Bridging the gap

13 August 2020

The UK’s estimate for underpaid and evaded tax by wealthy individuals has risen for the second year in a row according to HMRC. It reached £1.3bn in 2018/19, up from £1.2bn the previous year and £1.0bn the year before. This shortfall is part of an overall £31bn UK ‘tax gap’ for the year – the difference between the total amount of tax declared as payable compared to the amount HMRC estimates should be due based on the results of tax enquiries and total UK economic activity.

Constituent parts

The data does not show how the total tax gap shortfall is made up, but we can make some guesses. HMRC has been extremely effective in discouraging the use of artificial arrangements designed to exploit loopholes, create artificial losses etc. Although there will always be a small number of promoters marketing avoidance schemes claiming to eliminate tax liabilities in this way, their impact on the overall tax-take is probably not significant when it comes to wealthy individuals.

A much larger proportion of the tax gap is likely to come from simple non-reporting. In some cases, taxpayers forget or are simply unaware of their obligation to declare income. We still see cases where a client did not realise that the sale of their holiday home in Italy would create a tax liability in the UK, for example. HMRC understands that this type of omission can result from an innocent mistake, but the current system of penalties for failure to disclose liabilities is unsympathetic: ‘failure to correct’ penalties for non-UK income or gains start at 200 per cent of the tax, but can be reduced to a minimum of 100 per cent depending on the quality of disclosure and level of cooperation with HMRC.

HMRC’s approach

The days of UK taxpayers being able to hide their wealth from HMRC in numbered Swiss bank accounts are long gone. The UK is at the forefront of international agreements to exchange financial data, and HMRC now receives information on the owners and contents of foreign bank accounts every year. This information is collated using the ‘Connect’ computer system, which automatically matches it to submitted tax returns, identifying anomalies for investigation.

The fact that the tax gap for wealthy individuals has been rising over the last two years suggests that it will be worth HMRC devoting additional resources to investigate wealthy taxpayers as a quick way to raise additional revenues. We have already seen moves in this direction, and there are probably more to come.

Mitigating penalties

For anyone who thinks they may have failed to declare income or gains correctly, it is very important to come clean as soon as possible. The tax penalty system is designed to encourage disclosure by providing for large discounts where cooperation is voluntary and unprompted. On the other hand, anyone who ignores the problem in the hope that HMRC will never find out about them is likely to be disappointed, and literally to pay a large penalty for doing nothing.

For more information please get in touch with Andrew Robins.