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Tony Wickenden: Mind the tax gap

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A state of constant tax change has become the norm tax professionals and financial advisers accept. Consumers also accept it and to some extent embrace it.

The embracing part is usually to do with the individually and corporately rich and famous “getting what’s coming to them” in the form of tribunal and court decisions, legislation and publicity.

Most of us “in the business” are only too aware of the Treasury’s need to close the tax gap (the difference between what the Government would collect if the tax were perfectly applied and collected, and what it actually collects). It is pretty huge: even at its lowest estimate it is thought to be over £30bn.

In its 2014 publication on the issue HM Revenue & Customs expressed the following key findings:

•      The tax gap in 2012/13 (the latest year) is estimated to be £34bn, which is 6.8 per cent of total theoretical tax liabilities.

•      The percentage tax gap has reduced steadily from 8.5 per cent in 2005/06 to 6.8 per cent in 2012/13.

•       The current tax gap estimate of £34bn is £8bn lower than it would have been if the percentage tax gap had remained at the 2005/06 level of 8.5 per cent.

•      The corporation tax and VAT gaps have seen the largest reductions over this period.

•       The tax gap increased between 2011/12 and 2012/13 from £33bn to £34bn, due to an increase in the VAT gap of £0.9bn and an increase in the tobacco tax gap of £0.3bn .

Government strategy to close the gap has been founded on a multi-disciplinary approach. Given that over 20 per cent of the gap is attributed to legal interpretation and avoidance it is hardly surprising these areas have seen some action. However, the concern was that while tax arrangements were in dispute the money under consideration remains with the consumer.

Consider the Treasury/HMRC as a business. The tax gap represents both a revenue and cash flow challenge. Anti-avoidance legislation, the general anti-abuse rule and positive results in the tribunals and courts all represent serious revenue generation initiatives resulting in “invoices” in the shape of assessments. However, until the money (tax) related to those (invoices) is collected there is a cash flow challenge.

Recent action to deal with this comes in the form of the provisions for the direct collection of outstanding tax from the accounts of those owing tax and the initiation of follower notices and accelerated payment notices, both of which aim to collect tax “early” from those engaging in “aggressive” tax avoidance.

A key condition for the issue of an APN is that the scheme in dispute has a disclosure of tax avoidance schemes reference number and is subject to an open inquiry. Having a strong Dotas regime is thus an important component in the drive to collect in more tax related to APNs.

In July 2014 the Government published a consultation document called “Strengthening the Tax Avoidance Disclosure Regimes”, which contained proposals for improving the operation of the Dotas rules. The consultation, which closed on 23 October, put forward a number of suggestions for change, including options for:

  • Changes to the descriptions of schemes required to be disclosed (the “hallmarks”)
  • Changes to continued compliance with the rules by promoters not resident in the UK
  • Changes to the penalties applicable to users of schemes who fail to notify their use of a scheme
  • The introduction of protection for those who wish to provide information about potential avoidance to HMRC but who are prevented from doing so by governance or confidentiality requirements

A summary of responses to the consultation was published alongside the Finance Bill on 10 December. The draft Finance Bill 2015 contains legislation to implement the changes required to the Dotas rules in Part 7 of the Finance Act 2004 (including legislation that allows HMRC to publish information about disclosed schemes and their promoters). However, the Treasury wishes to consult further over regulations to make changes to the hallmarks before these come into effect after Royal Assent to the Finance Bill 2015.

Of particular relevance to financial planners are the proposals to strengthen the Dotas rules in relation to inheritance tax. I will look at these in my next article.

Tony Wickenden is joint managing director at Technical Connection 

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