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Last updated: 15 Feb 2021
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How will HMRC plug the gap in tax revenue caused by COVID-19?

Antony Greenwood, Manager in our Tax Investigations & Dispute Resolution team, highlights how the UK government may intensify action to tackle tax avoidance and non-compliance to reduce the gap in tax revenue caused by COVID-19.

The UK government is already finding itself in the unenviable position of having to contend with the immediate and long term aftermath of the much needed and welcome COVID-19 financial support schemes. Having supplemented the income of millions of people, at a time when GDP has suffered an unprecedented fall and tax revenue is at an all-time low, the government now has to manage a formidable economic scenario.

As the country battles to reduce the reproduction rate, the government is faced with the task of rebuilding the economy, and filling the proverbial coffers. One of the ways in which it hopes to do this is by closing the ‘tax gap’ - the difference between what is collected in tax revenue, and what would be collected if everyone complied fully with their tax obligations.

So what do we anticipate the government will do to plug this critical gap?

About the author

Antony Greenwood

+44 (0)20 7556 1475
greenwooda@buzzacott.co.uk

The UK government is already finding itself in the unenviable position of having to contend with the immediate and long term aftermath of the much needed and welcome COVID-19 financial support schemes. Having supplemented the income of millions of people, at a time when GDP has suffered an unprecedented fall and tax revenue is at an all-time low, the government now has to manage a formidable economic scenario.

As the country battles to reduce the reproduction rate, the government is faced with the task of rebuilding the economy, and filling the proverbial coffers. One of the ways in which it hopes to do this is by closing the ‘tax gap’ - the difference between what is collected in tax revenue, and what would be collected if everyone complied fully with their tax obligations.

So what do we anticipate the government will do to plug this critical gap?

Future compliance activity

Future compliance activity

In the Spring 2020 Budget, prior to lockdown, the Chancellor announced further action to tackle tax avoidance and non-compliance, with the goal of raising an additional £4.7bn between now and 5 April 2025. We’d expect this to be applied across the spectrum of HMRC compliance and investigation teams. Such action is only likely to intensify in the current climate. We anticipate it will include:

  • The recovery of furlough payments that were claimed ‘in error’. Initially, this is by encouraging voluntary disclosures and repayments of over-claims but, as has already been the case, there will almost certainly be fraud investigations, both civil and criminal.
  • The continued pursuit of individuals with undeclared overseas income and gains, and the extremely high (up to 200%) penalties that can be applied in those cases under the Requirement to Correct legislation.
  • A further increase in allegations of deliberate behaviour, which increases time limits, penalties and consequently yield to the Exchequer.
  • An increase in case officers taking, in our view, unreasonable positions in terms of behaviour and penalty assessments, due to internal pressure of increased individual yield targets.
  • The introduction of Financial Information Notices to provide HMRC with access to more information than it has ever had before.

Specific areas that will be in HMRC’s sights over the next 12 months are:

  • Operators in ‘licenced’ industries, due to something known as tax conditionality.
  • The construction industry, with the Construction Industry Scheme set to be overhauled.
The introduction of tax conditionality

The introduction of tax conditionality 

Tax conditionality is a term used for when the renewal of licences is dependent on compliance with tax obligations. Industries that could be caught are: private security, taxis and private hire vehicles, waste management, landlords with houses of multiple occupancy, scrap metal and even retailers and traders.

Under a system of tax conditionality, firms applying for licences to operate will be checked to confirm they are properly registered for tax, including PAYE for any employees. This ensures all such licensed businesses are within the tax system.

The introduction of such a requirement follows a consultation that was held in 2018 in relation to the use of tax conditionality as a way to tackle the ‘hidden economy’. We anticipate tax conditionality will be introduced by virtue of the Finance Act 2020.

Wider applications of the principle are also being considered, with further consultations being planned in relation to applications for government awards, authorisations or grants. The format of such wider applications is currently unclear. However, it would not come as a surprise if all licences, grants and even government contracts were to become conditional upon the business demonstrating complete compliance with tax legislation.

The overhaul of the Construction Industry Scheme

The overhaul of the Construction Industry Scheme

A consultation document in relation to Construction Industry Scheme (CIS) was open for responses earlier this year. The consultation proposed that abuse of the CIS system should be tackled by giving HMRC the power to amend deduction amounts claimed by sub-contractors.

The consultation document stated the long-term objective to be the undertaking of supply chain due diligence by all parts of the supply chain to support compliance. We would assume this means the plan is to mirror the application of the Kittel principle, which HMRC is relying on to recover VAT from the customers of defaulting businesses, or their directors, where it can recover VAT from those businesses itself.

What should you be doing?

Whatever industry you’re in, it’s more important than ever to ensure your personal and business tax affairs are correct and up to date. HMRC is under constant pressure to increase collection of undeclared liabilities and seem increasingly willing to impose harsh penalties and use the full weight of its (comparatively limitless) resources to take unreasonable positions and put undue pressure on customers.

There is no question that HMRC is better equipped to challenge inaccurate tax returns and claims than ever before. Those caught will face severe financial penalties, and potentially even criminal prosecution.

How can we help

How can we help?

If you’re in any doubt as to the accuracy of your filings, or you have received any unexpected contact from HMRC, qualified and experienced expert representation is vital.

Buzzacott’s award-winning Tax Investigations & Dispute Resolution team have built a reputation for making expert disclosures on behalf of clients. Our knowledge of HMRC’s policy and procedures means our clients regularly avoid unnecessary penalties.

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If you'd prefer to speak to our team directly, please call +44 (0)20 7710 3389.

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