UK government “strongly supportive” of HMRC in response to recent Public Accounts Committee criticism

Out-Law News | 03 Mar 2014 | 10:56 am | 2 min. read

The UK government has come out in “strong support” of tax officers at HM Revenue and Customs (HMRC) in its response to several critical reports by the House of Commons Public Accounts Committee (PAC), an expert has said.

Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that it was “rare” for the government to disagree so strongly with a report by the PAC, which has conducted several inquiries into HMRC’s tax collection and settlement practices as part of its remit in relation to UK public spending.

“The government’s response to the PAC report is strongly supportive of HMRC in a number of key areas; particularly the calculation of the ‘tax gap’, and HMRC’s approach to prosecutions,” she said. “We welcome this support, which is in line with our response when the PAC’s report was originally published in December.”

“It is rare for the government to disagree so strongly with a report of the PAC - they disagreed with the recommendations on the tax gap, prosecution policy and the impact of changes to tax policy on business behaviour, as well as recommendations in relation to disaster recovery and tax credit debt. Perhaps the star of the PAC is beginning to wane?” she said.

The government did, however, agree with the PAC’s conclusions in relation to the extent to which HMRC over-estimated how much it could collect from UK holders of Swiss bank accounts as part of the recent agreement between the UK and Switzerland. According to its response, HMRC is contacting every person whose details were disclosed under the agreement to ensure that all tax which should be paid is paid.

In its December report, the PAC was particularly critical of the methods used by HMRC to calculate the annual ‘tax gap’, a rough measure of the difference between the amount of tax owed to HMRC and the amount actually collected. It said that by not gathering information about how much potential tax revenue is lost through “aggressive tax avoidance”, HMRC had underestimated the amount of money actually lost to the Exchequer.

The PAC made a number of recommendations which it said would enable HMRC to demonstrate more clearly that is “deals robustly with individuals and companies who deliberately mislead it”. It recommended that the department pursue large international businesses and individuals that “knowingly mislead or withhold information” more aggressively, and to be more explicit about the limitations of its current measure of the tax gap.

However in its response, given in the form of a Treasury minute, the Government rejected the PAC’s recommendations. It backed comments made by both HMRC and tax expert Heather Self of Pinsent Masons at the time of the PAC’s initial report, pointing out that the tax gap was not a measure of “how much tax might be paid if tax laws were different”.

“The tax gap definition, calculation and the limitations are described in detail in the departments’ annual tax gap publication,” it said in its report. “The tax gap measures compliance with existing tax law and is informed by the intelligence the department gathers on the use of avoidance schemes.”

It also rejected criticisms of HMRC’s prosecution policy, stating that the department “already demonstrates firm action against those who cheat the system”.

“It deploys its criminal capabilities, as part of a wider compliance approach and in line with its customer strategy to tackle losses and change behaviours of those targeted,” the government said. “When the behaviour of a taxpayer merits the use of criminal powers the department uses those powers.”

“The department already makes extensive use of behavioural insight when formulating policy advice and designing tax legislation, and it continuously improving how it does this,” it added later in the same report, in relation to criticisms of HMRC’s handling of the impact of tax policy changes on business behaviour.