Tackling the tax gap

According to HMRC data, in 2022/23, the UK’s tax gap surged to a record £39.8 billion, with small businesses accounting for nearly two-thirds of unpaid taxes.

The tax gap, which represents the difference between the tax that should be paid and what is actually paid, stood at 4.8%. For small businesses, the corporation tax gap rose to £10.9 billion out of the total £13.7 billion corporation tax gap. 

With the Labour government in power for the first time since 2010, their manifesto includes a ‘Close the Tax Gap’ document, outlining potential changes to address this issue. The Labour Party aims to raise an additional £5 billion annually by 2029/30 by reducing the tax gap through several proposed measures: 

• Legislative Changes: Suggestions include expanding the UK’s Disclosure of Tax Avoidance Schemes (“DOTAS”) rules and simplifying the tax system. No details have currently been provided, but this is an area to keep an eye on. 

• Tackling Downstream Non-Compliance: Using part of Labour’s proposed £555 million in additional funding, HMRC will focus on addressing non-compliance among the most complex and high-value taxpayers, such as large businesses. Labour also plans to allocate funds specifically for strategically important criminal cases to serve as a deterrent and to improve offshore compliance. 

• Supporting Upstream Compliance: Some of the additional funding will also be used to help taxpayers avoid unintentional errors. Plans include technological improvements, with an additional £300 million per year added to HMRC’s capital budget. 

This funding is to allow for the recruitment of 5,000 new compliance staff, further increasing the number of enquiries and compliance checks conducted. 

Persons of Significant Control (“PSC”)

HMRC’s Wealthy Team is issuing “nudge” letters to individuals registered as PSCs of limited companies. These letters are not formal compliance checks but aim to verify if individuals are required to complete self-assessment tax returns for the 2022/23 tax year in line with the guidance. The letters contain information on failure-to-notify penalties and potential behavioural penalties. 

While these letters are not formal checks, the consequences of non-compliance can be severe for PSCs with a tax reporting requirement. Recipients of the first letter have until 23 August 2024 to register and submit their returns. Given the time required for HMRC to issue a unique tax reference number, many may struggle to meet this deadline. However, registering promptly demonstrates compliance, which may mitigate potential penalties. 

The letter also states that if HMRC discovers an error in a submitted return or identifies that a return should have been submitted, it may initiate a compliance check. If a return has not been submitted, HMRC can raise a determination, estimating the amount of tax due and collecting that amount.  

Compliance checks and determinations can be lengthy and costly, making it essential to address these letters properly. Seeking professional assistance can help ensure that you meet compliance requirements and craft an effective response, potentially reducing the risk of penalties. If it’s determined that a self-assessment is not required, a well-prepared response can further mitigate the risk of HMRC issuing a determination. 

Construction Industry Scheme (“CIS”)

HMRC has also initiated a new ‘nudge’ letter campaign targeting insurers who may be commissioning construction work. These letters are directed at businesses operating directly or through a loss adjuster. The objective is to remind businesses of their obligations under the CIS and to increase the registration of large insurance companies as ‘deemed contractors,’ thereby enhancing overall tax compliance in the sector.  

The letters highlight that insurance sector groups commissioning ‘construction operations’ and spending over £3 million within any rolling one-year period must register as ‘deemed contractors.’ These ‘deemed contractors’ have 90 days from the date of the letter to register for CIS, start making deductions from contract payments, and fulfil other CIS obligations. Failure to comply may lead to HMRC opening compliance checks. If errors are found, any disclosures will be treated as prompted, and penalties will be calculated accordingly. 

The CIS is a complex area of taxation, and ensuring correct compliance is crucial. Engaging an expert when dealing with HMRC can help navigate these complexities strategically, ensuring issues are resolved as quickly and effectively as possible. 

If you have any questions about any of the topics raised or would like to discuss any areas of dispute, then please reach out to your normal Kreston Reeves contact or email taxdisputes@krestonreeves.com.