HM Revenue & Custom’s (HMRC’s) 2019 measuring tax gaps report has shown that the tax gap has shrunk to 5.6%, or £35 billion.
“The shrinking tax gap is further evidence that HMRC’s toughening approach to tax compliance has all but consigned the issue of aggressive avoidance from the world of 10 years ago to the dustbin of history. However, there is still confusion at HMRC between aggressive tax avoidance – which it has rightly legislated against in recent years – and sensible tax planning, which is perfectly legal.
“The burden of tax compliance has increasingly shifted on to the taxpayer but there remains a general shortfall in tax knowledge, particularly in small businesses, which are unlikely to have professional tax teams and may not always be able to afford advice. This is likely to mean innocent errors or misinterpretation continue to form a large chunk of the tax gap.
“Taken together, failure to take reasonable care – an arguably subjective metric – and plain, simple error account for more than £9 billion of the tax gap. With a range of tools at its disposal, HMRC is increasingly quick to levy penalties in the case of genuine errors and this can cause real challenges, economic and emotional, for tax payers. Making Tax Digital launched for VAT in April 2019 and is planned for wider roll out in the coming years and this, HMRC hopes, will help reduce the level of errors.
“It is interesting to note that HMRC cites “legal interpretation” as a growing contributor to the tax gap, increasing by £1 billion on the previous year. HMRC implies that it is taxpayers who are getting things wrong, but recent cases – notably those where HMRC has targeted journalists and television presenters it believes are liable for tax under the IR35 rules – have shown that in fact the courts are frequently correcting HMRC’s view of the law and are taking the tax payers’ side. Put simply, what HMRC thinks it should be collecting is not always correct in the eyes of the courts.”