Writing for the LIBF, Gerry Brown, consultant at QB Partners, looks at HMRC’s tax gap calculations and how advice firms can help clients be more aware of the tax mistakes they could be making.
On 23 March,‘Tax Day’, HM Revenue & Customs (HMRC) published a discussion document on non-payment of offshore tax. Gerry Brown looks at the impact of, and reasons for the tax gap. And he unpicks HMRC’s strategy to boost payments.
Helping taxpayers get offshore tax right shows the ‘soft’ side of HMRC, encouraging taxpayer compliance rather than threatening with a draconian penalty regime.
The HMRC strategy seems logical and simple. One of its functions is to reduce the ‘tax gap’. That is the difference between the amount of tax that should, in theory, be paid, and the amount that’s actually paid.
HMRC reports annually on the tax gap and its 2020 report suggests the gap is £31bn. This is equivalent to 4.7% of UK tax liabilities. Measuring the tax gap involves the use of many estimates and assumptions, so there’s a huge margin of error.
The HMRC analysis states, “Errors, including those involving offshore tax, account for 10% of the overall UK tax gap.”
The discussion document goes on to state that errors: “result from mistakes made in preparing tax calculations, in completing returns, or in supplying other relevant information, despite the taxpayer taking reasonable care.”
Moving up the culpability ladder, HMRC believes: “Failure to take reasonable care accounts for 18% of the overall UK tax gap and results from a taxpayer’s carelessness or negligence in adequately recording their transactions or in preparing their tax returns.”
The cost of tax errors
Add the 10% due to errors where reasonable care has been taken, to the 18% where there’s been a failure to take reasonable care. As HMRC concludes: “These behaviours combined account for 28% of the overall UK tax gap.”
That 28% of £31 billion is £8.68 billion.
So logic suggests that if taxpayer carelessness and negligence could be reduced, much more tax could be collected.
How to tackle offshore tax non-compliance
HMRC points out, “Offshore tax non-compliance that is not deliberate can be caused by a range of factors including:
• not being aware of offshore tax obligations
• guidance and communications relating to ‘offshore income’ not being relevant or clear
• reliance on anecdotal evidence or out-of-date advice
• not asking for help and support until the tax return is due.
The HMRC discussion paper looks at three approaches:
• helping taxpayers get their tax right by using data differently
• supporting taxpayers better with their offshore tax obligations
• promoting offshore tax compliance by working with agents and intermediaries?
The paper states: “HMRC now receives increasing amounts of offshore data each year under various agreements, such as the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA). HMRC also requests data from other jurisdictions to help with specific tax enquiries as well as intelligence on possible tax non-compliance.”
Over 100 jurisdictions have committed to automatically exchange financial account information under the CRS, which HMRC describes as “the most comprehensive international agreement”.
In fact, HMRC reports having received information on 7.6 million offshore financial accounts held by UK resident individuals, and the entities they control, in 2019 alone.
How data can be used to encourage payments
The report sets out several approaches to boost compliance, including using the data to send prompts and reminders to taxpayers and their agents.
Taxpayers would need to provide, in the self-assessment, a breakdown of the overseas income declared, detailing each individual source. This would make it relatively easy to reconcile the data received by HMRC under CRS/FATCA with the amounts self-assessed.
The idea of prompts is entertaining. Imagine receiving a random email from HMRC asking if you’ve remembered to include your Spanish bank interest in your self-assessment?
Once this approach has been developed, of course, why shouldn’t it be extended to UK source income?
