Small businesses responsible for 41% of the tax gap, says HMRC

The UK tax gap for 2016-17 was estimated to be £33bn, which is 5.7% of theoretical liabilities. This percentage shortfall is the same as in 2015-16 after the original figure for that year had been revised down from 6% with actual data, information from investigations and improved data analysis.

 

According to HMRC, small businesses are responsible for 41% of the gap, followed by large businesses at 21% and mid-sized ones at 12%. Criminals are the third largest component forming 16% of the gap.

 

The gap comprises eight behavioural components:

 

Behaviour	£bn	%
Failure to take reasonable care	5.9	18
Criminal acts	5.4	16
Legal interpretation	5.3	16
Evasion	5.3	16
Non-payment	3.4	10
Error	3.2	10
Hidden economy	3.2	10
Avoidance	1.7	5

 

Catherine Robbins, partner at Pinsent Masons, said: ‘Despite the public perception, only a very small percentage of the tax gap is due to tax avoidance. Very few businesses are engaged in tax avoidance schemes now and, as HMRC hunts for new sources of revenue, it is increasingly coming down hard on basic, almost routine errors.’

 

She pointed to evidence of the department’s change in tack in that the tax gap attributed to ‘legal interpretation’ has risen by more than £1bn in five years, and the amount attributed to failure to take reasonable care, which has also risen by more than £1bn. The gap due to avoidance has fallen by £500m.

 

Ms Robbins added: ‘Avoidance is not the cash cow HMRC wants it to be. As a result, it is increasingly challenging legal interpretations to add to businesses’ tax bills.’

 

Given HMRC’s belief that small businesses are responsible for 41% of the tax gap, HMRC is likely to pay more attention to them, according to PfP, the specialist tax investigation insurer.

 

Managing director Kevin Igoe said: ‘HMRC has long made a habit of targeting small businesses and individuals. That is unfortunate as they may have less resources to defend themselves. There is a danger that HMRC may form a low opinion of tax returns from small businesses, which means that around one-fifth of small and medium-sized enterprises are at immediate risk of tax investigation.’

 

Singling out the inheritance tax gap which HMRC puts at £600m in 2016-17, a rise of 50% from £400m five years ago, law firm Collyer Bristow said that complex inheritance tax rules must be simplified to close the gap. In contrast, however, inheritance tax receipts jumped 13% to a record high £5.3bn in 2017-18, up from £4.7bn the previous year.

 

James Badcock, partner at Collyer Bristow, said: ‘The problem is that inheritance tax is so complicated that innocent taxpayers are making honest mistakes and underpaying tax. The rules are sometimes so irrational that there is an element of “accidental evasion” by those who don’t have professional advice. If HMRC wants to close the tax gap it is crucial that the rules are simplified so that fewer errors are made.’

 

He added: ‘In its current form, inheritance tax’s complexity encourages behaviours that are detrimental to sensible financial planning and the distribution of wealth through generations.’