Tag Archive | "tax gap"

Tax Evasion: It’s All Greek To You AND The Taxman

Today’s article was going to be all about the differences between the UK and US tax systems. Set against the backdrop of the Greek tragedy, it may have given contractors and freelancers some hope that HMRC (and the IRS) are getting some things right.

Why write an article that uplifts the spirits when those accused of exorcising any hope are so clearly guilty?

Well, that’s just the point. With so much of the buzz around the Exchequer about how it’s going to screw limited company contractors for the deficit in taxes, self-employed people need that lift.

The research started well enough. A pleasant read on Bankrate.com explained that tax evasion is not limited by international boundaries. In the Med/Aegaen, the sport of dodging the taxman may have become “Greece’s national pastime”, and indeed be the reason that the country’s economy is the lame man of Europe.

But the fact is, everyone’s having a go.

The Global Threat of Tax Evasion and Avoidance

Tax avoidance in the US is between 83-85%, the additional 2% coming after a friendly nudge from the IRS. Bang, that was one of my points nailed.

I then found another friendly article on Sollertia, this one providing an overview of the differences between HMRC and the IRS. Yes, that’s what I needed. It points out the differences of our tax systems, but something struck me as odd.

The Bankrate.com article suggests that Americans don’t want the IRS to transform from an ambivalent overseer to a tax enforcement agency. The Sollertia article then suggested that the US method of collecting taxes is even more complex than that imposed by HMRC.

A conflict of opinions? Or a different attitude to taxation?

Could a more relaxed attitude to taxes encourage taxpayers to be more forthcoming?

Heaven knows, trying to crack down on tax caused Harry Theoharis to quit the role he assumed in Greek parliament before he’d been in it a year and a half. Death threats and warnings from those in government to ease up on the wealthy would do that to you, I guess.

Well, God bless everyone in the Land of the Free, where pundits forecast 50% of workers to be self-employed by 2020. They must have undying faith in their government that their taxes are going towards just causes.

Until this week, there was a similar forecast for self-employment in the UK labour market: half of the workforce to be their own bosses by 2020. But ONS figures published on Friday saw a huge drop of 131,000 self-employees year-on-year. Perhaps Britizens don’t have the blind faith engendered by our US cousins.

The tax gap – is it really unfathomable?

Looking to end my confusion, I turned to the one man I know who’d give me a no-bull answer on the difference in the tax gaps across the Atlantic: Richard Murphy.

As if it was written in the stars, his most recent publication (and he writes 3-4 blog posts per day) was bang on the money. Entitled The National Audit Office, the tax gap, HMRC and ‘other estimates’, it promised to fill in the missing blanks for my article here.

The problem is, it seems that HMRC has so many holes in its own calculations, any estimates the NAO can give are ‘wishy-washy’ at best.

You must go and read Richard’s article to see the extent of the problem. The more worrying thing for contractors is this: when justifying the amount HMRC is going to take from you, they have no real benchmark.

They don’t know the deficit they need to make up in the tax gap. They don’t even know if their estimates are close, despite the IMF encouraging them to take America’s lead in how they work out how much they are due.

The Exchequer believes it needs protecting from £430M of tax avoidance from disguised employees masquerading as limited company contractors and freelancers. To me and you, that may seem like a drop in the ocean.

For the taxman? Trying to work out how much evasion is happening here in Blighty is a ship that’s already sailed…

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How much does the UK really lose to tax avoidance each year?

HMRC says that Tax Research UK’s claims that tax avoidance in the UK is currently running at £120 billion a year are very misleading.

The Revenue says this claim has caused concern and confusion, especially as it estimates the tax gap to be £35 billion. Furthermore, HMRC stresses that it collects more than 90% of all the tax that is owing to the Exchequer.

HMRC has produced a report for MPs in which it explains that the disparity is due in part to the estimates not being directly comparable because their definitions are different. Despite that, the £120 billion is misleading because it confuses the tax gap with legitimate reliefs and cash flow in certain areas.

For example, the figures from Tax Research UK do not take the yield from direct tax compliance into account and that totalled £13.9 billion in the financial year 2010-11.

The report ended by saying that measuring the tax gap was not a precise science, but the Revenue is confident that a tax gap of £35 billion is a much more accurate estimate than £120 billion.

The government has been trying hard to clamp down on tax avoidance and close any loopholes as soon as they are discovered. Honest taxpayers would no doubt be very distressed if they thought £120 billion a year was still slipping through the net when a lot of people are struggling to keep their heads above water.

We will never know the true extent of UK tax avoidance, but we must hope that the government closes the gap further in the near future.

© 2012 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: UK Pounds being washed down the bath by Images_of_Money

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Contractor accountants may see more of their clients’ records checked

Earlier this year, HMRC began a pilot scheme to check the business records of small businesses.

800 SMEs, in eight areas, were included in the test and the Revenue discovered that 44% had issues with record-keeping. The pilot also discovered that 12% of the businesses it visited kept seriously inadequate book-keeping records.

HMRC has now said that it intends to step up the scheme and complete as many as 12,000 checks before the end of this financial year in April 2012. In the year 2012-13, it will carry out the checks on 20,000 small businesses.

To begin with, only firms that have kept extremely poor records be fined, but over the longer term serious inadequacies could lead to penalties of up to £3,000.

Richard Summersgill, the director of local compliance at HMRC, explained that good record-keeping enables companies to pay the correct amount of tax when it becomes due and SMEs that comply will avoid interest and penalty charges.

The Revenue says the new checks are designed to support businesses and reduce the tax gap but the CIoT is seriously concerned that the programme is to be extended.

Anthony Thomas, the president of the Institute, said it was questionable whether the Revenue has the power to penalise companies before tax returns are sent in. He went on to say that there could be misunderstandings over what constitutes adequate records rather than incomplete ones.

Thomas cited as an example the Powers team at the Revenue saying that a shoebox full of receipts and invoices was adequate in-year but the compliance team saying that unless they were listed, it was a case of inadequate record-keeping.

John Cassidy from PKF said that HMRC should focus its activities on areas that bring in an immediate cash return such as PAYE. The Revenues records show that errors and underpayments of PAYE have increased and yet compliance checks have virtually stopped.

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: The Nose by lamcopphis

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Tax gap shrinks but we shouldn’t become complacent

The tax gap shrunk slightly to £35 billion over the last 12 months, according to the latest data from HMRC.

In the financial year 2009-10, the amount of tax that remained uncollected due to tax avoidance and evasion was 7.9%, down 0.2 percentage points on the previous year. Whilst this might sound like a lot, it is actually lower than a lot of countries who publish tax gap data.

David Gauke, the exchequer secretary to the Treasury, said that HMRC continues to show good progress in closing the tax gap, but we must not become complacent. Over the last few weeks offshore tax evaders have been challenged, tax avoidance loopholes closed and a new unit set up to make sure the UK’s richest individuals pay the tax they owe.

However, some tax experts say it is difficult to get a realistic assessment of the size of the problem because HMRC uses tax figures that are four years old in its calculations.

Heather Self, from McGrigors, said that calculating a tax gap for VAT was simple, but when it comes to direct taxes like corporation tax and income tax, it’s a different story.

She went on to say that the Revenue must make sure it does not trample on innocent taxpayers. Over the last few years, HMRC has made some errors and become more heavy-handed and she is concerned that the added pressure to reduce the tax gap may see it adopting a blunderbuss approach.

HMRC loses £6 million a year due to simple errors and carelessness on the part of taxpayers, according to the CIoT. This news led the Institute to recommend all small businesses seek professional help when it comes to bookkeeping.

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: SIze conspiracy by sporkist

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