INTERNATIONAL
Monetary Fund's (IMF's) staff has advised the United Kingdom's Her
Majesty's Revenue and Customs (HMRC) to distinguish between compliance
and policy components of tax avoidance schemes in assessing the tax gap.
This
recommendation forms part of the IMF Country report captioned ‘ United
Kingdom: Technical Assistance Report — Assessment of HMRC's Tax Gap
Analysis' that was released on 22 October.
It
has recommended that HMRC should report both the gross gap and the net
gap in addition to the anticipated net gap to enhance reporting. The
report says: "Reporting both gross gap and net gap estimates would improve performance measurement."
The
report has concluded that the HMRC's tax gap analysis program is
comprehensive in tax coverage, effectively addresses its multiple
dimensions, and work is ongoing to enhance its support to HMRC
management. Tax gaps are estimated for most of the taxes administered by
HMRC.
As put by the report, "HMRC produces one of the most comprehensive studies of tax gap estimates internationally."
IMF
staff prepared the report in response to request from HMRC's for
technical assistance in the realm of tax gap analysis. The background to
the IMF report is HMRC's Vision Statement in the HMRC's Strategic Plan
2012–2015. As put by the Strategic Plan, "We will close the tax gap,
our customers will feel that the tax system is simple for them and
even-handed, and we will be seen as a highly professional and efficient
organization."
The
report explains that the tax gap is the difference between current and
potential collections as is commonly defined by experts. Under this
definition, the term ‘tax gap' tends to describe the difference between
the actual tax collections and the tax collections a revenue
administration should collect given the current policy framework
(potential collections).
It has also called for creation of a proper accruals report for VAT revenues. IMF staff believes that "Better data are needed for the amount of VAT collected on inputs into exempt supplies."
As
for assessing direct tax gaps, the report has recommended that
segmentation of taxpayers in random enquiry programs, and projection of
results, should be based on risk profiles. The practice of excluding
outliers from random audit samples should be reviewed.
The report's other recommendations include: "Wage-levels
assumed for ghosts and moonlighters estimates need a stronger basis.
Targeted audit results should be used for checking tax gap estimates and
assumptions."
The
report has suggested that HMRC should continue pursuing the use of tax
gap to support resource allocation to tackle noncompliance.
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