The government has rejected a number of recommendations from a recent Public Accounts Committee (PAC) report looking at HMRC’s approach to tax collection and has indicated its support for the tax authority's collection methods.
PAC was particularly critical of the way HMRC calculates the annual tax gap and its attitude to prosecutions for tax avoidance.
It recommended that ‘HMRC should be explicit about the limitations of its current measure of the tax gap and gather intelligence about the value of tax lost through aggressive tax avoidance schemes. When there are firm plans to change international tax laws to tackle avoidance, HMRC should use this intelligence to assess how much additional tax revenue the changes would generate within the UK.’
However, in a Treasury minute published last week, the government rejected this proposal, saying: ‘The tax gap measures compliance with existing tax law and is informed by the intelligence the department gathers on the use of avoidance schemes. It does not cover how much tax might be paid if tax laws were different.’
The minute says the government also disagrees with PAC’s recommendation that HMRC should be more willing to pursue prosecutions against individuals and large businesses to test the boundaries of the law and to demonstrate firm action against those who have knowingly misled or withheld information. The Treasury says HMRC is already taking firm action against those who cheat the system.
In addition, PAC’s call for HMRC to gain a better understanding of how companies and their advisers will react to new tax rules and legislation in order to prevent ‘unintended consequences’ is dismissed.
The minute says the department already makes extensive use of behavioural insight when formulating policy advice and designing tax legislation, including the use of private sector expertise, with detailed descriptions of the policy aims, of the expected impact and of the yield or costs of tax measures now published as part of the Budget process.
The government does not support PAC’s recommendation for enhanced disaster recovery facilities within the new Real Time Information (RTI) systems, saying HMRC had determined that full 24/7/365 disaster recovery was not necessary for tax purposes, and the cost of providing it was prohibitive. It also rejects PAC’s suggestion that HMRC should undertake an analysis to identify which tax credit debt is recoverable and write off that which is not, before tax credits are transferred to Universal Credit.
Heather Self, tax partner at law firm Pinsent Masons, said: ‘It is rare for the government to disagree so strongly with a report of the PAC - they disagreed with the recommendations on the tax gap, prosecution policy and the impact of changes to tax policy on business behaviour, as well as recommendations in relation to disaster recovery and tax credit debt. Perhaps the star of the PAC is beginning to wane?’
The government did, however, agree with the PAC’s conclusions in relation to the extent to which HMRC over-estimated how much it could collect from UK holders of Swiss bank accounts as part of the recent agreement between the UK and Switzerland. According to the Treasury’s response, HMRC is contacting every person whose details were disclosed under the agreement to ensure that all tax which should be paid is paid. It has also implemented the recommendation for HMRC to do more to help small businesses adapt to the requirements of RTI.
