HMRC's efforts to close the tax gap

It has been well publicised that HMRC is to employ additional staff in an effort to close the ‘tax gap’. HMRC is continuing its crackdown on all forms of tax evasion, and government statistics show that it is making some headway.

The ‘tax gap’ has fallen by £4bn, from £39bn in 2008/09 to £35bn in 2009/10, although this has largely been attributed to the VAT rate cut which was in effect for 13 months from Dec 2008 (which meant that there was less VAT to be evaded).

David Gauke, secretary for the Exchequer, said that: ‘Although these numbers show continued progress from HMRC in reducing the tax gap there is no room for complacency. Just recently we have closed various tax avoidance loopholes, created a new unit to focus on the wealthiest individuals in society and challenged those who use offshore bank accounts to evade tax.’

Since 2007, we have seen the introduction of various tax initiatives to encourage those with previously undisclosed income or gains to come forward.

The Offshore Disclosure Facility (ODF)

It is now four years since we saw the first HMRC ‘amnesty’, The Offshore Disclosure Facility (ODF), which was initiated after HMRC had obtained details of 100,000 offshore bank accounts held by UK residents, which had not previously been declared to HMRC. 

The term ‘amnesty’ was something of a misnomer as HMRC was not letting people get away with any tax irregularities. The facility worked by offering taxpayers the opportunity to make a voluntary disclosure in respect of any previously undeclared income and gains in exchange for a guaranteed reduced penalty of 10% of any tax unpaid. Those whom HMRC suspected to have had undisclosed offshore income or gains who did not come forward, were warned that faced a minimum penalty of 30% with the possibility of this increasing to 100% in extreme cases.

The results of the initial campaign were as follows:

  • HMRC received 45,000 disclosures, totalling £400m
  • the average disclosure yielded £9,000
  • the largest single disclosure yielded £3m
  • 300 ‘large and complex’ cases worth an estimated £100m were given extra time to complete their disclosures
  • the estimated cost to HMRC of operating the disclosure is £6m.

All in all, the first original ODF was clearly a success for HMRC.

New Offshore Disclosure Opportunity (NDO)

A second offshore disclosure facility was instigated in 2009, following HMRC receiving account details form 146 offshore financial institutions.

Following receipt of this information, HMRC estimated that there were still a further 10,000 people who should have come forward under the original facility. Taxpayers who had not previously been contacted under the original ODF could avail themselves of guaranteed reduced penalty of 10%, whereas those who had previously been contacted under the ODF would benefit from a 20% penalty. Those failing to come forward and whose undisclosed income was subsequently discovered by HMRC would face the prospect of civil or criminal action and much tougher penalties of up to 100%.

The results were as follows:

  • HMRC received 5,500 disclosures, totalling £85m
  • the average disclosure yielded £15,500
  • the disclosures included 15 individual payments over £500,000, including four in excess of £1m.

Liechtenstein Disclosure Facility (LDF)

A third offshore facility was launched in 2009, following an agreement between the UK and Liechtenstein governments. The LDF will run until 2015 and is available to anybody with ‘relevant property’ in Liechtenstein. Despite this, the facility can be used to disclose any offshore income, not just that arising in Liechtenstein.

The main benefits of the scheme are:

  • a 10% fixed penalty on the underpaid liabilities for years up to and including 2008/09);
  • no penalty where an innocent error has been made;
  • assessment period limited to accounting periods/tax years commencing on or after 1 April 1999; and
  • immunity from prosecution (unless there is wider criminality, such as corruption, commercial fraud, and not disclosing assets in divorce proceedings).

It has been suggested that the Liechtenstein authorities saw this as a way of turning a problem into an opportunity, and anticipated a lot of capital moving from other havens not yet caught into Liechtenstein, in order to take advantage of the more lenient regime under the LDF compared to the NDO. Taxpayers are able to benefits from the LDF by opening an account in Liechtenstein.

We should now, of course, bear in mind that since 6 April 2011, HMRC may levy a penalty of up to 200% of the tax at stake (double the previous maximum), in addition to the tax due plus interest. The first affected returns will be those for 2011/12.

Targeted Campaigns

2010 saw HMRC’s campaign strategy take a new direction with a more pragmatic approach, targeting specific professions and industries. HMRC’s approach to the targeted campaigns is to target those industries where:

  • it is perceived that the greatest opportunities for tax evasion persist
  • information is readily available to enable HMRC to make such moves.

Tax Health Plan (THP)

The first industry-specific campaign was the Tax Health Plan (THP), which gave medical practitioners and dentists the opportunity to come forward and put right any deficiencies in their tax affairs. HMRC used information gathered from third parties information requests, including payments made by insurance companies to identify practitioners whom it believed may have had something to disclose.  Again the ‘carrot’ was a guaranteed fixed penalty of 10%; the ‘stick’ was the threat of civil action and stiffer penalties or criminal prosecution.

The results were as follows:

  • the THP raised over £10m from over 1,500 disclosures 
  • the average disclosure was over £6,500
  • with an individual payment of over £1m by a doctor and over £300,000 by a dentist
  • a number of criminal prosecutions are now under consideration.

Plumbers Tax Safe Plan (PTSP)

The next ‘chosen ones’ were plumbers and gas fitters, with the Plumbers Tax Safe Plan being launched in July 2011. It is interesting to read some of the plumbers’ discussion forums on the internet on this topic which range from ‘is this an April fool?’ to ‘I have just found 2p down the back of the seat in my van. That is all I have hidden. Do I need to make a disclosure?’

HMRC again used third party information, predominantly the Gas Safe (formerly CORGI) Register.

So far, the campaign has only generated a yield of £328,000 from 600 disclosures at an average of £550 per disclosure. One feels, however, that the sting in the tail will be Part 2 of the campaign. Plumbers have been arrested on tax evasion charges and HMRC claims to have already identified ‘over 500 civil cases to be brought, predominantly focused on so-called “ghosts” from July 2011” with “thousands more to follow”.’

VAT Initiative

The VAT Initiative, launched in July 2011, aims were to give taxpayers the opportunity to come forward if they think that they should have been registered for VAT but are not or to correct VAT irregularities. The initiative offered taxpayers a reduced 10%, unless there has been deliberate concealment.

After expiry of the notification period on 30 September 2011, HMRC commenced checking information received against self assessment and corporation tax returns. Those who notified have until 31 December for returning their completed VAT registration form (VAT1) or other information to HMRC.


The Tax Catch-Up Plan (TCP)

HMRC has now launched another campaign, this time aimed at those who have provided private tuition or coaching. It gives this group the opportunity to regularise their affairs by coming forward with details of undisclosed income. In exchange, they get a lower 10% or 20% penalty, similar to that offered to the plumbers under the PTSP. 

The obvious groups of taxpayers are those working in academia, sport, leisure or music but other groups those working in PR, IT and law could also be included as the campaign is aimed at any provider of coaching or tuition.

To take advantage of the campaign HMRC requires notification by the taxpayer that they intend to declare income from coaching, tuition or anything else by 6 January 2012. Full disclose and payment is required by 31 March 2012.

To quote HMRC:

‘We are making it as easy as possible for people offering tuition and coaching to use this unique opportunity to put their tax affairs in order by making a full disclosure, and benefit from the best possible terms.


‘We are using various intelligence sources to identify and then target those who do not take advantage of this opportunity to declare their full income. The message is clear: contact us before we contact you.’

HMRC has commenced issuing Section 16 notices to various educational establishments to gather information on payments made to persons other than employees. Colleges that fail to comply with the demands in time will be subject to a £300 fine and a further daily fine.

See Related Links for further details of the campaign.

So Who is next?


The next targeted campaign is to be aimed at e-traders, who have been put on alert they the campaign will commence in spring 2012. It is envisaged that the terms will again be similar to the those of the plumbers’ campaign.

HMRC intends to use state-of-the-art web interrogation tools to catch evaders. These could include tools like ‘web robot’ software to review the internet, and ascertain specific information and details regarding individuals and companies.

A ‘web robot’ search targets and matches specific key words and, for example, can search for:

  • the name of the person under investigation
  • e-trading sites, such as Ebay
  • frequency and monetary value of transactions
  • specific goods descriptions.

They will then use the information gathered to cross-check with their own computer tax systems to weed out evaders.

The majority of people who buy and sell personal items on sites such as eBay would not be expected to come forward. It will, however, be necessary to consider the normal ‘badges of trade’ in order to establish whether or not a person is trading.

You may wish to look at badges of trade.

Summing up

So to sum up, the figures on the reduction of the tax gap are encouraging for the Government. The first of the campaigns, the offshore disclosure facility, is expected to yield half a billion pounds. The latest tax campaign has also been successful. 

With the introduction of HMRC’s sweeping new information-gathering powers under Finance Act 2008, Schedule 36, and the use of more sophisticated technology, it will become increasingly hard for tax evaders.   

HMRC certainly has some ambitious targets to meet if it is to achieve its stated objective of closing the tax-gap by £7bn per year until 2014/15. We know that they now have the legal framework in place and sophisticated software in place to assist its work. The success of HMRC’s campaign strategy will ultimately depend on the deterrent effect of their follow-up action in cases where those given the opportunities to come forward have failed to do so.