It barely seems a moment since an article was last written summing up last year’s U.K. issues, and 2017 has been as surprising, in many ways, as 2016 was. Not the outcome of the election (that was no surprise whatsoever), but indeed because there was an election at all. Certainly, none had been planned, yet in June of this year the U.K. held a “snap” election. General elections in the U.K. are supposed to be held every five years. (The next one was scheduled for 2020.) But an early, or snap, election can be held if at least two-thirds of lawmakers agree to it or if there's a vote of no confidence in the government.
What was surprising, however, was the impact this election had on our day-to-day work in the Chartered Institute of Payroll Professionals’’ (CIPP) policy team. As usual, there was a period of pre-election purdah (state of seclusion or secrecy) to prevent discussion about future policy development taking place. Councils and civil servants are tasked to be mindful of everything that they do in the run-up to an election, and departments cannot make any communications that could be seen as unfairly advantageous to any candidate or political party. The ultimate test of their success in this regard would be, “Could a reasonable person conclude that you were spending public money to influence the outcome of the election?"
Indeed, we are fully aware of the rules of purdah, as over the last two years this rule has been tested to the full. It is nothing short of miraculous that any new policy has been delivered from 2015 through to 2017 given the number of elections held.
The fact that the U.K., along with so many other nations, continues to hold record levels of debt probably explains sufficiently why the passing of essential legislation, aimed at filling the coffers and narrowing the tax gap, has continued to be a priority.
The snap election tested the rules of purdah to their maximum, to the extent that not only were new policies not discussed, but largely neither were items that sit in the “business as usual” area.
So, 2017 has been an unusual year: busy, as we would expect in pay, pensions, and reward, but also because the legislative timetable has been adjusted, tweaked, and stretched to its limits to accommodate the snap election as well as our exit negotiations from the European Union.
What Is the Tax Gap?
Having mentioned the tax gap, let us expand a little—after all, where would the festive season be without an imaginary tale or two? I would be stretching the point to suggest the tax gap could be considered ghostly, although many have commented about how scary the legislative activity has become as a result of its existence.
The “tax gap” is the difference between the amount of tax that should, in theory, be collected by Her Majesty’s Revenue and Customs (HMRC), against what is actually collected.
The most recently published figures show that the tax gap is on a gradual downward trajectory. The U.K. tax gap for 2014-2015 was estimated at £36 billion, or 6.5% of tax liabilities, compared with 8.3% in 2004-2005. This means that the tax gap is now £11 billion lower than it would have been if the percentage tax gap had remained at the 2004-2005 level.
Why Measure the Tax Gap?
The tax gap has been much criticised over recent years for many varied reasons. However, the tax gap is considered to be a useful tool by HMRC to aid its understanding of the relative size and nature of noncompliance.
That understanding guides HMRC’s actions:
- As a foundation, it guides HMRC strategy, considering the different areas covered, the different causes, and the different customer groups together with their behaviours supports HMRC thinking, not only in how noncompliance may have occurred, but how those causes can then be addressed.
- Increasingly HMRC will draw upon information about the tax gaps that exist for other countries and how other tax agencies manage their tax gaps to provide insight into which strategies might be the most effective in reducing the tax gap. As a nation, the U.K. is amongst the most compliant when considering on a global scale.
- Whilst the tax gap is neither timely nor precise enough to set performance targets, it does provide information that helps HMRC to understand its long-term performance.
Tax Gap Measures
The tax gap estimates are measured in three ways:
- Customer group—small and medium-sized enterprise (SME) employers,large business, criminals, and individuals
- Behaviour—The hidden economy, criminal attacks, non-payment, error and failure to take reasonable care, evasion, avoidance, and legal interpretation.
- Tax type—Income tax, National Insurance Contributions (NICs) and Capital Gains Tax, Value Added Tax (VAT), corporation tax, excise duties, and other taxes
PAYE and Employers
In 2014-2015, the estimated tax gap for employers was £2.8 billion, which is equivalent to 1.1% of the employer Pay As You Earn (PAYE) theoretical tax liabilities. This was made up of £0.9 billion from SME employers and £1.9 billion from large employers and represents 1.3% of SME employer and 1.1% of large employer PAYE theoretical tax liabilities respectively.
Interestingly, one of the key findings highlighted in the most recent report related to a large reduction in the PAYE tax gap from £4 billion in 2013-2014 to £2.8 billion in 2014-2015. The Real Time Information (RTI) system is considered to have made a significant contribution to this reduction. With more regular submissions being made, HMRC has a greater quantity of near real-time data by which to judge this gap; however, as unresolved problems still remain with duplicated payments, particularly where there has been a change of software, payroll provider, or employer set-up, it will be interesting to see how these estimates move around in future reports.
Importance of the Tax Gap
By calculating the tax gap and all its different parts, HMRC has been able to focus (and have a measure by which to demonstrate that focus) in a more targeted way on the noncompliance that is estimated to exist within the different “customer” groups.
Implementing its “promote, prevent, respond” approach to noncompliance, HMRC is working toward a process of making the payment of tax simple and efficient for the compliant majority.
This is achieved by promoting good compliance and preventing errors occurring when we deal with HMRC (a digital tax service will be fundamental to the success of this aim). If promote and prevent activities are successful, then HMRC can focus and respond robustly to those who are intent on cheating the tax system.
As such, we see legislation and regulatory powers being passed that strengthen HMRC powers to tackle tax avoidance. To a Government whose legislative timetable is stretched, the tax gap estimates are proving to be a useful tool that enables HMRC and HM Treasury to make their case for reform.
Autumn Budget 2017
As we just went past the date of the 2017 Autumn Budget (by the time you read this, the Budget will have been held), I can’t help but wonder whether the theme of any new announcements will look to the tax gap as their evidence basis?
A bill currently making its way through Parliament, the Parental Bereavement (Leave and Pay) Bill, is a Private Members’ Bill sponsored by Kevin Hollinrake MP and supported by the Government. Once enacted, it will create a statutory entitlement to Parental Bereavement leave of at least two weeks for working parents of children up to the age of 18. This will be achieved by amending the Employment Rights Act 1996.
Social security legislation will also be amended to allow payment, subject to qualifying conditions, along similar lines to other forms of parental leave and paid at the same rate.
More about this new obligation on employers in future articles. Not all legislation is about raising more in taxes.
Samantha Mann, MAAT, MCIPPdip, is Senior Policy and Research Officer for the Chartered Institute of Payroll Professionals (CIPP).