Tax gap falls to ‘record low’

Despite the ‘tax gap’ rising for wealthy individuals, the gap from big businesses fell to a “record-low” of £5.3bn, down from £5.6bn last year and the high of £7.6bn recorded in 2005/6, according to Pinsent Masons. The firm noted that the ‘tax gap’ for wealthy individuals reached £1.7bn in the past year, up from the £1.6bn recorded last year and £1.3bn two years ago. Steven Porter, partner at Pinsent Masons, said: “The jump in the high net worth tax gap is likely to see HMRC react by getting more aggressive in how it investigates wealthy individuals’ tax affairs. “While routine audits were suspended for a period during the pandemic, we expect to see HMRC seeking to increase income from investigations quite aggressively once lockdown ends.” He added: “HMRC has a real focus on domicile and residence of high net worth individuals at present, and believes it is missing out on tax that should be paid by internationally-mobile executives. “Whilst HMRC has said that the tax residence of individuals stranded in the UK due to Covid-19 won't be affected, extra time in the UK may lead to scrutiny of that person's tax situation more generally.” Despite the fall in suspected underpaid and evaded tax by large businesses, HMRC is still “seeking further powers” to crack down on non-compliance, Pinsent Masons added. According to the firm, HMRC is now consulting on a plan to make large businesses notify HMRC in advance if they plan on paying tax “in a way that differs from HMRC’s interpretation of tax law”. Jason Collins, partner and head of litigation, regulatory and tax at Pinsent Masons said: “HMRC has built a large arsenal of weapons to combat tax underpayment by corporates over the last decade and that is reflected in the shrinking of the ‘tax gap’. “HMRC isn’t finished adding new powers however. It seems likely that it will soon be able to make big businesses inform it in advance if their interpretation of tax law is different from HMRC’s.” He added: “There is nothing wrong with having a different interpretation of the law from HMRC – testing what tax laws actually mean is a vital part of why tax tribunals exist. “Some corporates may see the new power as forcing them to confess to sins they have not actually committed. This notification requirement will add more pressure to tax functions in businesses that are already feeling the strain of the fallout from the pandemic and Brexit.”