As part of the Spring Statement, the government issued a policy paper, headed Tackling tax avoidance, evasion, and other forms of non-compliance, which set out its approach and achievements in tackling these issues. The paper reveals some interesting facts and clearly demonstrates HM Revenue & Customs (HMRC) is making significant headway.
It is hard to believe that, since 2010, more than 100 measures have been introduced to tackle these areas. The changes, alongside HMRC’s compliance work, have secured and protected some £200bn in tax revenue which would not have otherwise been paid. While the government has given around £2bn in additional funding to HMRC since 2010, no one can argue it has not received a phenomenal return on its investment, which for the majority of us is good news.
The tax gap is the difference between the tax receipts the Exchequer expects to receive and what it actually collects. The tax gap for 2016/17 was £33.4bn – a near-record low and the joint lowest level there has been in five years. If you thought avoidance and evasion were the main sources of lost revenue for HMRC, however, you would be wrong – it actually comes down to non-compliance.
Non-compliance is broken down into two categories – a failure to take reasonable care, and errors, which combined make up 28% of lost revenue. On a case-by-case basis, these discrepancies can appear insignificant but, due to the large number of taxpayers involved, the compounding effect becomes significant.
The biggest offenders of non-compliance are small businesses, at 41%, while individuals are the least, at 10%. The hope is that, with the progression towards making the majority of taxes digital, it will help ensure errors are minimised simply by helping taxpayers get things right from the outset.
The combined loss of income for evasion and avoidance comes second at 21%, although if taken on its own avoidance would come last at 5%. Tax evasion as we all know is always illegal. It is when people or businesses deliberately fail to provide full and accurate information to HMRC. It can, in some cases, also lead to prosecution.
Tax avoidance on the other hand may not be illegal but it does involve bending the rules to gain a tax advantage that Parliament never intended. These arrangements usually involve contrived or artificial transactions that serve no real purpose other than to produce a tax advantage.
The introduction of the General Anti-Abuse Rule (GAAR), though slow to take effect, has helped HMRC challenge tax avoidance schemes. In all, 10 opinions provided by the independent GAAR Advisory Panel in 2018/19 supported HMRC’s view that the tax avoidance arrangements affecting more than 2,300 taxpayers were not a reasonable course of action, and tended towards the blatant end of the avoidance market.
Other changes, such as strengthening and expanding the disclosure of tax avoidance schemes and disguised remuneration legislation, the introduction of accelerated payment notices and follower notices, and powers to act against promoters of tax avoidance schemes, have all proved effective. HMRC has, for example, issued more than 81,000 accelerated payment notices, and since 2014 these, along with settling marketed avoidance cases, have brought in more than £8.7bn.
On a more cautionary note, since the formation of HMRC’s Fraud Investigation Service in 2016, custodial sentences totalling 100 years have been handed out to individuals convicted of criminal offences relating to arrangements that have been promoted and marketed as tax avoidance schemes. Since 2015/16, HMRC has a success rate of around 90% for avoidance cases taken to litigation by taxpayers on the substantive issues. Many more have chosen to settle before their case gets that far.
More positively, the good news for advisers is that the traditional tax-planning tools in their armoury such as maximising pension and ISA contributions, use of discounted gift schemes and loan trusts as well as use of enterprise investment schemes and venture capital trust arrangements, are still available. The days of the more aggressive forms of tax avoidance arrangements appear to be coming to an end and with victory in sight, HMRC is continuing its attack.
Neil MacGillivray is head of technical support at James Hay