This week's opinion: 4 July 2019

Two things struck me about the latest tax gap estimates from HMRC (tinyurl.com/hmrctgrl). The first is that the UK has a very high level of compliance. A tax gap of just over 5% is low in international terms and shows that the vast majority of taxpayers do meet their tax obligations. The second is something that has been in the statistics before but whose significance I had not really considered previously. £6.2bn of the gap – 18% of the total – is due to ‘legal interpretation’. That is defined as ‘where the customer’s and HMRC’s interpretation of the law and how it applies to the facts in a particular case result in a different tax outcome, and there is no avoidance. Specifically, this includes the interpretation of legislation, case law, or guidelines relating to the application of legislation or case law’. The tax gap is defined as ‘the difference between amount of tax which should, in theory, be paid and what is actually paid’. If HMRC challenges my client’s claim to capital allowances on a particular item and I win the argument has the tax gap increased? If allowances are due there is no gap: the correct tax has been paid.

The more I think about it, the harder it is to see that ‘legal interpretation’ has anything to do with the tax gap. If my client obtains capital allowances that HMRC did not at first consider were due I can see that would affect the Treasury’s projection of the tax yield. That may be an economic problem that needs fixing, but it does not contribute to the tax gap.

Perhaps next year HMRC could explain in more detail how ‘legal interpretation’ fits into the tax gap statistics.

If you do one thing...

I wrote about Katib (TC6149) after the First-tier Tribunal hearing. The Upper Tribunal has now published its judgment (tinyurl.com/UTKatib). Para 58 has some interesting remarks about the competence of advisers that are worth a read.