap in accordance with the UK Statistics Authority’s code of practice. Its work on calculating the tax gap has been praised in the past, including by the International Monetary Fund.

However, it should be remembered that the tax gap figure is HMRC’s best estimate based on the information available to it.

 

 

Tax Regulation

The UK’s main professional bodies support mandatory registration of agents with HMRC and believe a range of approaches is needed to address poor conduct in the tax advice market.

The professional group has submitted a joint response to the government’s latest consultation on raising standards in the tax advice market.

The government has outlined three possible stand-alone regulatory approaches for raising standards in the tax market.

The group believes that mandatory professional body membership is the best option, but only if it is appropriately designed and scoped. They support mandatory registration of tax practitioners with HMRC and can share their experiences of appropriate and proportionate checks and the operation of registration schemes with HMRC.

It is critical that the potential costs of increased oversight and regulation for the professional bodies, their members and taxpayers are quantified. Any increase in costs must be proportionate to the problems that have been identified. Tax advice must remain affordable for taxpayers. In addition to providing initial cost estimates, the government should commit to ongoing monitoring of costs and burdens.

 

 

The Freelance Workforce in the Election

The nation’s freelancers, contractors, and self-employed individuals have largely been ignored in the election so far with the manifestos falling short of addressing the critical issues facing this vital part of the economy.

The Conservative manifesto included a pledge to cut the main rate of national insurance for the self-employed. Abolishing NI for the self-employed will benefit sole traders, not the task force of contractors who were also ignored during the pandemic.

The IR35 reforms have placed a massive burden on business and have impeded economic growth and yet nothing is proposed to right the situation.

Despite Labour leader Keir Starmer’s pledges to “transform the nature of the job market,” there was a stark absence of any mention of self-employed workers or their priorities. The party needs to acknowledge the value of the self-employed and how they prop up our economy, particularly in the face of economic challenges.

The Liberal Democrats promise to address key freelancer priorities. Their manifesto included a pledge to review the government’s off-payroll working IR35 reforms to ensure self-employed people are treated fairly.

They seem to have an understanding of the importance of the flexible workforce and would move to review IR35 which is proving to be a disaster based on an outdated HMRC concept of “deemed employment”.

Nigel Farage wants to abolish the controversial IR35 rules.

Surely all that the flexible workforce requires is a level playing field and policies built on a modern understanding of how they operate, rather than being shackled by outdated assumptions of “disguised employment.”

 

 

Interest Rates Held

Interest rates have been held for the seventh time in a row.

At its meeting on 19 June 2024, the Monetary Policy Committee (MPC) voted by a majority of 7 to 2 to maintain the bank rate at 5.25%, a decision that will come as no surprise to economists.

Two members preferred to reduce it by 0.25 percentage points, to 5%.

The BoE noted that among those who voted to maintain the rate, there continued to be a range of views about the “extent of accumulated evidence that was likely to be needed to warrant a change in Bank Rate and the degree to which incremental information was leading them to update materially their assessment of inflation persistence”.

This came on the back of headline CPI inflation having fallen back to the 2% target.

For some members within this group, the return of headline inflation to 2%, while welcome, was not necessarily indicative of the required sustained return to target.

 

 

HMRC Went to Tribunal over Penalties of  £248

They lost!

The taxpayer, Gareth Bezant, was aware of the high-income child benefit charge (HICBC) but believed that it did not apply to him because his salary fell below the threshold. However, the benefits in kind that he had received in the 2021/22 tax year meant that he had become liable to the HICBC without realising.

HMRC was also late in realising, as it was not until 22 June 2023 that HMRC sent Bezant a notice to complete a tax return for the 2021/22 tax year (the paper notice).  That was 142 days after the tax for the 2021/22 tax year should have been paid. However, the notice stated: “You must make sure we receive your tax return and pay all the tax you owe for the 2021/22 tax year within three months of the date on this letter.”

In compliance with the terms of the notice, Bezant duly filed his return on 31 August 2023. Days later, on 5 September 2023, HMRC issued notices of a 30-day late penalty, of £124, and a six-month late payment penalty, also for £124.

The following day, Bezant appealed against the penalties to HMRC and subsequently to the tax tribunal.

The FTT considered whether the wording of the paper notice provided a reasonable excuse for failing to pay. They concluded that it did not provide a reasonable excuse for missing the original deadline but because of the erroneous wording on the notice to file a return, they reduced the penalties to £nil.

A result for the taxpayer.

 

 

Right to Work Rules

Before hiring a new member of staff, it is essential to conduct a right-to-work check to ensure they have the legal right to work in the UK

The working visa rules also changed earlier this year and from 11 April 2024, applicants applying for UK visas have to be earning at least £38,700, up from the previous £26,200.

It is essential to carry out right-to-work checks before when employment begins.

These checks involve a three-step process, beginning with obtaining the documents or other evidence of the right to work, checking the documents are genuine and that the person presenting them is their rightful owner and the prospective employee, and making a copy of the documents or Identity Document Verification Technology (IDVT) check and retain it on your records.

Checks can be carried out manually using original documents, online or digitally for British and Irish citizens.

An essential part of right-to-work checks is record keeping.

A record is needed of every document that has been checked, or if completing a digital check, the outcome of the IDSP’s IDVT check.

These should be kept securely for the duration of employment and for two years after, and accessible quickly should government officials need to check them. Being unable to produce them could mean the statutory excuse is lost.

 

 

Questions?

If you have any questions about any of these, you know where to find us. If you prefer, just give me a ring on 07770 738770 or email me at alan.long@thelongpartnership.co.uk.

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