In my new report 'In the Shade: the UK's missing economy' I suggest that HM Revenue & Customs are lax, in the extreme, in their efforts to collect corporation tax. As evidence I have shown that they fail to ask for corporation tax returns from at least 650,000 companies who might be due to make them each year. I also show that in the last year surveyed at least 270,000 companies failed to submit corporation tax returns. Despite this HMRC told the Guardian:
We don't recognise the estimate of tax lost to companies. We are extremely good at identifying companies which need to send in a tax return, pursuing overdue returns and generally protecting tax payable when a return doesn't appear.
I have shown just how ludicrous this claim is this morning. Over a four year period 99.9% of the value all tax penalties issued by HMRC for late submission of corporation tax returns were not paid or were written off for one reason or another. Now I accept that is in part because of a coincidence of accounting data but in the most generous interpretation possible 11% of penalties were paid - and that interpretation is probably far too generous to be true.
In that case the evidence is very clear indeed: HMRC fail to find almost any of the corporation tax returns not submitted to them. And they fail to collect the penalties due. So it is almost certain that they fail to collect the tax due as well, which is, of course, what I suggest in my work. In that case corporation tax has become, in effect, an honesty box tax for those who are willing to submit their corporation tax returns, with the rest being given the choice of opting out of the system.
I explained one way in which that opting out could take place in the report, suggesting that when HMRC send an enquiry form to a new company they ask whether or not it intends to trade and if a negative answer is given they then do not send it tax returns for five years - which I described as a licence to defraud HMRC. However, a commentator on this site, who seems to know what he or she is talking about, has said that this is now out of date (I have edited two comments together):
The position that HMRC took until maybe a couple of years ago was that, if a company failed to notify accounting dates or dormancy within 3 months of incorporation, HMRC would assume that the company was active and set up live accounting periods from the date of incorporation (until informed otherwise.)
The current, up-to-date position is the exact opposite. Companies (truly dormant or otherwise) no longer have to tell HMRC they are not trading. If HMRC don't hear anything back within a few months of the issue of the CT41G letter, HMRC assumes that the company is non-trading, note the record as dormant and no notices to deliver returns are issued.
When quizzed about this HMRC management repeat their mantra that lots of newly set-up companies never actually trade and it is a waste of time and resources (i.e. jobs) to keep maintaining records on such companies. When challenged about the evidence of their assertion (e.g. a proper study, some statistics) they hide behind their favoured management-speak.
If that is the case then this is pure madness: corporation tax will have become an 'opt in' tax system. Unsurprisingly tax evaders will choose to opt out, and HMRC may be letting them do just that.
If this is true (and comments would be welcome, please, including from HMRC) then this is recklessness, in the extreme, with public revenue.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
In my experience honesty boxes tend to get nicked as soon as anyone puts money in. What I fear is that the horse has bolted and may now be too far down the motorway to be caught. The question then is which lorry will flatten it?
I agree that it does appear to create a troubling loophole if that is the process HMRC have adopted, but how many would-be evaders would plausibly exploit such a loophole? If you’re going to operate as a ghost, wouldn’t you just do so as a sole trader, rather than create a risky paper trail by trading through a company?
Please excuse my naivety if I’m missing something.
Better to be a limited company by far
Usually can be arranged so there is no trace back to real owner and it can just be got rid off when tax authorities then forget it
Not so if done in own name
Fair point. Of course you’re right that layers of ownership for this purpose. It had been a long day. 🙂
Of course you are right RM- where have you been? This applies across other taxes too. I can assure you that HMRC does not even getting the basics right.What is more most (not all) Accountants peddle the myth to their compliant clients that HMRC will check this or that as a deterrent – it’s all hokum.
However some companies do opt in for CT, largely because they want to claim VAT refunds. Not that they necessarily ever pay CT, as HMRC may be asking for some VAT to actually be paid and thinking about stopping the VAT refunds by the time it is due. Then it’s time to close that company and run the business through another vehicle. The VAT officers who stop the refunds play an important role in fighting the tax gap, and will of course claim the stopped refund as yield.
Buy are those stopping the refunds losing their jobs?
Yes, HMRC is getting rid of lots of compliance officers, including people who do this job.
Thought as much…
And it’s lack of staff that explains why HMRC is happy just to have stopped the refunds without ever having pursued the VAT payable.
“I have shown that they fail to ask for corporation tax returns from at least 650,000 companies who might be due to make them each year.”
yes, ‘might’. But the vast, vast majority won’t need to.
In many on the groups of companies I act for there are dormant companies, some historical leftovers, some formed to protect names, some with projects planned that might or might not come off. I am sure anyone still active in the tax/accounting scene will say likewise.
If you want to put HMRC and us to the trouble of issuing hundreds of thousands of returns which will be returned nil, fine but it’ll not bring in a penny in tax.
As mentioned elsewhere, evaders are trying the keep a low profile. Forming a company, having a registered office and announcing who the directors and what their home addresses are to Companies House hardly amounts to a low profile. Any company formed at Companies House is now automatically notified to HMRC who will write requesting information. I’m sat here looing at just such a request.
As usual, with no actual evidence, a lot of “what ifs” and “supposeds” and extrapolations you have created a scare story out of nothing.
You might as well run a story that with around 48 million adults in the UK and only 8 million self-assessment tax returns issued, there is a scandal over 40 million people who MIGHT be self-employed or have other hidden income.
My research allows for there being 1.5 million dormant companies in the UK
And bluntly: if you have a company you should submit a return
Please tell me why not?
More than that though – forming a company is the most anonymous way to trade in the UK – you need never appear to have anything to do with the trade by use of cheap nominees. If you do not know that please acquaint yourself with the facts
As for that letter you refer to – look at my post this morning
There are no what ifs here – just a certainty of evasion
Please do not stick your head in the sand. After all – I based all my claims on HMRC evidence that there is massive unrecorded trade. Why do you wish to deny it? What’s your motive for doing so? Please explain
“I based all my claims on HMRC evidence that there is massive unrecorded trade.”
I am not denying that there is unrecorded trade just asking what EVIDENCE you have that this is being carried out by companies?
“if you have a company you should submit a return Please tell me why not?”
Because it would be a bureaucratic nonsense to expect a million+ dormant companies to incur the cost of filing a tax return and HMRC to administer them. You seem to forget that companies are already obliged to file dormant accounts at Companies House and so are notifying that they remain dormant with one Government body already.
And if as you suggest there is mass evasion going on by companies, with the individuals already filing false accounts at Companies House, why would they not just file false accounts with HMRC? You make suggestions as if they were magic wands but this would achieve nothing.
What would be achieved by tying up HMRC resources to administer a million+ genuine dormant returns when those resources could be used in active black economy work?
If in your post you have the certainty of evasion, you should forward this to HMRC.
Do, please acquaint me with the ‘facts’ on these cheap nominees. There must be an army of them to deal with 600k+ companies. They will of course themselves be visible to HMRC and Companies House. If you have EVIDENCE you will no doubt have passed it to the authorities. If on the other hand you have nothing but conjecture, theory and hearsay, you will no doubt confine writing about them to your website.
Where have I denied that there is unrecorded trade? Please do not put words in my mouth.
Finally if you are assuming that all companies listed at Companies House as ‘active’ are actually trading, that is simplistic. Companies House base this on SIC codes which are often either historic or based on intention.
You seem not to have noticed my post this morning: the Revenue assume a company is not trading when it has a PAYE scheme
And not have you noticed that I have made a practical recommendation that banks advice which companies have accounts: then we might have a good idea which are trading
Instead you go in for assertion and ignore the mass of evidence I present
Respectfully, just as you have a problem with accepting responsibility for your actions (having a company does give rise to responsibilities) so you also appear to have a problem with discriminating between evidence and myth – the latter being all yours
But if in doubt: if there was no problem with nominees why did the ULK government and G20 make this such a big issue? Was it all really on my say so? Maybe, but I think not