The UK government has made tax compliance a key focus, announcing a range of measures aimed at tackling tax avoidance, strengthening HMRC’s enforcement capabilities, and modernising the tax system. From investing in HMRC’s debt management capacity to expanding Making Tax Digital and increasing scrutiny of offshore tax arrangements, these steps are designed to close the tax gap and ensure compliance across the board.
However, while these initiatives may enhance tax collection and deter avoidance, they also present challenges for businesses, individual taxpayers, and advisors. Misguided enforcement, inadequate resourcing, and a lack of support for digitally excluded taxpayers risk creating unintended consequences that could undermine confidence in the tax system.
Chris Walklett, Head of Corporate Tax at Bishop Fleming, shares his insights on these developments, highlighting both the positive aspects and potential pitfalls of the government’s approach. He discusses the need for better-trained HMRC staff, the importance of fair and accurate digitalisation, the impact of offshore tax measures on inward investment, and the need for genuine consultation when reforming penalties and tax advisory regulation.
Re: investment in HMRC’s debt management capacity
“We have called for several years for the government to invest more in HMRC. The commitments to more compliance staff are welcome but proper training needs to go along with that. Over the years there has been a reduction in both numbers of HMRC personnel and the training they receive.
When HMRC undertake targeted avoidance campaigns (such as the recent R&D Tax Credit campaign) these are resourced by staff drafted in from other departments with little or no training. Whilst these measures do catch abusers, they also catch legitimate tax payers who have submitted accurate returns. These poor outcomes cause resentment in the business community and, worse, these erroneous and iniquitous campaign outcomes are recorded as successful counteraction by HMRC which reinforces (inaccurately) their assessment of the appropriateness of the campaign measures.”
Re: Confirmation of the continued rollout of Making Tax Digital (MTD) for income tax Self Assessment (ITSA)
“Digitalisation and automation are critical components of an evolving tax regime. AI can be a powerful tool in triaging tax returns for risk and hence targeting enquiries into those returns. We would support such measures so long as they are used in an appropriate way and that poor (and unjust) outcomes on enquiries are mitigated and do not result in bad data that reinforces the targeting and triaging methods adopted.
The Treasury need to be sensitive to the digitally excluded as they drive to digitalise the tax system, and be conscious that as a result of tax measures announced in recent years (and the associated fiscal drag) more and more people are being dragged unwittingly into the tax net and the need to submit a tax return. These taxpayers are not evaders in waiting but the unwary who will need support, especially if they are in the cohort of the digitally excluded.”
Re: Overhaul of government’s approach to offshore tax non-compliance by the wealthy
“There has been much focus on high net worth individuals and offshore avoidance but there also needs to be focus in the international corporate arena. Many multinational groups are failing to comply with transfer pricing obligations, potentially leading to lost corporate tax revenue. This underlines the need for HMRC to have more resources (and technology) at its disposal, enabling HMRC to collect taxes at current rates as opposed to raise taxes to fill the tax gap.
Measures announced to improve reporting requirements for high-net worth individuals and multi-national corporations are a move in the right direction. The Treasury must use international tax measures with caution, however. We need to attract inward investment not put investors off, or worse, see individuals and businesses move their business overseas.”
Re: The government’s consultation on options to simplify and strengthen HMRC’s inaccuracy and failure to notify penalties:
“We welcome government’s desire to engage with tax payers and regulatory bodies via consultation. It is critical that those voices are heard and that consultations are not just a ruse to support policy in the context of ‘we consulted’.
We would support proposals to strengthen HMRC’s ability to take action against tax advisors who facilitate non-compliance. Many of those advisors are not qualified tax advisors. There needs to be increased regulation of who can call themselves a tax advisor, in a similar vein to the financial services sector.”