The Budget – closing the tax gap

What is closing the tax gap?

It is the difference between the tax a government is owed and what it collects and is likely to be a focus for the Chancellor, Rachel Reeves, when she presents her Budget. In 2022/23 the tax gap was estimated to be £39.8bn. This equates to 5% of the tax it is owed. 

This is not all down to evaders. Only 25% of the tax gap is due to what might be referred to as illegal behaviour or deliberate tax evasion. Whereas 45% comes from genuine errors and mistakes, often by employers. 

The errors and mistakes often arise from carelessness because of a lack of tax education and misunderstanding of the available tax guidance. The failure to educate is due to a lack of resources available that provide employers with the necessary support. 

There is a need to simplify some of the rules across employment tax. Clearer guidance, streamlining exemptions, bringing the rules for tax and national insurance (NI) more in line with each other and bringing some of the antiquated expenses and benefit rules into the 21st Century. 

By doing this, businesses can reduce time spent on tax and NI, freeing up time to run their business and focus on employees. This could result in increased productivity. 

It all comes down to making tax less taxing! The Chancellor may advocate a series of measures, including adequate staffing and investment of HMRC, use of artificial intelligence to identify non-compliance and provide bespoke help to taxpayers, and a focus on simplification. 

As an employer is there anything specific you should be considering and how might increased compliance activity affect you? 

Getting back 2 basics: Employment tax essentials for employers 

Back 2 basics is all about employers focussing on the areas where mistakes are often made. 

There are ever increasing pressures on businesses and their owners, often out of necessity and this means an employer’s focus may not always be on their systems and processes around payroll, expenses and benefits. Taking the time to step away from how things have always been done and going back 2 basics is essential. 

But where do you start and what support do you need? 

With HMRC likely to increase their compliance activities to close the tax gap, this will be even more important. In addition, the planned changes to introduce one national minimum/living wage rate across all ages, and rumours of the Chancellor reviewing employer’s NI and salary sacrifice, is all going to add to costs. This will mean that mistakes in any areas could be more costly than ever.   

One effective strategy is to conduct regular reviews. Reviews help identify discrepancies and areas of non-compliance, allowing employers to correct mistakes before they escalate. Investing in training for payroll and finance teams ensures they are up-to-date with the latest tax regulations and best practices. This proactive approach closes the tax gap without HMRC intervention and fosters a culture of compliance within the organisation. 

Navigating the complexities of employment tax can be daunting for employers. However, understanding the basics and implementing robust policies, systems, and processes can significantly reduce risks. 

We can support you with this by 

• Identifying where employers often get payroll, expenses and benefits wrong 

• Considering and reviewing the importance of policies, systems and processes to get things right 

• Addressing the main areas where risks occur 

• Recognising the benefits of disclosing errors to HMRC? 

 We provide reviews and support at all levels and you can choose to have a bronze, silver or gold review package of your systems, processes and records. To discuss these options, you get in touch with us here.