Out-Law News 1 min. read

HMRC 'tax gap' from PAYE and self assessment up by almost 10% in a year


The amount of tax lost to potential avoidance and evasion that should have been collected through pay as you earn (PAYE) and self-assessment has increased by almost 10% in a year, according to the latest figures from HM Revenue and Customs (HMRC).

The self-assessment 'tax gap', meaning the difference between the amount of tax which should in theory be collected by HMRC and what was actually collected, increased by 5% to reach £4.6 billion in 2013/14, according to HMRC's own figures. At the same time the PAYE tax gap reached £3.9bn, up by 15% from £3.4bn in 2012/13, according to the figures.

Tax expert Fiona Fernie of Pinsent Masons, the law firm behind Out-Law.com, said that HMRC was likely to "continue its focus on investigations into individual taxpayers" to plug the increasing gap. Recent figures obtained by Pinsent Masons showed that HMRC is now conducting more investigations into suspected underpayment of employment taxes than ever before, she said.

"With a deficit to plug, HMRC is likely to focus on High Net Worths who may have significant assets held offshore in complex structures – these kinds of investigations are likely to yield high returns," she said.

"The Revenue is increasingly making use of retrospective legislation, meaning anyone who feels that their tax affairs - past or present - could place them at risk of investigation should now seek advice," she said.

HMRC opened 2,488 'employer compliance reviews' over the year ending 31 March 2015, a 13% increase on the 2,197 it conducted in 2013/14, according to figures recently obtained by Pinsent Masons. HMRC uses employer compliance reviews when it suspects that a business is underpaying employment taxes, and it can levy fines of up to 30% of the tax owed even in cases of genuine human error.

Employment tax expert Chris Thomas of Pinsent Masons said previously that these investigations gave HMRC the chance for 'easy wins'. This was "partly because the rules can be complex to understand and very fact-specific, but also because it generally involves a lot of different stakeholders across the business and there is a lot of opportunity for things to go wrong", he said.

Fiona Fernie said that the reported increase in investigations also made sense against "a rising PAYE tax gap".

"Businesses need to ensure that they fully understand and abide by rules on what should and should not come under PAYE," she said. "The Revenue has been clamping down on schemes which allow the avoidance of big tax bills on a variety of different types of payment to employees, or those who should be treated as employees but aren't."

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