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KEY POINTS
- Higher tax rates make tax avoidance more attractive.
- Would greater investment in HMRC recover more tax?
- The expansion of HMRC’s High Net Worth Unit.
- Is all tax avoidance immoral?
- The effect of the recent tax ‘amnesties’.
Tax is suddenly sexy again. That always seems to happen after a change of government, though anyone younger than about 35 may not even remember the last time.
A top income tax rate of 50%, increases in National Insurance contributions, and threatened attacks by HMRC on those who are not domiciled in the UK, the affluent, and anyone with a bank account overseas (even if the department has to use stolen bank records achieve its goal) have raised the stakes.
Two other factors then combined to make tax the lead story in all of the media.
First, it was announce
d that six million people were to face adjustments to tax liabilities as a result of errors in tax coding, and then the new Lib-Con deputy prime minister, Nick Clegg, suggested on Radio 4’s Today programme that not only was tax evasion immoral but so was legal tax avoidance.
As a result, there have been any number of exposés regarding the leaky sieve that goes by the name of HM Revenue and Customs.
All of this must be seen in the context of the recent government statistics, which suggest there is a tax gap of £42 billion: i.e. the amount of tax that is chargeable but not collected. Other sources might suggest the figure is at least twice as large.
What conclusions can we draw from the unprecedented September activity that was not connected to a Budget?
Government strategies
On election day, Taxation published my article A challenge to the Chancellor, which proposed that by spending £700 million a year in new staff at HMRC, the new Chancellor of the Exchequer, whoever he might be, could easily bring in ten times that figure.
Danny Alexander announced at the Liberal Democrats’ recent conference that his master, George Osborne, would be investing £900 million a year in a targeted way and hoped to bring in that elusive £7 billion.
However, this money is to be very specifically directed and, in particular, eyebrows have been raised at the expansion of the scope of HMRC’s High Net Worth Unit.
This business division has been yo-yoing in recent years. Alistair Darling felt it was not doing its job because of lack of focus, and he restricted its activities to the richest 5,000 people in the country.
His view was that the team was not large enough to investigate a greater number of wealthy people, and therefore its efforts would be watered down unless there was a change of strategy.
It seems that Messrs Alexander and Osborne have a very different view of life and they are returning to the good old days when the Revenue regarded many more people as potential tax minimisers (a word that has been forced upon me by Nick Clegg’s muddying of the waters between evasion and avoidance).
Now, the expanded unit will be charged with ensuring that every one of the richest 150,000 people in the UK is paying the correct amount of tax. This seems like a mighty task; the questions that it begs are twofold.
First, has the team really got the resources to look adequately at so many taxpayers, many of whom will have highly complicated affairs both in this country and around the world?
Second, what is going to happen to those among the remaining 60 million people who are not rich enough to qualify but do not keep their tax affairs in order?
There must at least be a possibility that the answer to the first question is a straight ‘no’, even allowing for the scoping up in resources, while the chances of tax evaders lower down the scale getting caught might become even slimmer since the politicians in charge of the Treasury have made it so clear that their primary interest is in the really big-hitters.
Tax and morality
Nick Clegg may not have been fully briefed when he appeared on Today. His initial stance that tax evasion must be stamped out should be supported by all except the criminal fraternity.
Extending this to legal tax avoidance through elaborate ‘schemes’ might seem sensible to the man in the street who does not have a chance to save millions of pounds thanks to the efforts of his tax advisers.
However, Mr Clegg’s suggestion that all avoidance – for example, making a charitable donation and in doing so obtaining tax relief for both donor and charity – is immoral should cause cries of outrage.
Similarly, is making an annual gift to a much-loved child such a heinous crime?
If nothing else, Mr Clegg had better check his own, and his colleagues’, tax affairs jolly carefully before throwing any more stones in that famous glass house, the Commons, which was recently home to the kind of expenses claims that even fraudsters might think about twice.
The tax gap
While nobody would deny that making specific sorties into specific areas of tax minimisation – for example, by offering an amnesty to doctors or people with bank accounts in little-known European states, as well as investigating the affairs of the rich and famous – will bring in cash, it is merely scratching the surface.
The fact that six million people taxed through PAYE were paying either too little or too much tax, and nobody was aware of it, says a great deal. The implication is that at least 20%, and quite possibly a far greater proportion, of the taxable population is either failing to pay enough tax or is paying too much.
This is chastening and should be a cause of severe embarrassment to not only the underfunded and unsupported HMRC, but also to the Treasury and – if fingers have to be pointed – to the politicians who allowed our tax collection department to fall into disrepair.
In the United States, there is a tax system built on self-assessment, but revenue auditors are both expected to investigate and are feared when they do. They have both manpower and teeth when it comes to penalising wrongdoers.
Why, oh why, can the UK not follow suit? If we were to start the process by announcing a full amnesty in respect of any back taxes, possibly demanding full reparations for four or six years of underpayments together with interest and a modest penalty, say 10%, that would clear the decks and be a good starting point.
Some statistics
According to information provided by the Tax Faculty of the ICAEW, HMRC have told us that:
- The new disclosure opportunity yielded about £82 million from approximately 5,500 disclosures: an average of £14,500.
- The tax health plan for medics yielded about £9 million from approximately 1,500 disclosures: an average of £6,500. One case alone raised £1.2 million for HMRC.
It seems hard to believe that, in a country of 60 million people, at least half of whom are working, only 7,000 taxpayers are tax defaulters. There must also be a question as to whether doctors and dentists and those with offshore investments are the worst transgressors.
Even if one were to assume very modest figures of one million people who have not quite got their tax right by an average of £10,000 per person, an amnesty would yield £10 billion before interest and penalties, and probably somewhere in the region of £15 billion all in. In reality, the figure is likely to be much higher.
Follow-up
It has to be said that a strategy will serve no purpose if, as with all of the other amnesties to end all amnesties, and there have been several already, follow-up is at best patchy and disorganised.
Three years on, it is not clear that information gleaned from banks at the time of the offshore disclosure facility in 2007 has been followed up thoroughly.
However, HMRC are now sending out Code of Practice 9 enquiry letters (apparently the first for many months) to holders of Swiss bank accounts, based on a client list originally stolen by an HSBC employee.
Perhaps the real problem here is the brain drain from the department over many years. The ‘cut costs at all costs’ mentality of the previous government and, one fears, its successor, has proved disastrous.
The consequence is that, to the general public, HMRC have become a call centre with not enough people to answer the phones. That perception will naturally lead many to conclude that, as in other countries, the payment of tax has become voluntary, not only for Her Majesty the Queen, but also each and every one of her subjects.
Hearing demoralised members of a government department speaking out in the media with disguised voices to denounce the failures that have led them to despair is not much fun.
It would be far better to hear they were enjoying life with well-briefed new colleagues and, as a direct consequence of their efforts, income tax thresholds were being increased and rates reduced.
Therefore, it once again seems sensible to call on George Osborne to recruit a large number of new, well-trained staff for HMRC with a specific brief of bringing the tax gap down by at least £10 billion per year and preferably three times that figure.
Philip Fisher heads the employment tax and rewards team at PKF(UK)LLP and can be contacted by email. The views in this article are his own and do not necessarily represent those of PKF(UK)LLP.
