Yours is No Disgrace

SMEs Blamed for Tax Gap

The recent Public Accounts Committee’s (PAC) Report on HMRC’s performance in 2016/17 notes that HMRC believe almost half of the tax gap is attributable to small and medium-sized enterprises (SMEs). The tax gap is the shortfall between the amount of tax expected by the Treasury and the sums actually received.

Over the past decade there has been a downward trend in the tax gap from 7.9% (£35 billion) in 2005/06 to 6% (£34 billion) in 2015/16. HMRC’s intention is to close the gap as far as is possible and believes that with more powers, people, interventions, and data it will be able to do just that, but the department is not able to estimate how far the gap can realistically drop.

Apparently, almost half of the tax gap is the fault of a large number of SMEs owing relatively small amounts of tax. HMRC believes that several measures will address this risk posed by the SME sector, namely:

  • Introduction of Making Tax Digital for Business programme;
  • Working closely with intermediaries such as Amazon and eBay; and
  • Using tax agents with small business clients to encourage increased compliance.

The PAC has therefore recommended that HMRC should set target levels for reducing the tax gap, including for the SME sector, and set out how the department will be more responsive to emerging risks.

Once again, SMEs have been unjustly cast in the role as villain and in response to the PAC’s report, John Cullinane, Chartered Institute of Taxation Tax Policy Director, said:

“HMRC have clearly believed for some time that the impact of SMEs on the tax gap is especially significant. The nature of this issue merits a more detailed explanation from HMRC than the tax authority shares at present. Without more granularity on the nature of the impact on the tax gap, HMRC risk stigmatising SMEs, which could be unfair and does not seem calculated to improving whatever underlying behaviour is the cause of the problem. It is also unhelpful to the public’s understanding of tax. If more focussed information on SMEs and the tax gap is not available to HMRC, then more needs to be obtained, so targeted initiatives can begin, which we would be keen to support.”

HMRC performance

HMRC raised £574.9 billion in tax revenues in 2016/17, an increase of £38.1 billion (7.1) % on 2015/16.

Whilst the PAC recognised the improvements in taxpayer service since the unacceptable levels in 2015/16, it is still concerned about HMRC’s ability to maintain this level of performance.

In 2016/17, HMRC achieved its best performance in the past five years against its key targets, which was mostly due to additional investment.

The average speed to answer telephone calls fell from 12 minutes in 2015/16 to under 4 minutes in 2016/17. HMRC’s target is for taxpayers to spend no longer than 5 minutes waiting to speak to an adviser. However, this excludes the time a person is in HMRC’s automated telephony system before entering the queue. HMRC considers 5 minutes a reasonable average speed to answer and says that typically a person spends an additional 2 – 4 minutes listening to automated messages before joining the queue for an adviser, so the total waiting time is more realistically 9 minutes.

Some of HMRC’s other performance measures also provide a misleading picture of the reality of peoples’ experiences. For example, HMRC counts most calls terminated in its automated telephony system as successfully handled. The truth is however, that the individual simply hangs up because of difficulty navigating through the automated message system and becomes frustrated by how long it takes to do so.

The PAC has therefore recommended that HMRC should introduce a new set of measures that better reflect the actual experience of taxpayers. Automated telephony should be included within the 5-minute speed-to-answer target.

HMRC’s performance will continue to be monitored by the PAC who intend to return to this issue at a later date.

Report on HMRC’s performance in 2016/17 (PDF)

 

2 Comments

  • The Q says:

    And the CIOT say about half the tax gap is due to ILLEGAL
    activity (evasion) . But why go after the criminal, when
    you have an army of jobsworth Nazis only too willing to
    harrass SMEs who may not be dotting the Is and crossing
    the Ts ( *** ) eh.

    *** The CIOT say some of the tax gap is due to taxpayers
    not being given concise/understandable instruction
    from HMRC on what is (not) to be paid.

  • Bob says:

    The issues is the rise in offshoring and inter company transfer visas being used to import cheap labour. I haven’t had a rate increase in 10 years, so in real terms my income has drop around 33.3%. At the same time I’m still paying the same amount of tax I was 10 years ago, so in real terms HMRC is also getting 33.3% less. All this only works the the top 1% and politians with their snouts in the trough…. not me, not HMRC and not the UK in general.

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