UK Inquiry Tracker

Tackling the tax gap

Public Accounts Committee Closed Inquiry

Opened: 27 Jul 2020 Closed: 9 Nov 2020 Parliament page

The “tax gap” is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid. HMRC relies heavily on taxpayers - individuals and organisations - reporting their finances and paying their taxes in line with the rules. In the last financial … Read more The “tax gap” is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid. HMRC relies heavily on taxpayers - individuals and organisations - reporting their finances and paying their taxes in line with the rules. In the last financial year, 2018-19, it collected 90% of the tax owed through this “voluntary compliance” and payment of tax. Inevitably some taxpayers make mistakes, others choose not to comply fully, and some cannot pay because of insolvency. Taxpayers can genuinely interpret tax rules differently from HMRC - or construct artificial arrangements to avoid tax. In 2018-19, HMRC reported a new record tax revenue of £627.9 billion - an increase of £22.1 billion (3.6%) on the year before. But the tax gap, of tax owed “by the book” but not paid, was £31 billion or 4.7% of the total tax owed – though this is down from a peak tax gap of 7.2% in 2014. The state of the economy, how many people in are in self-employment or employed, and the perceived fairness of tax policy - all these and other factors can affect how many voluntarily pay completely the right tax. Tax administrators like HMRC can increase tax revenue by encouraging “voluntary compliance”, but also of course by stopping non-compliance. Keeping the tax gap low is always a challenge because taxpayers continually change their behaviour to exploit “opportunities” in the tax system. The NAO report “Tackling the tax gap” published 22 July 2020 found that HMRC’s work to tackle non-compliance is offering good value for money. HMRC has successfully reduced the tax gap by targeting the factors underpinning non-compliant behaviour - which recently included a series of mass-marketed tax avoidance schemes. But the NAO also found that HMRC has not extended these successes to the cases where taxpayers are bending the rules, or don’t take reasonable care they’re paying the right tax, and there are questions about the focus and resource HMRC dedicates to tackling the tax gap across big business, SMEs and individuals. In September, the Committee will question senior Government officials on how effectively HMRC is tackling the tax gap. If you have evidence on the issues raised above, please submit it here by Thursday 27 August. Show less

6 Recommendations

14 Conclusions

1 Report

1 Oral session

2 Letters

1 Event

Activity timeline 5 events

21 Jun
2021

Correspondence

Correspondence from Jim Harra, Chief Executive and First Permanent Secretary, re Consequential impacts on historical tax gap estimates from…

4 Feb
2021

Report published

Treasury minutes: Government response to the Committee of Public Accounts on the Twentieth report from Session 2019-21

3 Nov
2020

Correspondence

Correspondence to HM Revenue and Customs on the Tackling the tax gap report, dated 22 October 2020

16 Oct
2020

Report published

Twentieth Report - Tackling the tax gap

7 Sep
2020

Oral evidence

Tackling the tax gap

Oral evidence sessions 1 session

7 Sep 2020

View on parliament.uk

Tackling the tax gap

Beth Russell · Her Majesty's Treasury Jim Harra · HMRC Penny Ciniewicz · HMRC

Reports 1 report · click to expand

Title	HC No.	Published	Items	Response
Twentieth Report - Tackling the tax gap	HC 650	16 Oct 2020	20	Responded

Recommendations & Conclusions

7 results

3 Recommendation Accepted

Twentieth Report - Tackling the ta…

HMRC does not include sophisticated and undesirable tax planning by the wealthy and large businesses...

HMRC does not include sophisticated and undesirable tax planning by the wealthy and large businesses in its estimates of the tax gap. HMRC’s tax gap measures the uncollected revenue due to taxpayers’ non-compliance with existing rules. HMRC does not assess … Read more

Government Response

The government states it agrees with the recommendation and claims it is implemented, explaining that it already provides an estimate of the 'avoidance tax gap' for revenue loss when taxpayers do not follow the spirit of the law, as detailed in its publication.

HM Treasury

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5 Recommendation Accepted

Twentieth Report - Tackling the ta…

It is not clear that Making Tax Digital will help reduce the tax gap or...

It is not clear that Making Tax Digital will help reduce the tax gap or taxpayer costs at a time when individual taxpayers and small businesses are under considerable pressure. HMRC’s primary objective for the ‘Making Tax Digital’ programme is … Read more It is not clear that Making Tax Digital will help reduce the tax gap or taxpayer costs at a time when individual taxpayers and small businesses are under considerable pressure. HMRC’s primary objective for the ‘Making Tax Digital’ programme is to help reduce the tax gap attributable to small businesses caused by error and failure to take reasonable care. The effectiveness of the programme is not yet known but HMRC is confident that it will achieve its aims: improving compliance rates, increasing productivity of businesses and allowing HMRC to realise savings. HMRC tells us that the Office for Budget Responsibility supports its view that the programme will help to close the tax gap, but we are not convinced that for all businesses there will be the benefits to them or tax collection that HMRC envisages. For example, the findings of a survey of businesses and agents, carried out 1 Since the Committee’s evidence session HMRC is reported to have announced that companies and other bodies had voluntarily returned more than £215 million to the government in furlough scheme payments they did not need or took in error. 8 Tackling the tax gap by the Chartered Institute of Taxation and the Association of Taxation Technicians during December 2019 and January 2020, raised doubts about the effectiveness of Making Tax Digital in reducing errors and increasing productivity as expected by the government. The survey findings also suggest costs to business of complying with the programme far exceed government estimates. The Making Tax Digital programme is a logical plan in a world where more and more activity is carried out digitally, but it will impose extra, and possibly unreasonable, costs on some individual taxpayers and small businesses, and may be disproportionate to the gain to HMRC. Some of these businesses may be less able to afford the changes since COVID-19. Recommendation: HMRC should, as part of piloting future rounds of MTD, assess whether the administrative burden it is Show less

Government Response

The government agrees with the recommendation with a target implementation date of Summer 2021, and HMRC is engaging with stakeholders to understand and minimise MTD costs, with revised estimates to be published.

HM Treasury

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6 Recommendation Accepted

Twentieth Report - Tackling the ta…

HMRC’s plans to tackle the part of the tax gap attributable to small businesses are...

HMRC’s plans to tackle the part of the tax gap attributable to small businesses are made more difficult by the need to help those businesses survive the impact of the COVID-19 pandemic. HMRC estimates that 43% of the tax gap … Read more

Government Response

The government accepts the recommendation, confirming that HMRC wrote to the Committee on 10 November 2020, explaining its approach to balancing tax gap efforts with supporting small businesses impacted by COVID-19, and published an issue briefing detailing this.

HM Treasury

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10 Conclusion Accepted

Twentieth Report - Tackling the ta…

HMRC’s estimate of the tax gap includes both non-compliance with the letter of the law,...

HMRC’s estimate of the tax gap includes both non-compliance with the letter of the law, such as tax evasion, and non-compliance with the spirit of the law, such as tax avoidance.22 We asked the Department the extent to which the … Read more

Government Response

The government confirms that it already provides an estimate of the 'avoidance tax gap,' defined as revenue loss from taxpayers not following the spirit of the law, detailing how this is captured in its publications.

HM Treasury

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15 Conclusion Accepted

Twentieth Report - Tackling the ta…

HMRC is implementing an ambitious initiative, Making Tax Digital, to help tackle error and failure...

HMRC is implementing an ambitious initiative, Making Tax Digital, to help tackle error and failure to take reasonable care, particularly in the small business population. Small businesses accounted for the largest share of the tax gap (£13.4 billion; 43%) in … Read more

Government Response

The government agrees with the committee's observation, reiterating its existing plans to expand Making Tax Digital to all VAT payers from April 2022 and to businesses/landlords with income over £10,000 from April 2023, while noting ongoing stakeholder engagement to minimise costs.

HM Treasury

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16 Conclusion Accepted

Twentieth Report - Tackling the ta…

We questioned the Department about the effectiveness of Making Tax Digital in closing the tax...

We questioned the Department about the effectiveness of Making Tax Digital in closing the tax gap, particularly in tackling tax evasion. HMRC explained that the programme is not designed to tackle tax evasion by small businesses. Other solutions are required … Read more

Government Response

The government agrees and outlines its ongoing plans for the expansion of Making Tax Digital (MTD) to more taxpayers and tax types by April 2023, noting its role in reducing errors and improving productivity, with continued engagement on cost estimates.

HM Treasury

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18 Conclusion Accepted

Twentieth Report - Tackling the ta…

Small businesses accounted for the largest share of the tax gap in 2018–19.42 The tax...

Small businesses accounted for the largest share of the tax gap in 2018–19.42 The tax gap attributable to small businesses was 43% (£13.4 billion) of the total tax gap in 2018–19 and has remained fairly stable as a percentage of … Read more

Government Response

The government agrees and states it has implemented a strategy to balance tackling the tax gap in small businesses with providing support during COVID-19, having published an issue briefing outlining its approach.

HM Treasury

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Government Response AI assessment · 19 of 6 classified

Accepted 7

Accepted in Part 1

Acknowledged 2

Not Addressed 4

Rejected 5

Total 6 recs + 14 conclusions

Correspondence 2 letters

21 Jun 2021 Correspondence from Jim Harra, Chief Executive and First Permanent Secretary, re Consequential impacts on historical tax gap estimates from revisions to tax receipts, dated 10 June 2021

Parliament page

3 Nov 2020 Correspondence to HM Revenue and Customs on the Tackling the tax gap report, dated 22 October 2020

Parliament page