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Money talks, especially when it comes to tax | AccountingWEB Jake Smith | photo of tube train and platform with mind the gap warning
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Money talks, especially when it comes to tax

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One of the challenges facing any government is how to pay for the policies they want to implement. As we inch closer to a general election, shadow chancellor Rachel Reeves is facing increased pressure to say where she will find the money to implement the Labour Party’s plans, should they win the next election.

11th Apr 2024
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At the Spring Budget, Jeremy Hunt announced that he would be investing a further £140m to improve HMRC’s ability to manage tax debts

The Chancellor also announced that he would be abolishing the tax rules for non-UK domiciled individuals, or non-doms, and replacing them with a residence-based regime. The latter was largely used to fund the recent national insurance cut and was seen as possibly reducing options for Labour when it comes to their spending plans.

Labour's latest proposals go further on the planned non-dom changes, claiming that by removing loopholes in Jeremy Hunt’s plans they would be able to collect around £2.6bn extra. 

This week Reeves announced that if elected, Labour would be clamping down on tax avoidance and closing loopholes to eventually raise up to £5bn. It was reported that they would “boost headcount at HM Revenue and Customs by up to 5,000 over the course of a parliament to provide increased focus on tax-compliance work.” 

It claimed this would come at a cost of up to £550m (for the increased headcount and other improvements such as further digitalisation) and would mean more compliance checks for larger businesses and a focus on offshore tax compliance. However, sadly for most AccountingWEB members, it’s unlikely that the money will go to increase the number of people on HMRC helplines. it seems it will be instead directed to increase inspectors and improve the digitalisation of the tax service. 

Interestingly, part of the new funding allocation for HMRC would be ring-fenced for strategically important "blockbuster" criminal cases expected to have a deterrent effect.

One rule for the rich another for everyone else

For some years now, HMRC has faced criticism for not using the powers granted in the Criminal Finances Act 2017 to prosecute anyone. Indeed, HMRC has not charged a single company under the landmark legislation passed six years ago to crack down on corporate tax evasion. As Dan Neidle commented “A deterrent that you never use is no deterrent.”

Conversely, investigations by Neidle's Tax Policy Associates in 2023 found that between 2018 and 2020 nearly 400,000 people earning less than £13,000 received a penalty for a late tax return filing. Often these people owed no tax, but were potentially unwittingly caught by the self assessment rules, yet still faced a fine.

Another of Neidle’s campaigns led to HMRC chief executive Jim Harra saying “There are no penalties for innocent errors in your tax affairs” after former Chancellor Nadhim Zahawi reached a £5m tax settlement with HMRC which included a penalty.

More recently, the billionaire businessman Bernie Ecclestone admitted fraud following a lengthy, complex and worldwide investigation into his tax affairs by HMRC and prosecuted by the Crown Prosecution Service (CPS). 

As a result of this case, Ecclestone has paid £652m in relation to his wider tax affairs, covering tax, interest and civil penalties, although he avoided prison as his 17-month sentence was suspended for two years. The payment apparently makes him the second-highest individual taxpayer of 2024. The sheer scale of the figures seems to make a mockery of the government’s recent law change to increase prison sentences for the most egregious examples of tax fraud.

One infamous celebrity who failed to avoid prison for tax evasion was Lester Piggott, though his tax fraud of around £3.2m was nowhere near the same scale. Maybe he should have aimed higher? If Labour’s plans do lead to more “blockbuster” cases, the potential returns could be high, but it remains to be seen whether they will have the desired effect of deterring individuals or corporations from trying to find shady methods to avoid paying the tax they should and thus reduce the apparently widening tax gap.

Money is power

Another story that caught my eye recently was the alleged spat between Chancellor Jeremty Hunt and the entrepreneur Sir James Dyson. This story shed light on one of the ‘legal’ routes for companies to pay less tax – simply ask their friends in government to help them.

Dyson you may remember is previously best known for vacuum cleaners, supporting Brexit and losing a libel lawsuit against the Daily Mirror for a column in the paper that suggested he was a hypocrite who “screwed” Britain by moving his company's headquarters to Singapore after backing the UK's breakup with the European Union. 

Research and development (R&D) is an important part of the tax and finance planning for many companies, especially those at the cutting edge of tech developments. There has been a lot of content on AccountingWEB recently about the changes to R&D tax relief and the issues this will have for businesses legitimately engaged in R&D

It’s right that HMRC has been clamping down on spurious claims. There seems to have been a rise in ‘ambulance-chasing’ style R&D claims firms. This has led to many small businesses being left out of pocket when their claim is ultimately rejected and refunds clawed back by HMRC but the R&D claims company has already taken their fee.

Cowboy R&D outfits are not a problem if you’re super rich though. You just go and see the Chancellor like Sir James Dyson did recently. According to the Financial Times the pair met to discuss the tax relief after Dyson had made a series of public remarks about the government’s approach to entrepreneurship.

As the meeting was private we don’t know whether Sir James made the most of the unprecedented opportunity of an individual meeting with the Chancellor to plead his case. 

Even though privileged access like this would be beyond the reach of most individuals or businesses, it seems that the meeting didn’t go too well. I’ll charitably assume that Sir James requested the meeting to lobby for the improvement of the finances of the country rather than just the profits of his firm. Either way, it now appears that a change of career may be on the cards as the conversation apparently turned rather heated with the Chancellor reported to have said, “If you think you could do a better job, why don’t you just stand for election?”.

Well, even if Dyson doesn’t take up the suggestion, Rachel Reeves may well have the opportunity to try and do a better job than Hunt if Labour wins the next election.

The tax gap is too high and it hurts us all 

A lack of resources and expertise at HMRC is one of the frequent frustrations mentioned in Any Answers. So the Labour Party's plans to increase resources at HMRC to try to cut down evasion, close the widening tax gap and bolster the nation's finances might be welcomed by many in the accounting profession. 

Reeves said the tax gap, which was £36bn in 2021-22 – the most recent year for which figures are available – had remained unacceptably high under the Conservative government, claiming it has increased by £5bn this year alone. It’s a problem that has been around for many years and the figures are often questioned so it remains to be seen whether this latest proposal can deliver on the promises.

A potential sting in the tail of this announcement for some regular readers of AccountingWEB was that, along with the potentially good news on increasing funding and resources to get more inspectors, there was also a promise of increased digitalisation at HMRC. This had regular AnyAnswers commenter FactChecker and others somewhat dismayed that the potential Chancellor-in-waiting, Rachel Reeves was doubling down on digitalisation and therefore unlikely to cancel MTD ITSA as they regularly call for. But that’s a story for another day.

This opinion column was updated on 15 April to clarify the potential increased headcount was up to 5,000 and potential budget of up to £550m would be to cover the personnel costs as well as other improvements.

 

 

Replies (13)

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By FactChecker
11th Apr 2024 16:55

If we're going to get into Politics (and why not if that's restricted to facts rather than nebulous policies that may or may not come to pass), then there should be fastidious focus on accuracy.

"Reeves announced that if elected, Labour would “boost headcount at HM Revenue and Customs by 5,000 over the course of a parliament to provide increased focus on tax-compliance work” ... and "It claimed this would come at a cost of around £550m."

Er, no ... she said the increase in headcount would be UP TO 5,000 - and also that the £550m was the budget (again 'up to') for a combination of that increased headcount AND for investment in new technology.

That doesn't mean that I disagree with either objective intrinsically ... although both 'targets' could do with a LOT of refinement (headcount with which skills to deliver what services etc, and fixing some existing technology as a higher priority than adding more broken new bits).
But it does mean that any discussion will lose focus quickly if either party's proposals become seen as unreliable vapourware ... so call them out - please don't do their job for them via inaccuracies.

Thanks (5)
Replying to FactChecker:
Jake Smith, AccountingWEB
By Jake Smith
15th Apr 2024 09:39

Hi Factchecker, thanks for pointing out the inaccuracy, I'll amend the article to show up to 5000 and that the budget for it would be up to £550m including all the proposals, not just for the increased headcount.

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By Justin Bryant
12th Apr 2024 09:03

This is just pure pie in the sky as explained here many times before and there are no easy £bns of rampant tax avoidance to be clawed back. The BE thing was a flash in the pan one-off re tax fraud rather than avoidance and you cannot replicate that for all the medium & small businesses with their undeclared £bns of (mostly cash probably) income that are the main cause of the tax gap.

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Replying to Justin Bryant:
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By Justin Bryant
12th Apr 2024 11:20

The fact that The Guardian agrees with me means I must surely be right here!
https://www.theguardian.com/commentisfree/2024/apr/10/the-guardian-view-...

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Replying to Justin Bryant:
By Ruddles
13th Apr 2024 07:58

I would respectfully suggest that it means anything but

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Replying to Justin Bryant:
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By johnjenkins
12th Apr 2024 11:50

Justin if you were right then the high streets wouldn't be such a shambles and we wouldn't have stagnation (you call it recession). Extra cash always goes back into the economy, so it is quite clear that the "tax gap" extra cash isn't there.

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Replying to johnjenkins:
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By Justin Bryant
12th Apr 2024 12:14

You're making a slightly different point (about the overall/ultimate effect of the so-called tax gap). The Guardian and I agree that there is a tax gap in the first place caused mainly by small/medium businesses as explained above that will never be closed and just has to be accepted as a fact of life/human nature basically.

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Replying to Justin Bryant:
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By johnjenkins
12th Apr 2024 14:24

No Justin, what I am saying is if there is this so called "tax gap" perpetrated by many small business, where's the extra dosh? It certainly isn't in the economy which it definitely would be. Perhaps it's in the supermarket and utilities coffers, they seem to be making a few bob.

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Replying to johnjenkins:
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By Justin Bryant
12th Apr 2024 14:27

Sorry, I thought you were talking sensibly. Your argument makes no sense. The UK economy is worth well over £2trn p.a. and the so-called tax gap wouldn't really affect it that much, even if it was all flushed down the toilet*. Similarly, the entire FTSE 100 is worth about £2trn and a 10% drop (£200bn) does not necessarily cause a recession etc. due to such wealth destruction.

*indeed, that could boost the economy by reducing inflation and thus interest rates.

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By Justin Bryant
12th Apr 2024 14:24

It looks like anyone with any sense agrees with me. See: https://www.taxjournal.com/articles/labour-takes-aim-at-tax-dodgers-

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Replying to Justin Bryant:
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By johnjenkins
14th Apr 2024 12:20

I like Raquel, she is down to earth. Unfortunately she has been persuaded by the IT people that persuaded HMRC that MTD would solve the hypathetic (yes my spelling is right) tax gap. I'm not naive to suggest there isn't a tax gap but certainly not to the tune of £36B. As previously stated the "tax gap" has never affected the economy adversely as it always goes back in. It's just that HMRC don't get the first slice. So Raquel get rid of MTD, AML, IR35 and you'll have more than enough money to cover whatever the "tax gap" is made out to be. Now if you really want to catch the REAL tax dodgers, let's get HMRC back to where it was before some bright spark thought that "digitising" and getting rid of quality staff was the answer.

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By AndyC555
15th Apr 2024 12:25

"As Dan Neidle commented “A deterrent that you never use is no deterrent.”"

A most absurd statement.

A deterrent that never needs to be used is bleeding obviously successful in deterring what it was set up to deter.

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Replying to AndyC555:
Stepurhan
By stepurhan
16th Apr 2024 09:22

AndyC555 wrote:

"As Dan Neidle commented “A deterrent that you never use is no deterrent.”"

A most absurd statement.

A deterrent that never needs to be used is bleeding obviously successful in deterring what it was set up to deter.

It would be an absurd statement if, as you have done, he had added "need" to it.

But a deterrent that is never actually used, despite the activity it is supposed to deter happening, is no deterrent. That is what I think he meant. It's not exactly hard to think of common activity which is illegal, such as parking on double yellow lines, where the deterrent is so rarely applied people don't think twice about doing it.

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