Tax & admin · 17 January 2018

HMRC risks vilifying small business owners without better tax gap scrutiny

Unpaid business taxes
The tax gap fell to a record low of six per cent in 2015/16

Without better analysis into claims small businesses are significant contributors to Britain’s so-called “tax gap”, HMRC risks unfairly stigmatising the self-employed, tax campaigners have warned.

According to the Public Accounts Committee’s report on HMRC’s performance for 2016/17, the tax office claimed high growth in self-employment had exacerbated the UK’s tax gap in recent years.

The tax gap – the difference between the total tax due and that collected by HMRC – fell to six per cent (£34bn) in the 2015/16 tax year, a record low. A total of 75 measures have been introduced to tackle non-compliance, such as new criminal offences for tax evaders, and investment into HMRC operations.

Read more: HMRC avoidance crackdown leads to record low tax gap

Facing the committee, HMRC attributed half of the tax gap – £15.5bn – to small businesses. The tax office said it believed there were a large number of firms with small amounts of revenue owed.

It said a high shift from employment – a highly compliant sector – to self-employment had widened the gap.

HMRC also told the committee that measures such as Making Tax Digital, and greater collaboration with intermedieries like Amazon and eBay, would increase compliance among small business owners.

In its report, the committee advised HMRC to “set target levels for reduction of the tax gap, including for the SME sector, and set out how HMRC will be more responsive to emerging risks”.

However, tax campaigners have warned that HMRC risks unfairly vilifying small business owners.

Responding to the report, John Cullinane, tax policy director at the Chartered Institute of Taxation (CIOT), questioned HMRC’s methodology and pressed for stronger analysis into the tax gap.

“HMRC has clearly believed for some time that the impact of small and medium-sized enterprises on the tax gap is especially significant. The nature of this issue merits a more detailed explanation from HMRC than the tax authority shares at present,” Cullinane explained.

“Without more granularity on the nature of the impact on the tax gap, HMRC risks stigmatising SMEs, which could be unfair and does not seem calculated to improving whatever underlying behaviour is the cause of the problem.

“It is also unhelpful to the public’s understanding of tax. If more focussed information on SMEs and the tax gap is simply not available to HMRC, then more needs to be obtained, so targeted initiatives can begin, which we would be keen to support.”

The committee also raised concerns regarding HMRC’s level of customer service support once Making Tax Digital is introduced.

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self-assessment

 

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To help readers prepare for the imminent self-assessment deadline on 31 January, our FreeAgent expert offers five essential tips for making sure submissions reach the tax office on time

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ABOUT THE EXPERT

Simon Caldwell is deputy editor at Business Advice. He has a BA in politics and communications from the University of Liverpool, and has previously worked as a content editor in local government and the ecommerce industry.

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