Andrew Hubbard

Written by: Andrew Hubbard

Andrew Hubbard


Is poor record-keeping at the heart of the UK’s tax gap?

According to HMRC’s analysis of the tax gap, a quarter of self-employed individuals understate their tax liabilities in their tax returns. Some of this is deliberate but HMRC believes that most of it is down to simple error (such as transposing figures) or failing to take reasonable care. That would suggest that small businesses have a major problem with accurate record-keeping.

HMRC has recently commissioned independent research on the views of small businesses and landlords on Making Tax Digital. The responses give a very different picture as 98 per cent of respondents were confident that the information they provided to HMRC was correct. Clearly there is a discrepancy here which needs to be explored, because HMRC’s view of the tax gap in the small business population is one of the key drivers of the Making Tax Digital agenda.

Any survey result does need to be considered with caution. Even in a survey such as this one, which is carried out on professional lines with proper statistical analysis, there can be no guarantee that a true cross-section has been reached, particularly when people can decide whether or not to take part. More than that, however, people who do actually know that their record-keeping is poor may be reluctant to admit it when asked, even by a neutral questioner. But even though the 98 per cent figure must be taken with a pinch of salt, the research does show that businesses have a level of confidence in their own record-keeping which HMRC believes is not merited.

It would be naïve in the extreme to argue that there are no problems in record-keeping. Most of us, if pushed, would probably admit to getting into the occasional muddle in our own personal finances, so it stands to reason that businesses will make mistakes. Nevertheless there is widespread scepticism that the proportion of the tax gap due to error and failure to take reasonable case is as high as HMRC says it is. HMRC also believes that most of the errors are in the taxpayer’s favour – in other words people are more likely to understate rather than overstate their profits. That is obviously true where people are deliberately fiddling, but surely errors could occur equally in either direction. I am as likely to mistype 49 as 94 as I am 94 as 49.

Accurate record-keeping must be in everybody’s interest. We would support any sensible measures which produce more accurate tax computations. For some businesses, as the survey makes clear, digital tools are the solution. However, others find purely manual record-keeping perfectly adequate and it is not at all clear that there will be anything like the increase in tax revenues which HMRC suggests if they are forced to ‘go digital’. The slowing down of the MTD timetable does gives an opportunity to take stock and for all sides to work out exactly how much of a problem poor recording-keeping really is. Let’s hope the opportunity is not missed.

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