At presentations and in articles I have often quoted the Tax gap as being the major driving force behind the whole MTD agenda and specifically within the tax gap HMRC’s avowed desire to reduce the gap they attribute to small businesses. The point of course being that with 80%+ of small business and micro taxpayers employing an accountant we are therefore being seen as part of the whole tax gap problem, as they (HMRC) see it rather than part of the solution, as we (Accountants) see it.
Accountants are still disbelieving and feel that their clients are not contributing to the tax gap and wonder if only HMRC did better with the “big boys” then not only will the gap be reduced and also MTD would become voluntary and not obligatory especially for the smallest of taxpayers.
Well if there were some who were in any doubt about HMRC’s views on the Tax Gap this section of Q & As taken from the House of Commons Public Accounts Committee’s review of HMRC’s Performance in 2016/17 should provide certainty not only on the future of MTD but also clarifies HMRC’s belief that the Tax Gap from small business is their biggest concern:
Chair: Mr Harra. We have picked at this issue before, but which parts of the tax gap are you most worried about? Which are the hardest bits to crack?
Jim Harra: It is all hard to crack in different ways. The largest part of it is really the small businesses. That poses a number of big challenges for us. First, there is a very large number of small businesses, so, case by case, it can be a relatively small amount and therefore it can be very difficult to tackle that in a cost-effective way. Also, the way that we have traditionally tackled that issue could be quite intrusive and stressful for a small business, because it involves in-depth investigation. And we are seeing in the economy a movement away from employment towards small businesses, so the underlying pressure is people moving out of an area of taxation that is highly compliant into an area that is highly non-compliant. That is a key challenge for us. We want to find different ways of tackling that, other than the traditional method of having a lot of boots on the ground investigating a lot of small businesses, although that will always be part of it. A key measure that Parliament has passed in the last couple of weeks is Making Tax Digital for business, which is starting to modernise the small business tax system and drive out some of the error and failure to take reasonable care. We can build on that in future. There are a couple of other areas where we can make a big difference. First, there is a new set of intermediaries in the self-employment arena. You have had eBay and Amazon here before you, and there are also taxi and takeaway apps, and we need to look to exploit these intermediaries more in the future to help small businesses to comply and prevent opportunities for them not to. Secondly, there is the tax agent industry, which has a very high level of penetration into small business taxation, yet its clients are often presenting as non-compliant. We need to drive up the value the tax system gets from agents in the system.
Geoffrey Clifton-Brown: Mr Harra, you mentioned Making Tax Digital, which will presumably bring in a lot of those non-compliant small companies. You ought to be able to close the tax gap when that measure is introduced. Is that correct?
Jim Harra: Yes; it is certainly our intention. As I say, there is also an underlying pressure that would tend to increase it, but the yield from that measure comes from closing the small business tax gap.
So again it’s Tax Gap, it’s errors and it’s Agents so do HMRC believe we are part of the solution or the problem?
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