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Tax avoidance low on HMRC’s tax gap

Tax avoidance low on HMRC’s tax gap

The contractor community has long felt it has been unfairly targeted by HMRC and that there has been a view that this completely legal way of working is somehow nefarious in nature.

Contractors are not taxed in the same way as regular workers, they sacrifice other benefits to work in this way. If you’ve made it to our website, you probably know all this, so I won’t cover old ground.

But it’s fair to say that there is a certain amount of bad feeling towards HMRC, and their actions over the years towards contractors have won them few friends.

Why have HMRC acted as they have? Because of an essentially fallacious belief that contractors are somehow trying to cheat the system? If so, in the vast majority of cases, this is not true.

In fact, new statistics released by the Chartered Institute of Taxation (CIOT) show that avoidance of tax – something contractors have long been unfairly accused of attempting – should be a fair way down HMRC’s areas of focus list.

HMRC believes that there is an astonishing £34 billion is the gap between the tax due to the Exchequer, and what it actually has in the kitty.

There are plenty of reasons why that gap is as big as it is. Celebrity offshore bank accounts, as rumoured this week, don’t help.

Tax avoidance is certainly contributory, and HMRC are right to look to tackle it and receive what they are legally owed. But it’s fair to say that there might be some bigger fish to fry first.

Illegalities such as criminal attacks, tax evasion, and the hidden economy make up almost half of that £34 billion figure – known as the ‘tax gap’. Evasion is behind £5.2 billion of the total, while criminal activity also tops the £5 billion mark.

In comparison, avoidance is to blame for only £1.7 billion of the gap. Now I say ‘only’ – yes, that’s a massive amount of money. More than most contractors get annually in take home pay in fact.

But when compared to active evasion of tax for example, it seems that focusing on avoidance so fervently is a misjudgement on HMRC’s part.

“These figures suggest that tax evasion and other illegal activity are costing the Exchequer more than eight times as much as tax avoidance,” said John Cullinane, CIOT Tax Policy Director. “The CIOT has long argued that HMRC needs to put more effort into investigating and prosecuting those who seek to evade tax. The Government are right to have put extra resources in this direction, as well as tackling artificial and abusive attempts to avoid tax.”

To put tax avoidance’s role in all this into some context, £3.3 billion is lost due to errors. These would include mistakes made in preparing tax calculations, completing returns or in supplying other relevant information. That’s some statistic.

There’s clearly something wrong somewhere. Cullinane has therefore called for HMRC to devote more to customer service, especially given the many changes to the tax system made and planned in the past 12 months.

Cullinane feels that focusing on customer service would be a ‘more direct way to help large numbers of fairly ordinary taxpayers who find themselves confronted by an ever more complex tax law and increasing compliance obligations. After all, nearly twice as much is lost in errors as in tax avoidance. If the tax authority needs more resources to directly help taxpayers to pay the correct sums, then they should get it.’

HMRC should shift from simply being quite a punitive entity and look at better ways to tackle its current problems, as well as provide a better service to those who are paying their taxes in a correct and legal way – like the vast majority of contractors.