HMRC's tax gap is "misleading"

THE TAXMAN’S PROCESS calculating the tax gap is “misleading” and risks it focusing on wrong actions to close the gap, a senior Treasury committee has warned.

While it is useful for HMRC staff to understand the difference between what it should collect and the actual figure, in some areas it would be better to identify ambiguities in tax law rather than calculate a figure for what tax should be collected under HMRC’s interpretation of the law, said the Treasury Select Committee.

Its calculation of the tax gap includes funds uncollected through different types of behaviour, ranging from error, to legal interpretation through to criminal intent.

The committee said that combining the losses through different behaviours into a single figure implies they are of equal gravity and fails to address that different actions are required by the taxman to deal with them.
HMRC should not be aiming to collect tax at any cost, but ensuring the taxpayers pay the correct tax.

“Separate reports on how much tax was lost through criminal activity and areas where HMRC had encountered different interpretations of tax law would be a better use of resources,” the report stated.

Details of the areas that HRMC would focus on to target tax funds were declared “sensible” by the committee, but the details lacked transparency. The Treasury was also criticised in this process. Criteria applied by the Treasury to check HMRC’s assumptions were unclear, the committee said.

More can be done to encourage voluntary tax compliance. Better negotiation practices and discouraging adversarial situations would improve compliance, and make taxpayers feel they are being treated more fairly.
A simpler tax system, better tax education and making disclosure easier would all help achieve that aim.