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Can HMRC Bridge the Funding Gap Without Raising Taxes?

Published by Prerana
Posted Date: June 17, 2024 , Modified Date: June 17, 2024

It is no secret that the Conservative and the Labour parties have both promised not to increase the big three taxes - Income Tax, National Insurance, and VAT – if they form the government after the upcoming July election.

But the parties’ election commitments will need to be funded somehow. They pledge that it will be funded by raising £5 billion to £10 billion by reducing tax avoidance. But how exactly will HMRC be able to raise this amount?

What Can Cause the Tax Gap?   

One of the major elements that can cause the tax gap is the parties’ pledge to not raise taxes. This means that the government and HMRC will have to look to alternatives to increase revenue. HMRC will need to spend a lot of time, money, and research into tax avoidance cases to raise the projected amount of funds.

HMRC tax gap

Another major cause is the errors in tax return filings by small businesses and individuals. HMRC can generate major revenue by improving their service and reducing the errors on tax filings by small businesses and general public. However, with HMRC service standards at an all-time low, the tax authority should focus on the fundamentals.

How Can HMRC Tackle the Tax Gap?

HMRC needs to focus on their fundamental services rather than looking for alternatives to close the tax gap. A tax investigation expert said, “What the government and HMRC really needs to focus on is going back to the basics.” Here’s how HMRC can tackle the tax gap:

  • Improve HMRC Support - HMRC’s strict guidelines may be confusing for general public and small businesses. So, by improving their customer service the tax authority can help avoid errors in tax returns. Also, introducing a relationship manager can help small businesses with their tax returns.
  • Raise Revenue through Crypto Investors – Crypto investors have to disclose their income in the Self Assessment Tax Returns from April 2025. HMRC can raise a lot of revenue from crypto investors disclosing their income.
  • Offshore Activity – HMRC now has more information than ever about offshore assets due to the establishment of Common Reporting Standard (CRS). This can be a major income source for the tax authority to fill the tax gap.

Apart from these measures, HMRC can use the help of technology and artificial intelligence (AI) to raise the amount of data for tax inspectors.

Conclusion

Due to party’s pledging not to raise taxes and HMRC services at an all-time low, experts have warned the expected revenue of £5 billion might be overambitious. HMRC faces many pressing challenges, notably its low funding and available resources.

However, with improved customer support, simplified tax guidance, and the use of AI, the efficiency at HMRC could be bettered, leading bridges in the funding gap without increased taxes.

Prerana
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