The House of Lords Economic Affairs Finance Bill committee has now published its report on Making Tax Digital (MTD). I submitted written and oral evidence to the committee earlier this year. There is much to commend in the report, but I want to focus on its finding on the tax gap. As their Lordships note:
HMRC's case [for MTD] appears to rest on three propositions:
(1)that a substantial proportion of the ‘tax gap'–the difference between the amount of tax that should, in theory, be collected by HMRC, and what is actually collected–stems from taxpayer errors, or a failure to take due care, when completing tax returns;
(2)that a disproportionate amount of such errors are committed by smaller businesses; and
(3)that requiring such businesses to keep digital records, on a timely basis, proven by making quarterly updates, will improve the quality of the information submitted to HMRC, thus reducing the annual loss of tax due to error and a failure to take due care.
According to HMRC's latest estimates, the total tax gap amounts to £36 billion or 6.5 per cent of total direct and indirect tax liabilities. Professor Richard Murphy challenged HMRC's methodology, arguing that the figure is an underestimate. For the purposes of this report we use HMRC's estimates of the overall gap.
They also noted:
Most of the evidence submitted to the inquiry challenged HMRC's analysis of the behavioural effects of the measures arguing that the estimated tax gap reductions would either never materialise in full or might even go the other way.
Some argued that, to the extent that record-keeping would improve, the result would not necessarily be in the Exchequer's favour.
The Chartered Institute of Taxation (CIOT) commented that they were not convinced that MTD would help close the tax gap because “businesses will make mistakes, both during the transition, and thereafter.”
Professor Murphy was particularly critical about the impact of the quarterly update requirement considering it would “increase the error rate”. He pointed out:
“People who are forced to prepare accounts in a short period of time tend to make a lot more errors than people who have a little more time to get the thing right … there will be an inclination … for people simply to dump in estimates to meet a deadline for submission when there is a penalty attached to it.”
And they conclude:
We do not share the confidence of HM Treasury and HMRC in their estimates of the tax gap reductions from the introduction of MTD from April 2018. On the evidence presented to us, those estimates appear very fragile and little more than guess work. They rely heavily on the untested proposition that sufficient numbers of taxpayers currently making errors will provide HMRC with correct information as a result of adopting digital record-keeping and quarterly reporting and that on balance changes would be in HMRC's favour. At this stage we regard those estimated tax gap reductions, the main drivers for the mandating the new obligations, as not yet proven.
That's pretty damning. And I think it is right.
But I also make another point. Earlier this week I pointed out that HMRC estimates may be critical to debate on Scotland's future. I was told by many unionists in Scotland that it was wholly inappropriate for me to question the objectivity of HMRC. Respectfully, the evidence is that HMRC is not too good at objectivity but is instead rather good at making politically motivated estimates to appease its political masters. Their Lordships agree. They should on the tax gap as well.
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I suppose your estimates are not politically motivated at all? It is obvious from your various posts that you hate the Tory party with a vengence.
Is that why when I was asked by the Tories to serve on a Treasury committee I did?
Well, Nye Bevan was undoubtedly correct about the Tories as the current sorry bunch are showing us day by day…
Just my personal opinion, of course.
That’s a strange comment Stephen this isn’t a case of hatred it’s merely trying to recognise reality. The key ingredients of a tax system have to be that the correct amounts are paid at the correct time. If this isn’t happening then either the collection process is flawed or the taxes are unreasonable.
There should not be any politic involved in reporting accurate numbers.
Bit of a shallow argument. If Richard’s motivation was based on Tory dislike he could have picked on a miriad of other conservative failings. Faced with the incontrovertible facts that Richard has highlighted with Making Tax Difficult, I would suggest that your accusation is pretty lame. In fact, your insubstantial and evasive reply has led me to think that you may be Jim Harra, in disguise.
As any reasonably well-informed individual would, Stephen, given the malevolence they inflict on all who are not “one of us”.
Mr Tyler
Would you like to name any, I mean any, statistics that are prepared entirely neutrally without any political bias?
When presented with facts that they can’t disprove, or just don’t want to believe, some people will resort to attacking a persons qualifications or beliefs.
Am I missing something? Where do their lordships say that they agree with you – as you say they do – about there being political motives behind this?
They say they di not trust HMRC’s estimate in support of an HMT policy
They said the basis was crap. HMRC said the basis for other impact assessments were crap too.
….and that was somehow a great basis for saddling everyone with a poorly thought, rushed and expensive millstone.
That costs £1.3 billion and won’t make a jot of difference to the tax gap.
Precisely
Which is all that matters
The inference was, as I suggested, that they think HMRC is not too good at estimates
Also from the same report:
“According to HMRC’s latest estimates, the total tax gap amounts to £36 billion or 6.5 per cent of total direct and indirect tax liabilities. Professor Richard Murphy challenged HMRC’s methodology, arguing that the figure is an underestimate. For the purposes of this report we use HMRC’s estimates of the overall gap.”
This means they didn’t find your arguments or evidence convincing, Richard.
That is your interpretation: you are welcome to it
ALternatively they noted two claims and chose to use the lower. I am quite happy with that
The problem seems to be all yours. I am entirely untroubled
Paul
No. They said that the difference between RM’s & HMRC’s figures was not necessarily relevant to the point at issue which was the efficacy, or otherwise, of MTD.
Had they doubted RM’s figures they would’ve said something like; According to HMRC’s latest estimates, the total tax gap amounts to £36 billion or 6.5 per cent of total direct and indirect tax liabilities. Professor Richard Murphy challenged HMRC’s methodology, arguing that the figure is an underestimate. We found HMRC’s estimates more persuasive.”
They also noted that estimates that were being made could easily be overestimates, rather than always being in favour of HMRC. Thus the Tax Gap could be much lower than that suggested by HMRC which certainly challenges the credibility of your estimates!
Have you noticed what a small part of the tax gap errors are?