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HMRC has issued a document which discusses methodology issues in estimating
direct tax losses and sets out HMRC’s approach to improving their ability to
measure such losses. The “losses” referred to are those arising from
non-payment and submission of incorrect returns. This clearly includes error
and deliberate understatements; but it is not clear whether avoidance is
included as it is not mentioned in the document.
The measurement of these direct tax losses is extremely difficult; HMRC note
that no tax authority routinely publishes comprehensive direct tax loss
estimates.
One technique currently adopted by HMRC is to carry out “random enquiries”
whereby samples of taxpayers are selected at random and their returns
subjected to full enquiries by HMRC officers. This programme gives
information about taxpayers under-reporting their tax liabilities, and the
corresponding amount of the additional tax due. The results can be used to
produce a figure for tax losses for the whole population because the
enquiries are randomly selected and form a representative sample. This
method is used in the USA but the sample sizes are much larger and therefore
the estimates are more accurate.
HMRC report that progress is being made but there are a number of key areas
where HMRC does not yet possess robust methodologies. Therefore HMRC is
attempting to develop a range of measurement techniques that cover all types
of direct tax loss across all taxes and taxpayers. For example, HMRC plan to
use their risk assessments on large businesses, which are recorded on a new
management information system, to help understand the size of direct tax
losses. HMRC also want to use the effective tax rate shown in company
accounts as a technique to estimate direct tax losses.
Our view
It is helpful for HMRC to publish their methodology. However it merely
confirms what had been thought, namely that considerable further work is
needed to help HMRC determine the size of the potential tax losses due
to incorrect returns. |
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