1‘Paradise Papers’ and the tax gap
1.On the basis of a Report by the Comptroller and Auditor General, we took evidence from HM Revenue and Customs (HMRC) on its performance in 2016−17.1 HMRC raised £574.9 billion of tax revenues in 2016−17 (about 85% of total revenues raised by government), and paid out £38.8 billion in benefits and credits (approximately one-fifth of the government’s total benefit expenditure). The annual cost of running HMRC, which is the second-largest government department in terms of staff numbers, was £3.3 billion in 2016–17. Almost 50 million individuals are in the tax system in the UK, and Tax Credits support around four million families. Every year millions of people contact HMRC by telephone, by post and online.2 HMRC’s vision is to be one of the most digitally advanced tax administrations in the world, automating the collection of tax data, and encouraging taxpayers to use its new digital services.3
2.The so-called ‘Paradise Papers’ highlight potential cases of tax evasion and avoidance, through offshore tax havens, on a sizeable scale.4 The leak was first reported in BBC’s Panorama programme, and in the Guardian, on 5 November 2017. HMRC told us that it had been aware for a few months that a leak was coming but, at the time of our evidence session, the Department had not seen the leaked material, despite having requested the documents two weeks ago from the International Consortium of Investigative Journalists, the BBC and The Guardian.5 At the time of our evidence session HMRC had not received any responses to this request for information and had not made any further requests.6
3.HMRC told us that over the last few years it has secured more than £2.8 billion from offshore tax evaders. HMRC told us that it would investigate every case of tax evasion and criminality that the leaked documents may point to.7 HMRC can re-open any case that was settled in the past, up to 20 years ago, including the ‘Panama Papers’ cases, if it transpires that, at the time of settlement, the facts pertaining to a case were not fully disclosed.8 HMRC told us that if the information requested on the Paradise Papers is not forthcoming it could use its network of tax treaties and exchange of information agreements with other countries to obtain the relevant documents.9 HMRC also told us that under certain circumstances it is allowed to make a payment to obtain data, as happened with the Panama Papers. Following legal advice, HMRC said it was unable to tell us how much it had paid in the case of the ‘Panama Papers’.10
4.This Committee was frustrated with the pace of HMRC’s response to the information in the Panama Papers, which were published on 4 April 2016. HMRC told us that the type of case under consideration, whether civil or criminal, dictates how quickly it can conclude a case, and criminal cases will take longer to prepare. There are currently 66 criminal or civil investigations; four people have been arrested and a further six have been interviewed under caution. These cases continue to be live and HMRC expects additional tax revenue of £100 million.11 HMRC told us that it is better equipped to deal with the Paradise Papers information than it was when the Panama Papers were leaked. It now has a specific team, the Risk and Intelligence Service, with between 2,000 and 3,000 staff, which can process data from many sources, collate data around individual taxpayers and undertake ‘risk-based’ interventions. However, HMRC was unable to say if it had sufficient resources to deal with all of the potential cases in the leaked documents as it did not know the scale of the leak.12
5.HMRC told us that, to help increase international tax transparency, there have been a number of developments in improving access to information about beneficial ownership and interests. In July 2017, HMRC created a registry of beneficial ownership of trusts, with information about both UK and non-UK trusts. In addition, Companies House maintains a register of people with significant control which identifies beneficial owners with more than 25% of shares or voting rights in UK companies. Overseas Crown dependencies and overseas territories maintain registers of beneficial ownership of companies which are accessible to HMRC.13 Other initiatives, such as country-by-country reporting and automatic exchange of information, which are key components of the Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) Action Plan will, by increasing global tax transparency, also help address some of the systemic issues highlighted in the leaked papers.14
6.The tax gap, which is the estimated difference between the amount of tax that should have in theory been collected and what is actually collected, is one of HMRC’s key performance measures. HMRC told us that it has “the most comprehensive measurement of the tax gap and that it is the lowest published one in the world”. According to HMRC’s latest analysis, the UK tax gap in 2015−16 was £34 billion (6.0% of total theoretical tax liabilities). There has been a downward trend in the tax gap over the past decade from £35 billion (7.9%) in 2005−06. We asked HMRC how much further the tax gap can realistically fall. HMRC told us that it is difficult to estimate the lowest feasible level but, while it cannot be completely closed, HMRC will aim to get it as low as possible. HMRC told us that with more powers, people, interventions and data, it can continue to reduce the tax gap.15
7.HMRC told us that parts of the tax gap were difficult to tackle in different ways. It highlighted the particular challenges posed by small and medium-sized enterprises (SMEs). The largest part of the tax gap (2015−16: £15.5 billion, 46%) is attributable to SMEs.16 HMRC told us that as there is a very large number of small businesses, the yield (tax recovered) from any given intervention can be a relatively small amount, which would make the intervention less cost-effective. HMRC’s investigations can also be intrusive and stressful for a small company. The problems associated with the SME tax gap are exacerbated by the trend of more people moving from being employed, a highly compliant sector of the economy, to being self-employed, a much more non-compliant area of taxation, across the wider economy.17
8.HMRC told us that it has a number of measures in the pipeline that will reduce the tax gap further. The Department expects, through its Making Tax Digital for Business (MTDfB) programme, closer working with intermediaries in the self-employment sector, such as Amazon and eBay, and using tax agents working with small businesses to encourage increased compliance, to help close the SME tax gap. MTDfB will apply to companies with turnover above the VAT threshold. HMRC is currently running a small-scale trial for income tax and has further trials planned to take place before the roll-out of MTDfB from April 2019.18 In relation to large corporations, HMRC expects the Diverted Profits Tax, which raised £280 million in 2016−17, to be a ‘game changer’ and lead to higher Corporation Tax revenue. HMRC also expects a change in multinational companies’ behaviour as a result of the introduction of country-by-country reporting which will increase the transparency of the amount of tax they pay.19
1 Report by the Comptroller and Auditor General, HM Revenue and Customs Annual Report and Accounts 2016–17, HC 18 (2017−19), 14 July 2017
2 C&AG’s Report, paras 2, 3.1, Figure 12
3 HM Revenue and Customs, Single departmental plan 2015 to 2020; C&AG’s Report, para 10
4 Qq 1−2
5 Qq 2−5, 30, 45
6 Qq 6−7, 44, 46
7 Qq 9−10, 18
8 Qq 35−36
9 Qq 12, 16−17
11 Q 19
12 Qq 20−23
13 Q 41
14 The Organisation for Economic Co-operation and Development, BEPS Actions, accessed 13 December 2017
15 Qq 76−77; HM Revenue and Customs, Measuring tax gaps 2017 edition: Tax gap estimates for 2015−16, October 2017
16 Q 78; HM Revenue and Customs, Measuring tax gaps 2017 edition: Tax gap estimates for 2015−16, October 2017
17 Q 78
18 Qq 78–84
19 Qq 53−59, 60−63
10 January 2017