Applied tax gap analysis in the United Kingdom
- Its use in tax administration, and future research
Mick Thackray
Knowledge, Analysis & Intelligence
Enforcement and Compliance
HM Revenue & Customs
June 2012
How does HMRC use their tax gaps?
1. Annual publication
2. HMRC Vision & Strategic Objective 1
3. Performance Management
4. Strategic resource allocation
5. Evaluation
6. Future work
Defining the tax gap
•
We define the tax gap as the difference between the tax that is paid and the tax that
we consider should be paid. It therefore includes amounts we consider should be due
in accordance with the spirit of the law as well as the letter of the law.
•
This definition is a product of what we use tax gap analysis for – to assess the threats to the tax
base. Differences over the interpretation of the law can lead to substantial losses in tax against
expected receipts and increase HMRC’s operational costs so are an important part of the picture.
The tax gap
•
On September 21st 2011 the latest estimate of the UK tax gap was published:
http://www.hmrc.gov.uk/stats/mtg-2011.htm It related to 2009-10 and amounted to £35bn or 8% of
theoretical liabilities. This is the net tax gap – ie after HMRC’s compliance activities.
Tax gap broken down by behaviour
Error
7%
Avoidance
14%
Non-payment
13%
Evasion
12%
Hidden economy
12%
Legal
interpretation
14%
Criminal
attacks
16%
Failure to take
reasonable care
11%
Tax gap by tax
Tax Gaps by Tax 2008/09
14%
12%
10%
8%
6%
4%
2%
0%
VAT
Excises
IT/NICS/CGT
CT
In 09/10 VAT had the largest tax gap followed by CT. IT has the smallest tax gap – largely because
the bulk is collected through PAYE. This is not unexpected as research shows that tax gaps are
higher for taxes that do not operate withholding regimes where there is less opportunity to
understate income levels. The tax gap for income tax paid by the self employed is much higher
Publication
•
Published in full in September each year
•
Genuine area of public interest
•
Allows external analysts to understand - and challenge - methodology
•
Official Statistics covered by the UK Statistics & Registration Service Act
•
Current administration’s transparency agenda:
•
Allows public, and parliament, to monitor HMRC’s performance
•
Informs public debate on taxation (fiscal deficit and austerity regime)
•
Counters special interest claims
http://www.hmrc.gov.uk/stats/mtg-2011.pdf
http://www.hmrc.gov.uk/stats/mtg-annex2011.pdf
http://www.hmrc.gov.uk/stats/vat-gap.pdf
http://www.hmrc.gov.uk/research/taxgap-workingpaper.pdf
HMRC Vision and Strategic Objective 1
HMRC Vision
We will close the tax gap, our customers will feel that the tax system is
simple for them and even-handed, and we will be seen as a highly
professional and efficient organisation
Strategic Objective 1
Maximise revenue to close the tax gap
Our objective is to provide the money for public services by maximising
revenue to close the tax gap and improving the extent to which individuals
and businesses receive the credits and payments to which they are entitled
Tax gap - trends
Trends in % tax gap
•
Overall the tax gap fell in
percentage terms between
16%
2004/05 and 2007/08. It rose
14%
again in 2008/09 – largely as a
12%
result of the increasing VAT gap
10%
driven by payment problems
8%
arising from the recession.
6%
•
4%
Note: VAT Gap figures revised in
December 2011
2%
(http://www.hmrc.gov.uk/stats/vat-
0%
2004/05
2005/06
2006/07
VAT
2007/08
Total
2008/09
2009/10
gap.pdf), but tax gap totals not
yet adjusted.
Performance management
Performance Management Framework
•
Reporting framework for HMRC senior management
•
Performance against Strategic Objective 1 reported in tax gap currency:
•
Direct effects of interventions – ‘cash to bank’
•
Indirect effects (Future Revenue Benefit): deterrence and prevention effects
•
Revenue protection: maintenance of tax gaps, eg repayments refused, loopholes
closed
•
Tax gaps themselves are not a target or performance measure
Tax Compliance Risk Overview
•
Comprehensive assessment of compliance risks and issues for HMRC and
HM Treasury senior managers
•
Financial dimension of risk score based on tax gap estimates
•
Link to HM Treasury’s fiscal risk management
VAT: How has the UK done in recent years?
VAT Gap
16%
14%
12%
10%
8%
6%
4%
2%
0%
2002/03
2003/04
2004/05
2005/06
2006/07
VAT Gap
£ billion
2007/08
2008/09
2009/10
20010/11
VAT Gap. less MTIC
2005/06
2006/07
2007/08
2008/09
2009/10
2010/11
VTTL
84.7
88.3
92.1
91.7
79.9
94.7
VAT Gap
11.7
10.7
10.1
11.9
8.5
9.2
Source: Provisional VAT gap estimates: Official Statistics Release, HM Revenue & Customs
December 2011 (NB: mid-range MTIC estimates)
The VAT Gap is only an indicator of levels
VAT gap estimates by year of publication
18%
17%
16%
VAT Gap
15%
14%
13%
12%
11%
10%
9%
8%
2001-02
2004
2002-03
2005
2003-04
2006
2004-05
2005-06
2007
2006-07
2008
2007-08
2008-09
2009
2009-10
2010
2010-11
2011
Compliance Resource Allocation Management
(CRAM)
•
Main purpose is to inform compliance strategy and resource allocation
decisions in Local Compliance, and (under development) Special
Investigations & Risk Intelligence Services
•
Optimal resource allocation decisions require understanding of full impact of
resource changes on compliance behaviour, expressed in tax gap currency
•
Attitudinal segmentation of taxpayers, with conceptual and theoretical
models of compliance behaviour, enable us to use a numerical model
•
Principal uses:
PROTECT
•
HMRC Strategy March 2010
•
Spending Review September 2010 (£917m investment)
•
Ongoing forecasts of Change benefits
CRAM – how it works
Customer Group
Population split by customer segment
• Large & Complex
• SMEs
• Individuals
• Willing and able
• Willing but needs help
• Unaware
• Potential rule breakers
• Rule breakers
INPUTS: HMRC activities
• Risk identification
• Enquiries
• VAT Pre-Creds
• Compliance Centres
• Campaigns
• Civil Investigation of Fraud
• Prosecutions
• Publicity
New resource
deployment
New levels of
productivity
Current tax
gap estimates
• Gross gap per
group / head of
duty
Split by head of duty
• CT
• VAT
• EC
• ITSA
Current levels of activity
• Coverage rates
• Hit rates and audit effectiveness
• Compliance centres
• Evasion referrals (through ERT)
• Pre-Creds
• Publicity and Prosecutions
OUTPUTS
• Average yield per unit
of resource
Current resource deployment
• Resource per activity /
head of duty / segment
New levels of
activity
Behavioural change
Changes to
compliance
yield
New gross
and net tax
gap
Segmentation overview for individuals
Stage 1
Stage 2
Stage 3
Segment 1:
Unaware
Mostly No
aware of
requirement
to comply
Mostly No
Mostly No
opportunity
to cheat
Mostly Yes
Mostly Yes
11%
Segment 2:
Potential Rule
Breakers
11%
Segment 3:
Rule Breakers
4%
motivated
to comply
Mostly No
Mostly Yes
able to
comply
Mostly Yes
Segment 4:
Willing but Need
Help
21%
Segment 5:
Willing and Able
53%
Note: additional segments for organised fraud and payment defaulters
Individuals Segmentation Summary Pack| 13/04/2015 | 14
Evaluation: OECD framework
Effectiveness
(Evaluation)
Cost Effectiveness
(Evaluation)
Observed
Outcomes /
Benefits
Desired Outcomes
/ Benefits
Improvements in
taxpayers’
compliance
Improve confidence
in a revenue body’s
administration
Inputs
Staff and other
financial resources
Activities
Outputs
Education, service,
audit, debt
programmes, etc
Number of
enquiries, audits,
debt cases, etc
Efficiency
(Monitoring)
Positive changes in
taxpayers’
compliance
Positive moves in
expressed levels of
confidence in
revenue body
Outcomes can be viewed over short, medium and long term
Adapted from OECD Forum on Tax Administration: Evaluating the effectiveness of compliance risk treatment strategies
Future work
•
•
Disaggregation or segmentation by:
•
Customer group
•
Customer behaviour
•
Customer attitudes (customer-centric strategy)
Bring up to date via synthesis of:
•
Forecasts
•
Leading indicators
•
Business intelligence
•
Risk Intelligence
•
Engagement with external academics (credibility)
•
Continuing research into indirect effects
Thank you!