05 August 2023
As part of its review of the estimated tax gap each year, HMRC considers the behaviour leading to the gap, including matters like tax avoidance, evasion, and failing to take reasonable care. Whilst the tax gap may be have remained relatively constant in recent years, statistics published by HMRC suggest a change in behaviour behind the theoretical lost tax, with increased amounts arising from tax evasion (£4.7bn in 2021-22, up from £3.7bn in 2020-21) and taxpayers failing to take reasonable care (£10.7bn in 2021-22, up from £8.2bn in 2020-21). The combination of both gives a staggering £15.4bn lost due to taxpayers who could have taken further steps to get their tax affairs right, and taxpayers who intentionally got their affairs wrong, making up over 40% of the total tax gap.
So, what can HMRC do next? One obvious area for improvement concerns those taxpayers who are failing to take reasonable care; ie taxpayers who make careless inaccuracies when reporting their tax affairs. There can be several reasons why these inaccuracies occur, one of the most obvious being the complexity of the tax system.
Tax simplification is clearly necessary; even the Treasury Committee, in a report issued on 16 June 2023, called for enhanced accountability of government efforts to simplify the UK’s over complicated and burdensome tax system. According to this report there are 1,180 separate tax reliefs available to UK taxpayers, as well as various nuances which require taxpayer action, such as the high-income child benefit charge.
Many believe it still feels wholly wrong to disband the Office of Tax Simplification (OTS), especially when the tax gap data suggests that the lack of simplification is resulting in a loss of tax.
One part of the taxpayer population that appears to be highly impacted by the sheer complexity of the tax system is small businesses. Last year, we commented on the increase in the small business corporation tax gap of 19%. This year the statistics show an overall increase in the corporation tax gap from £8.8bn in 2020-21, to £10.6bn in 2021-22, with small businesses alone accounting for £1.5bn of the increase.
We are already seeing an increased focus by HMRC on corporation tax, including the recent focus on research and development tax relief claims and the various nudge letters in respect of certain technical areas of the corporation tax legislation (eg bad debts). The rise in the corporation tax gap will surely only increase HMRC activity in this area. Is this the right approach though? Whilst it is clear that a level of enquiry activity is necessary, it feels like more can be done to help these taxpayers get their tax right from the outset.
Regardless of HMRC’s proposed approach to tackle the tax gap, more people are calling for the government to help taxpayers in the UK get tax right by simplifying the system. A less complex tax system could help taxpayers to get their affairs correct, perhaps resulting in fewer careless errors and potentially up to £10.7bn in extra tax revenues.