IHT and the Tax gap both increasing
Without the risk of providing a weather report, it looks as if the great English summer has finally arrived with temperatures increasing both last week and this week. Why as a nation are we so obsessed with the weather? It's a topic of conversation that we all enjoy partaking in, possibly more so than any conversation around business or personal tax, that’s unless you are a regular reader of my weekly newsletter.
It's another week of tax issues hitting the headlines, although I wonder if my news scheduled for the week commencing 1st July 2024 could be considered worthy of a front-page mention (not in reality) intrigued? Then keep an eye on my LinkedIn posts that week.
This week we have two stories which could possibly be described as opposites of each other, one focuses on how tax receipts are up and the other discusses the shortfall in tax collected, if this has spiked your interest then grab yourself an ice-cold drink and read on.
IHT Receipts on Track for 'Record Total' After Reaching £1.4bn
The latest HMRC tax receipts monthly bulletin revealed a significant increase in inheritance tax (IHT) receipts, marking an annual rise of 16.6 per cent. This spike is attributed to several factors, including a higher volume of wealth transfers following recent IHT-liable deaths, increased asset values, and frozen IHT thresholds. As of now, IHT receipts have reached £1.4 billion, setting the stage for what could be a record-breaking total for the 2024/25 tax year.
The rapid growth in IHT receipts after just two months could mean that IHT receipts are well on the way to a record-breaking sum for the 2024/25 tax year.
As many are aware there is a political reluctance to address IHT directly, and as a consequence it’s a topic that no one wants to really mention or to even plan for.
The Labour Party has briefly touched on the issue, particularly with a pledge to end the use of offshore trusts, which predominantly affects non-domiciled individuals. On the other hand, the Conservative Party has promised to retain business-related reliefs but has avoided any substantial discussion of IHT in their manifesto, a stark contrast to last year’s discussions about potentially abolishing IHT in the 2023 Autumn Statement.
It is worth noting that if a new government is hesitant of making transparent and potentially unpopular decisions to tax the passing on of wealth more harshly, then fiscal drag is doing a similar job behind the scenes anyway. With rising property and financial market values, more estates are being pushed over the frozen thresholds, thereby increasing the number of estates liable for IHT.
It’s worth remembering that IHT is no longer just a tax for the super-wealthy, as it was initially designed to affect. There is now an opportunity to revisit it and ensure it is fit for purpose today, as well as streamlining it to make sure that it is as easy as possible for families to understand.
HMRC's report also noted that total tax receipts for April 2024 to May 2024 amounted to £132.8 billion, an increase of £3.6 billion compared to the same period last year. This growth was driven by higher receipts from income tax, capital gains tax, national insurance contributions, business taxes, and stamp taxes. However, receipts from VAT and fuel duty saw a decline.
Specifically, PAYE income tax and national insurance contribution receipts for April 2024 to May 2024 totalled £77.2 billion, marking an increase of £2.8 billion from the previous year.
It's worth remembering how the situation has come to be so, as the sharp rise in IHT receipts signals not just an increase in wealth transfers but also highlights the impact of frozen thresholds and rising asset values. As political parties remain cautious in addressing IHT reforms, fiscal drag continues to push more estates into the taxable bracket. This growing burden underscores the need for a comprehensive review of IHT to ensure it remains equitable and manageable for families across the UK.
The Tax Gap Jumps to £39.8bn in 2022-23
The tax gap in the UK surged to £39.8 billion for the 2022-23 fiscal year, an increase of £1.7 billion from the previous year, according to the latest HMRC data. This gap, representing 4.8% of total taxes, highlights a significant portion of taxes going unpaid, with small businesses being the primary contributors.
Small businesses accounted for nearly two-thirds of the tax gap, amounting to £23.8 billion, up from 59% in 2021-22 to 60% in 2022-23. This rise marks a concerning trend, especially when compared to the 44% share in 2018-19. The increase in unpaid corporation tax by small businesses is particularly notable, rising to £10.9 billion from £3.7 billion five years ago.
The persistent non-compliance among small businesses can be attributed to the complexity of the tax system and inadequate support from HMRC, whose service standards have declined.
The tax gap for corporation tax alone rose to £13.7 billion, up from £10.8 billion the previous year. This figure has nearly doubled since 2018-19, reflecting the challenges in corporate tax compliance post-pandemic.
Conversely, there has been some progress in reducing VAT avoidance. The VAT tax gap decreased to £8.1 billion in 2022-23, down from £8.4 billion the previous year, and significantly lower than the £11.6 billion gap in 2019-20.
The compliance rate for personal taxes, including income tax, national insurance contributions (NICs), and capital gains tax (CGT), was relatively high, with only 3.8% unpaid, totalling £13.7 billion. Despite this, self-assessment and self-employed individuals contributed significantly to this segment, with 65.4% of this avoidance, equating to £8.5 billion.
Tax loss due to criminal activity and fraud was reported at £3.58 billion, representing 9% of the tax gap, a slight improvement from the previous year’s 10%.
To address the increasing tax gap, leveraging artificial intelligence (AI) to analyse HMRC data could be a vital step forward. This technology could help identify patterns of non-compliance more effectively, aiding in closing the tax gap.
John Barnett, chair of CIOT’s technical policy and oversight committee, emphasised the need for HMRC to improve its support and education for small business owners to reduce errors and enhance compliance. He noted that a significant portion of unpaid taxes is due to errors in tax returns, highlighting the necessity for clearer guidance and better customer service.
With the upcoming election, political parties are focusing on promises to clamp down on tax avoidance to increase public spending. However, there is scepticism about the feasibility of achieving substantial reductions in the tax gap.
Senga Prior, chair of the ATT technical steering group, pointed out that the largest portion of the tax gap is due to self-assessment taxpayers, particularly individuals and unincorporated businesses making errors. She advocates for improved HMRC customer services and the simplification of the tax system as essential steps towards addressing this issue.
The rise in the tax gap to £39.8 billion underscores the challenges in ensuring tax compliance, particularly among small businesses. As the government and HMRC seek solutions, the emphasis must be on simplifying the tax system, enhancing support for small businesses, and leveraging technology to improve compliance and reduce errors.
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