Tax Gaps 2019-20

Baroness Penn Excerpts

Thursday 7th April 2022 Grand Committee

[Baroness Penn (Con)]

My Lords, I thank the noble Lord, Lord Sikka, for securing this debate, and all noble Lords for their contributions. Although these ranged over a wide number of areas, I think the common thread of agreement was that every effort should be made to narrow the tax gap, and that is something that the Government will continue to bring forward further measures to achieve.

As set out by the noble Lord, Lord Sikka, HMRC publishes comprehensive estimates of the UK tax gap, including both direct and indirect taxes, annually. In fact, HMRC is one of only two tax authorities in the world to do this in such a comprehensive manner, underlining its belief in transparency. The latest publication estimates the 2019-20 tax gap as 5.2% of total expected liabilities, or £35 billion. The Government recognise that this figure is still too high.

However, this estimate also underlines the long-term downward trend in the tax gap, which, in 2005-06, stood at 7.5%. In fact, the most recent tax gap is at a near record low, which means that almost 95% of total tax due is paid. None the less, as has been acknowledged today, the current tax gap is slightly larger than that of the previous year, which stood at 4.9%—although, as several noble Lords have noted, I encourage the Committee to avoid drawing strong conclusions from a single year’s results. By way of explanation, the increase was mainly driven by changes in the VAT tax gap. My noble friend Lord Leigh is right to say that the VAT gap is, at times, subject to change. Such revisions are evidence of HMRC’s commitment to transparency and the complexity of the calculations. As the noble Lord, Lord Davies of Brixton, said, they also underline the importance of considering trends rather than figures for individual years. However, I stress that HMRC’s VAT gap estimate, and the methodology, are robust and in line with international best practice.

The noble Lord, Lord Tunnicliffe, asked whether there is cause to believe that the tax gap will increase for the following year. Although it is difficult to predict the potential impact of Covid-19 and the related recession on the tax gap, it is not necessarily the case that the tax gap will rise, as there are complex interactions that could change both the drivers and opportunities for tax non-compliance to occur. The VAT gap for 2020-21 has already been published and is at 6.7%, down from 8.4% in 1920. The tax gap for 2020-21 will be published on 23 June. Following the recession brought about by the financial crisis in 2007-08, the tax gap due to non-payment increased as businesses became insolvent while owing tax. The impact of the pandemic on businesses may be different, but if businesses fail, the tax gap due to non-payment may increase. The noble Lord also asked about the balance between genuine errors and more sinister causes, and other noble Lords talked about the breakdown in the tax gap provided. The breakdown by behaviour is illustrative, but the latest publication shows that, in 2019-20, failure to take reasonable care and error collectively accounted for around 29% of the tax gap. Legal interpretation, evasion and criminal attacks were at a similar size at 16%, 16% and 15% respectively. Non-payment was at 11%, the hidden economy was at 8% and, finally, avoidance accounted for the smallest proportion of the tax gap at 4%.

The noble Lord, Lord Sikka, asked about the Government looking at ways to improve analysis of the tax gap so that it better matches the Government’s priorities and policies. As I have said, tax gap breakdown by behaviour is illustrative and more detailed breakdowns are not available at a granular level. However, HMRC does not agree with TaxWatch figures and estimates that fraud and evasion account for 30% of the tax gap. HMRC has previously published levels of specific fraud, such as missing trader intra-community—MTIC—fraud, and has seen a decline from a peak in 2005-06 where it was £2.5 billion to £3.5 billion, to zero to £0.5 billion—as published in Measuring Tax Gaps 2019 Edition. HMRC did not publish an updated time series for MTIC fraud in its 2020 publication as fraud has remained at lower levels.

The noble Lords, Lord Sikka and Lord Davies of Brixton, asked about HMRC’s methodology in calculating its tax gaps. The tax gap estimates are official statistics produced in accordance with the Code of Practice for Statistics. This ensures that the statistics published by the Government serve the public and are of high quality. In May 2019, the Office for Statistics Regulation conducted a compliance check on the extent to which HMRC’s publication meets the standards of the Code of Practice for Statistics and commended HMRC’s preparation, production and publication. The tax gap methodology has also been extensively reviewed and given a clean bill of health by the International Monetary Fund. Tax gap estimates are reviewed each year to reflect updated data and methodologies.

On the points raised by my noble friend Lord Leigh, the Government are grateful to him and Retailers Against VAT Abuse Schemes for their work to highlight areas of non-compliance from overseas businesses selling goods into the UK. Now the UK has left the EU, the Government have used this freedom to create a fairer and more robust system for the collection of VAT on overseas goods. On 1 January 2021, the Government abolished low-value consignment relief, which was subject to widespread abuse, and moved the collection of VAT on most goods from overseas with a value not exceeding £135 away from the border. Now, overseas sellers and online marketplaces, where they facilitate a sale to UK customers, must register, charge and pay VAT to HMRC. The new treatment ensures the continued flow of goods at the UK border, clamps down on non-compliance and protects revenue.

In 2021, the Office for Budget Responsibility estimated that the changes will raise over £1.4 billion, with similar levels in future years, reflecting a change in where VAT liability falls following Brexit. HMRC continues to review the impact of the policy, including which options exist to tackle non-compliance by overseas sellers. Officials are aware of the VAT passport proposal and are considering it, alongside other proposals to tackle non-compliance.

The long-term reduction in the size of the overall tax gap has not happened by accident. This improvement is a result of the Government’s focus on tackling the small minority who deliberately try to defraud the Exchequer, as well as on helping taxpayers to get their tax right by promoting good compliance and reducing opportunities for error. That is why, within little more than a decade, the Government have introduced over 150 measures to tackle tax avoidance, evasion and other forms of non-compliance. These measures, alongside HMRC’s wider work, have secured and protected over £250 billion since 2010.

We also continue to play a leading role in clamping down on international tax avoidance and evasion, through the G20 and other bodies. Several noble Lords asked about some of the international dimensions to this, in tackling profit diversion, the base erosion of profits and other international actions. To the noble Baroness, Lady Kramer, I say that the UK has led the way internationally in making sure that multinational companies pay their fair share. HMRC has secured more than £6 billion in extra tax from multinationals, thanks to the diverted profits tax introduced in 2015 to tackle those who shift their profits abroad to avoid paying tax that they rightly owe in the UK.

Several noble Lords asked why base erosion is not included in the tax gap. As noble Lords noted, HMRC does include some forms of base erosion and profit shifting where it represents tax loss that we can address under UK law, but not BEPS arrangements that cannot be addressed under UK law. It is worth noting that, as new measures introduced in accordance with the OECD’s BEPS project take effect, the Government’s ability will be greatly strengthened to address BEPS under domestic law.

The noble Lord, Lord Tunnicliffe, asked why resources were being put into the DWP to tackle benefit fraud and about other measures to tackle public sector fraud more widely. Just like other forms of fraud, benefit fraud is stealing from taxpayers and the Government do not tolerate any fraud in the benefit or wider government system.

The noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Kramer, asked about the new public sector fraud authority. Its aim is to reduce fraud levels across government. We might expect the most immediate benefits to come from actions such as bolstering our data-analysis capabilities, which represent around £22 million of the package the Chancellor announced and are expected to have an audited return on investment of three to five times that. It might be worth my writing to noble Lords with more detail about how the new public sector fraud authority will work, because there is a lot more information coming on that.

Noble Lords asked a number of specific questions about additional investment in HMRC. I will also write on that, given the time.

The noble Lord, Lord Sikka, and the noble Baroness, Lady Bennett, made some claims about sweetheart deals. I must be absolutely clear: HMRC does not do deals with anyone. Tax disputes are resolved in accordance with the law, as set out in the published code of governance, overseen by the Tax Assurance Commissioner.

I am afraid I am running out of time. The noble Baroness’s point about HMRC treating taxpayers fairly was very important. I know it is something HMRC has worked on recently and will continue to work on. The Government think Making Tax Digital has been effective in helping to reduce the tax gap.

To conclude, closing the tax gap is an incredibly important area for the Government, on which we have taken real action. I welcome this opportunity to debate it and we will strive to reduce the tax gap through compliance work and improvements to the tax system.