Contractors, alongside other small business and personal taxpayers, need a simpler tax system, not more anti-avoidance legislation.
This is the conclusion that can be drawn from HMRC’s latest report into the UK’s ‘tax gap’, which shows that the taxman puts the blame for major tax revenue shortfalls firmly on the shoulders of small businesses, the self-employed and individual taxpayers.
The ‘tax gap’ is HMRC’s estimate of the difference between how much tax it considers should be gathered and how much tax is actually collected in a financial year. It is currently running at £32bn or 6.7% of total tax liabilities calculated for the 2010-2011 financial year. Or to put it another way, 93.3% of all tax due in 2010-2011was successfully collected.
And according to HMRC “nearly half of the 2010-2011 tax gap can be attributed to small and medium sized businesses.”
Furthermore, it says £2bn is lost through error and £3bn is lost through taxpayers showing a “failure to take reasonable care”. That totals the same amount as that lost due to deliberate avoidance activity, £5bn.
HMRC’s analysis demonstrates that £5bn is lost because of what are essentially avoidable mistakes. And with the individual self-assessment tax gap totalling 18%, or £4.4bn, this suggests that our tax system is just too complex for individuals and small business owners to cope with.
HMRC also reckons that avoidance is on the increase, rising by £200m from £1.9bn in 2009-2010 to £2.1bn in 2010-2011 for income tax, National Insurance Contributions (NICs) and capital gains tax (CGT) alone. When VAT and corporation tax are added, the total amount of tax lost to avoidance is £5bn.
The taxman describes avoidance as “bending the rules of the tax system to gain a tax advantage that Parliament never intended” which, as HMRC helpfully explains, is not the same as legitimate tax planning; the latter, says HMRC, “involves using tax reliefs for the purpose for which they were intended.”
Tax avoidance is, of course, perfectly legal. And HMRC confirms this in a roundabout way by saying that “it involves operating within the letter but not the spirit of the law”. But its estimates of tax revenues lost through tax avoidance activities are largely based on models and assumptions, not hard data and sampling of tax returns.
Reducing the complexity of the tax code would be likely to lead to substantial reductions in the level of errors and what HMRC sees as a lack of reasonable care in completing tax returns. Would introducing additional anti-avoidance legislation conjure-up an extra 5bn, or result in even greater numbers of errors?
Although simplifying the tax system will ultimately generate higher revenues, and George Osborne has made great play of his efforts in the field, the Chancellor has only funded “slightly under six” people to work in the Office of Tax Simplification. That figure was confirmed to an aghast Kirsty Wark on Newsnight last week by OTS head of tax John Whiting [10m 4s into video].
Compare those six people to the 25,000 HMRC staff working in enforcement and compliance, and you see just how seriously the government is taking tax simplification. Not very.
Like HMRC’s assessment of the tax gap caused by avoidance, these numbers just don’t stack up.