HMRC tax gap figures may trigger anti-small company measures at Autumn Budget 2021

Tax gap figures from HMRC last month could be used as the basis to target small businesses like contractor companies on October 27th -- at Autumn Budget 2021.

Released in spite of concerns about their methodology, the figures showing the difference between the total amount of tax expected, and that paid, increased in 2019-20 to 5.3%.

And when HMRC is “under pressure” and “wants more powers to [add] to the already bulging law book, [the tax gap mysteriously] increases,” warns WTT Consulting’s Graham Webber.

'Political manipulation'

Further ominously for micro-business facing the chancellor’s statement -- especially as Mr Webber says the gap is used for “political manipulation,” HMRC found small businesses to be the biggest contributors to the £35billion gap, which is up from £33bn (5%) in 2018-19.

In particular, 43% of the 2019-20 tax gap (or £15billion) was down to “small businesses,” more than twice the share ascribed to the second largest offenders -- corporations (17%).

“Small business are attributed with the largest share of not paying the tax they are supposed to”, reflects Tax Resolute UK’s Jesminara Rahman.

“This is why HMRC’s tax compliance activity is focused on small businesses. The corporation tax total tax gap is at £5.7bn. [And] even here, small businesses are attributed with the largest share.”

'Open to intrepretation'

According to the HMRC data, the gap in the exchequer from Income Tax and NICs (as well as Capital Gains Tax) is the biggest loss by tax element, with £12.6 billion not being paid when it ought to be.

As to the motivations, “the biggest reasons for the tax gap are carelessness and legal interpretation,” observes ReLegal Consulting’s Rebecca Seeley Harris.

“But these figures themselves are open to interpretation,” continued the tax lawyer, citing the 2021 stats. “They are always imprecise and retrospectively altered by data from earlier periods.

“For example, the tax gap has fallen steadily from 7% since 2014, but this year, the tax gap has slightly increased.”

'Uncertainty rating'

In the 2019-20 dataset, HMRC has for the first time given each component of the tax gap an “uncertainty rating”, following criticism by MPs that the taxman was being “misleading” with the annual figures.

The current dataset show that none of the HMRC models carry a “very low” uncertainty rating, 20% of the total tax gap carries a “medium” uncertainty rating, and 18% of the total falls within the “high” or “very high” uncertainty rating.

One of its former tax inspectors isn’t impressed. “The main focus of HMRC’s attention should really be on tackling the tax agents that peddle tax evasion by deliberately misinterpreting or misusing tax legislation, creating a hugely profitable business,” said the ex-Revenue official, Carolyn Walsh.

“Perhaps we should be asking why is it that HMRC is not having the same level of success in recovering tax gap money that is result of the activities of a relatively few marketed tax avoidance scheme providers and dodgy tax agents.”

'Inaccuracies on personal and company tax returns'

According to HMRC, the failure of taxpayers to take “reasonable care” accounts for £6.7bn (or 19%) of the total tax gap, ahead of legal interpretation £5.8bn (or 16% of the gap).

CWC Accounting, run by Ms Walsh explained: “Failure to take reasonable care can simply be inaccuracies on personal and company tax returns by taxpayers who may not seek professional advice.

“This represents about a third of the three largest [tax gap] causes, while the other two thirds --- over £11 billion -- is down to taxpayers who probably have taken advice, but of the non-professional kind.”

The accountancy firm added: “Indeed, we know that ‘avoidance’ is where the HMRC focus is and legislative changes have been aimed [at avoiders] over the last 15 years, serving to reduce the amount [lost to avoidance] from £4.7bn in 2005-6 to £1.9bn by 2014-15. And it’s been steadily dropping year-on-year ever since, to £1.5bn in 2019/20. But that’s not to say we shouldn’t expect new anti-avoidance measures later this month, in or immediately after Autumn Budget.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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