1.On the basis of a report by the Comptroller and Auditor General, we took evidence from HM Revenue & Customs (HMRC) on its performance in 2015–16. HMRC collected £536.8 billion of tax revenues in 2015–16, some £19.1 billion more (3.7%) than in 2014–15, and paid out £40 billion in benefits. While HMRC’s running costs increased from £3.1 billion in 2014–15 to £3.2 billion in 2015–16, the cost of collection fell from 0.58 pence per £1 revenue to 0.55 pence in 2015–16. HMRC is introducing major changes to how it works to make greater use of digital services and reduce its costs. Its stated vision is to have “one of the most digitally advanced tax administrations in the world”.
2.HMRC estimates that it achieved a compliance yield (from tackling those who seek to avoid or evade their tax liabilities) of £26.6 billion in 2015–16 against a target of £26.3 billion. The compliance yield calculation draws on a range of different measures of revenue generated or losses prevented, all of which involve a degree of estimation and uncertainty. HMRC’s latest estimate is that the tax gap (the difference between the amount of tax that should in theory be collected and what is actually collected) in 2014–15 was some £36 billion. While there has been a downward trend in the tax gap over the last 10 years from 8.3% in 2005–06 to 6.5% in 2014–15, it has levelled out in recent years.
3.We asked HMRC about the revisions it makes to its estimates of the tax gap for previous years. HMRC told us that revisions to prior year data were made to reflect new information becoming available to refine the assumptions behind some of the calculations. HMRC noted that it only used tax gap estimates to consider long term trends and did not assign much importance to year on year movements. HMRC also told us that it used the tax gap data to inform its “strategic picture of risk”, which helps determine the type of compliance work the Department should undertake. HMRC also referred to options under consideration, such as reporting tax gap estimates with a range of uncertainty around the central estimates, to improve the usefulness of the measure.
4.We asked HMRC how far it could realistically reduce the size of the tax gap. HMRC told us that a zero tax gap was unattainable as there were factors, such as businesses going bankrupt before tax due is collected and certain elements of the hidden economy, which it could never hope to eliminate. HMRC does not set itself any tax gap targets to meet as it treats the tax gap as a backward-looking measure of how it has performed. However, HMRC agreed to consider what minimum level for the tax gap might be achievable.
5.HMRC told us that, while there should be some consistency between its reported compliance yield and the size of the tax gap over a period of time, it was not possible to quantify the relationship between the two measures. We questioned whether HMRC’s compliance yield targets were stretching given that it had exceeded its targets for the past two years. HMRC’s compliance yield targets are agreed with HM Treasury on an annual basis. The Department recognised that its compliance yield measure was not an exact science and was based on a number of estimates. HMRC accepted that it should retrospectively evaluate the accuracy of its estimates based on the outcomes achieved.
6.We asked HMRC about the impact expected from the new requirement for multinational companies to provide information on their activities on a country-by-country basis which came into force earlier this year. HMRC noted that country-by-country reporting would provide it with better data on where multinationals were raising their revenues. The data would also inform HMRC’s risk assessment and selection of cases for investigation. The Department told us that if country-by-country reporting data indicated that businesses had not paid the correct amount of tax it would investigate. HMRC estimated that the introduction of country-by-country reporting would result in about £45 million of additional tax yield.
7.The country-by-country reporting that has been agreed is for information to be supplied on a confidential basis, as this was the only basis on which some countries would agree to adopt the new initiative. The Finance Act 2016 gave the Government the additional power to introduce a public country-by-country reporting requirement for large multinational companies. This power was adopted after work by members of the Committee to promote an amendment to the Finance Bill on the issue. The Government supports the view that country-by-country reporting should be public but believes that it should be implemented on an international basis or, failing that, on a multilateral basis. The Government is committed to working with international partners to reach agreements on a multilateral basis. Ideally, the Department would like to see public country-by-country reporting agreed internationally as a global standard.
2 C&AG’s Report, , Session 2016–17, HC 338, 12 July 2016
3 , Figure 4 and HM Revenue & Customs, , HC 338, 12 July 2016, page 49
4 HM Revenue & Customs,
5 , paragraph 1.26
6 , Figure 9
7 HM Revenue & Customs, , 20 October 2016
20 , section 161 and Schedule 19, paragraph 17 (6)
21 , 5 September 2016
30 November 2016