Today the National Audit Office (NAO) reports that HM Revenue &
Customs’ (HMRC’s) work to improve taxpayers’ compliance with the
tax system has achieved high rates of return.
HMRC estimates the tax gap – the difference between
the amount of tax the government is owed and the amount HMRC
collects – has reduced from its recent peak level of 7.2% of
theoretical tax owed1 in 2013-14 to 4.7% in 2018-19
(£31 billion), though there is scope to bear down further on
non-compliant taxpayers. The tax gap is affected by a number of
factors, including HMRC’s activity, economic conditions and
changes in tax policy.
The size of the tax gap is difficult to estimate and
can be revised in later years. In 2019 HMRC reported
that the tax gap had increased to £35 billion or 5.6% of tax owed
in 2017-18. It now estimates the tax gap reduced to £31 billion
or 5.0% of tax owed in 2017-18. In other years revisions have
significantly increased the tax gap from the estimate reported at
the time.
HMRC faces a continual challenge to prevent the tax
gap from growing because taxpayers and their advisors change
their behaviour. For example, tax avoidance schemes now target
more people on middle incomes than in the past.
HMRC’s latest estimates indicate most elements of the
tax gap reduced between 2015-16 and 2018-19. Notable
examples include reductions in the tax gap from VAT, excise
duties and criminal attacks, each by at least £0.5 billion. Tax
avoidance fell by an estimated 26% between 2013-14 and 2018-19
(from £2.3 billion to £1.7 billion) due to success in tackling
large business tax avoidance and marketed tax avoidance schemes.
Non-payment of tax liabilities, where a taxpayer is in debt to
HMRC, was the only significant area to have increased (by £1
billion or 32%) between 2015-16 and 2018-19.
Each year since 2011-12, HMRC has met
its targets for generating additional tax by improving taxpayers’
compliance with the system. The amount of money HMRC generated
through its compliance activities increased from £23.9 billion in
2013-14 to £34.1 billion in 2018-19. However, increases to the
additional tax generated through this will not necessarily reduce
the tax gap, which is also affected by factors outside HMRC's
control such as economic conditions and changes in tax
policy.
HMRC reports large rates of return from its
compliance activities. Rates of return ranged from £7 in revenue
for every £1 spent on compliance activity on individual
taxpayers, to 44:1 on large business taxpayers in 2018-19.
However, HMRC’s overriding consideration when allocating
resources in recent years has been to maintain a sufficient level
of compliance activity across all the various taxpayer groups,
particularly in light of budgetary pressures. While this is
important, the NAO highlights the risk that reducing resources
for compliance activity in areas with high returns could
disproportionately affect the tax gap.
HMRC has shifted towards earlier interventions to
prevent non-compliance happening in the first place. The
estimated revenue generated from this work increased from £3.2
billion in 2016-17 to £7.8 billion in 2018-19. In contrast, HMRC
has reduced by a third the number of traditional enquiries and
audits investigating non-complying taxpayers over the past three
years. The proportion of revenue from enquiries and audits has
not kept pace with increases in tax revenue
overall.
HMRC is considering a range of options that could
help to reduce the tax gap by modernising tax administration
systems and making services simpler for taxpayers. It has
developed strategies to tackle non-compliance for each taxpayer
group but not for all the different types of behaviour, such as
where taxpayers bend the rules or do not take reasonable care to
get their tax returns right.
, the head of the NAO, said:
“HMRC’s activity to ensure that taxpayers are
paying the right amount of tax secures significant revenue for
the public purse. However, reducing the tax gap is challenging
because taxpayers and their advisors change their
behaviour.
“HMRC should consider applying the lessons it
has learned in tackling tax avoidance to challenge other types of
non-compliant behaviour and support taxpayers to pay the right
tax.”
- ENDS -
Notes for
Editors
-
Theoretical tax liabilities are the amount of tax
theoretically owed to government.
