HMRC’s reporting of the ‘tax gap’ has been labelled as ‘misleading’ by the public accounts committee (PAC), which says the department should explain the limitations of its approach to calculating the difference between the tax that should be paid on the UK’s economic activity and the amount actually collected
The committee’s inquiry concluded that although HMRC recognises that there is significant uncertainty associated with its estimates of the tax gap, it continues to quote these figures in official reports and media releases in a way that suggests a much greater degree of precision.
MPs want HMRC to publish the range of its estimate of the tax gap, rather than suggest there is a single figure. In 2018-19, the most recent period for which data is available, HMRC estimated the gap at £31bn.
The committee said that while HMRC publishes a detailed analysis for around 42% of the tax gap using range estimates it cannot do this for the remainder because of data limitation. For example, it is unable to provide a detailed breakdown in some important areas, such as the tax gaps for the four nations of the UK.
HMRC’s analysis also fails to set out the relative size of the tax gap for different sectors of the economy and does not include legal but undesirable tax planning by the wealthy and large businesses.
The report stated: ‘HMRC claims success in tackling the tax gap but its estimates are simply not reliable enough to make such definitive claims.
For example, in July 2020, HMRC made substantial revisions to its previous estimates of the tax gap as new and updated data became available.
‘These large revisions reversed past trends reported by HMRC, highlighting the uncertainties associated with the tax gap estimates and the difficulty of using them to track performance.’
PAC’s comments have resulted in a robust response from HMRC CEO Jim Harra, who said he found the committee’s characterisation of HMRC’s work in this area’ to be wholly unfair and unsubstantiated’.
In a letter to PAC, Harra stated: ‘HMRC is the only revenue authority in the world that compiles and publishes a comprehensive measure of the tax gap, covering both direct and indirect taxes, every year.
‘We publish the tax gap because we believe it’s important to be transparent in our work.’
Coronavirus compliance challenges
PAC’s report also flags up concerns about HMRC’s compliance activities. It states that compliance yield (the additional tax revenue directly attributable to HMRC’s work) is down by about half in the first quarter of this year, largely as a result of the impact of the pandemic.
The number of completed civil compliance checks fell from 62,000 in the first quarter of 2019–20 to 40,000 in the first quarter of 2020–21, and PAC warns that HMRC ‘may never catch up’, claiming it will inevitably have to change its approach to compliance because of Covid-19.
As well as a large backlog of cases there is the risk of significant fraud and error in the furlough scheme, with HMRC estimates suggesting up to £3.5bn of furlough payments made by 16 August 2020 may have been fraudulent or paid in error.
The PAC report stated: ‘We reported in July that, despite a pandemic being a top national risk for years, lack of thinking about its economic impacts had forced the government to design the support schemes from scratch.
‘With at least some thinking about the economic risks of a pandemic in advance, it may have been possible to build in stronger safeguards against fraud and error, while still providing much-needed support to businesses and their employees.
‘HMRC relies heavily on taxpayers’ ability and willingness to report and pay their taxes in line with the rules.
‘This may have changed—in the short term and possibly for several years to come. More than ever, therefore, HMRC needs to consider the support customers need and the costs it imposes on taxpayers, particularly as it proceeds with plans to make tax digital, where there are indications that the costs imposed on taxpayers far exceed government estimates.’
The committee also argues that HMRC’s plans to tackle the part of the tax gap attributable to small businesses have been made more difficult by the need to help those businesses survive the impact of the pandemic.
HMRC estimates that 43% of the tax gap in 2018–19 was attributable to small businesses (£13.4bn). In response to Covid-19, HMRC has paid out billions of pounds to support small businesses.
To support taxpayers, especially small businesses, and increase the efficiency of its compliance approach, HMRC is increasingly adopting a ‘one to many approach’ in its compliance checks rather than the more traditional investigations of individual taxpayers. PAC says this may not provide the tailored support small businesses need through the pandemic and HMRC needs to adapt.
Meg Hillier, PAC chair, said: ‘Best estimates really won’t do when you’re talking about multi-billions of pounds that could be being collected to support public services, and particularly when billions of pounds is being spent on Covid support.
‘We expect HMRC to be doing more to collect the tax owed, whether from individuals or companies. ‘Our finding of the astonishing lack of economic planning for a pandemic shows how the unacceptable room for fraud against taxpayers was allowed into the government’s hastily drawn up economic support schemes.
‘I would like to see the government publish a list of the companies which received furlough money. Where taxpayers money is being used, transparency should be a given.
‘HMRC must act now to minimise fraud and error and ensure that taxpayers do not pay time and time again in the years to come.’
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