Tax gap

A report from the Treasury Select Committee

On 9 March 2012 the Treasury Select Committee (TSC) published its latest report Closing the Tax Gap: HMRC’s record at ensuring tax compliance .This is a follow-up up to their July 2011 report Administration and effectiveness of HM Revenue & Customs :

The TSC took further evidence, including from David Heaton Chair of the Tax Faculty, on HMRC’s administrative and operational record at ensuring tax compliance.

The Tax Gap

A key element in deciding how to approach compliance is deciding the extent of the problem: what is the difference between the tax that is collected and what should be collected – the Tax Gap. The TSC thought that because the HMRC calculation was somewhat of an amalgam of different things it did not necessarily give an accurate figure of the aggregate Tax Gap nor was it a good guide to where HMRC ought to devote its limited resources to bring in more tax revenue.

The TSC invited further submissions on how the tax gap calculation can be improved, and whether it serves any useful purpose in HMRC’s work.

If readers have views on either of these two issues then please get in touch with Ian Young ian.young@icaew.com

Voluntary compliance

The TSC concluded that by far the best way to close the tax gap will be to encourage voluntary compliance. The TSC recommended that simplifying the tax system should be a legislative priority for the Government in the present Parliament. Taxpayers need to be clearer as to what are their tax obligations and the TSC recommended that HMRC commission a study to identify the biggest gaps in the public’s understanding of their tax obligations and to develop a strategy for addressing them. The TSC also thought that a general disclosure facility ought to be set up to run alongside the recent targeted campaigns.

Large Business

The TSC also looked at the Large Business Service and the way large tax disputes are currently settled. This work follows on from the reports of the Public Accounts Committee (PAC) on which we have reported earlier. The PAC has been very unhappy that tax disputes with large business have not been handled properly in the past and this has resulted in considerable underpayments of tax and interest.

The TSC noted that HMRC is going to establish a new post of Assurance Commissioner who will be part of the team to independently review proposed tax settlements in excess of £100m. It recommended that the new Assurance Commissioner should appear before the TSC after the publication of the proposed annual report on the outcome of HMRC’s dispute work.

It also recommended that HMRC’s proposed code of governance for tax dispute resolution should be explicit that the same rules apply to settlement of tax disputes with its large corporate customers as apply to settlements with all other taxpayers.

HMRC Governance

Finally the Report also looked at who is in charge at HMRC. It recognised that because HMRC is a non-Ministerial department it is not under the administrative control of a Minister and as David Gauke, who is in charge of the tax system, recognised;

‘The governance [of HMRC] is not [an area] where I, as a Minster, can in any way micro-manage how HMRC do it, but I would expect and hope that my concerns are reflected.’

The TSC recognised that there is a tension between HMRC maintaining the confidentiality of taxpayers’ affairs and in doing so being independent of politicians and, at the same time, the need for the department to be accountable to outsiders and to Parliament.

The TSC identified the following issues as requiring attention and said that it would return to these issues in future Inquiries:

·         the legal status of HMRC;

·         the power of Ministers to implement change in HMRC where it is needed;

·         the need to balance these issues with the need to maintain taxpayer confidentiality, and

·         the need to examine HMRC’s corporate governance.