UK tax gap increases for wealthy individuals but record low for large businesses

According to figures released by HM Revenue & Customs (HMRC) the ‘tax gap’ for wealthy individuals reached £1.7 billion in the year ending 31 March 2019, up from £1.6bn the year before and £1.3bn in the year to 31 March 2017.

"The jump in the high net worth tax gap is likely to see HMRC react by getting more aggressive in how it investigates wealthy individuals’ tax affairs," Porter said.

"HMRC has a real focus on domicile and residence of high net worth individuals at present, and believes it is missing out on tax that should be paid by internationally-mobile executives. Whilst HMRC has said that the tax residence of individuals stranded in the UK due to Covid-19 won't be affected, extra time in the UK may lead to scrutiny of that person's tax situation more generally," he said.

"While routine audits were suspended for a period during the pandemic, we expect to see HMRC seeking to increase income from investigations quite aggressively once lockdown ends," Porter said.

In contrast, the ‘tax gap’ for big businesses in the year ended 31 March 2019 was a record-low £5.3bn, down from £5.6bn the year before and from a high of £7.6bn in 2005/6.

"HMRC has built a large arsenal of weapons to combat tax underpayment by corporates over the last decade and that is reflected in the shrinking of the ‘tax gap’," said Jason Collins, another tax disputes expert at Pinsent Masons.

"HMRC isn’t finished adding new powers however. It seems likely that it will soon be able to make big businesses inform it in advance if their interpretation of tax law is different from HMRC’s," he said.

The UK government is currently consulting on a plan to make large businesses notify HMRC in advance if they plan on paying tax in a way that differs from HMRC’s interpretation of tax law. If adopted, this requirement will come into effect in April 2021. The consultation was originally due to close in May but the consultation period has been extended to 27 August 2020 as a result of the coronavirus pandemic.

"There is nothing wrong with having a different interpretation of the law from HMRC – testing what tax laws actually mean is a vital part of why tax tribunals exist," Collins said. "Some corporates may see the new power as forcing them to confess to sins they have not actually committed. This notification requirement will add more pressure to tax functions in businesses that are already feeling the strain of the fallout from the pandemic and Brexit."