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A money tree | AccountingWEB | Election pledges hang on dubious £6bn in unpaid taxes
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Election pledges hang on dubious £6bn in unpaid taxes

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The main political parties are basing their spending strategies on £6bn of extra taxes, but looking at the tax gap, Philip Fisher doubts whether this sum will be available in the near future. 

12th Jun 2024
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Both the incumbent government and the hot favourites to win the general election are resting significant parts of their policy offerings on the recovery of £6bn in unpaid taxes every year.

Nobody can doubt that if this money flows in, there will be major benefits, whichever party is in power.

Although Rishi Sunak and Jeremy Hunt on one side and Sir Keir Starmer with Rachel Reeves on the other are using the same methodology, until the last few days the figure had not been rigorously considered or challenged. This might be a mistake.

The debate has been triggered after the National Audit Office’s head Gareth Davies suggested to Parliament in January that £6bn a year could be recovered through a concerted effort on tax avoidance and this has become instant gospel.

Could it be understated?

Estimates of the tax gap vary but start in the region of £35bn and could be as much as £100bn.

If that is the case, then one might argue that attempting to recover a mere £6bn is relatively unambitious.

Just imagine what wise politicians could do with an extra £20bn? I fear they would probably just fritter it away with the rest.

It would at least give us the chance to consider whether it might be better for the country at large to abolish inheritance tax or implement comprehensive green energy policies.

The past

If people are queuing up to pay £6bn a year in additional taxes, then this surely begs the question as to why the current government has not accepted the cash over the last decade and a half?

At some point, perhaps in the middle of an election debate, someone might like to put the point to Rishi Sunak or Jeremy Hunt, since many of their problems could have been solved with an extra (inflation-adjusted) £90bn or so in the bank.

Cost

Assuming for the moment that it might be feasible to add an extra £6bn on to the tax take, surely it must be necessary to build in additional costs in doing so.

Unless the Prime Minister and/or Chancellor of the Exchequer can announce in mid-July that people who haven’t been paying taxes must now do so and everyone who has been avoiding and evading taxes for the last decade or two complies, bringing in this cash will take some effort.

This probably means recruiting significant numbers of highly skilled workers into HMRC - and they will not settle for the national minimum wage.

In addition, some well-heeled folk or organisations who prefer to underpay their taxes will take their cases through the courts. As a result, HMRC will need greater internal legal resources and a big budget for KCs and their teams, who will inevitably charge top dollar in return for attempting to bring in megabucks.

Others might skip the country, making the prospect of chasing them down nigh on impossible.

Practicalities

It is a sad fact that many of those who underpay their taxes do so because they don’t have the money. Should that prove to be the case, insolvencies will go up but some of the projected income will never appear.

In addition, a lot of the under-declared money could be due from individuals who are not currently recipients of tax returns.

Trying to identify such people who would typically owe relatively small amounts might be more bother than its worth.

In a similar vein, Gareth Davies estimated at £5.5bn a year is lost through fraud and error around universal credit. You wouldn’t envy HMRC offices trying to get that back.

Some possible solutions

There are going to be few new ideas in this area.

Those with long memories will recall the days when HMRC regularly issued estimated assessments and often overstated the amounts due. Doing so now might be good news for cashflow and some of the money would undoubtedly stick but will prove hellish for both victims and staff at HMRC.

Boosting telephone lines to receive “shop your mates” tip-offs could be very lucrative but would anyone answer the phone?

Perhaps the most effective solution might be to introduce one or more tax amnesties, with the prospect that some taxpayers will take advantage and start flinging money at the Treasury in return for minimal effort at the other end.

The real problem is that, if people don’t believe there is a realistic possibility of getting caught, they will continue to evade taxes or abuse the system. That is a consequence of succeeding governments that have cut HMRC to the bone and then reduced it further.

This leads into the crux of the problem and the reason why the next Chancellor may be baffled to discover that the £6bn doesn’t flow in as predicted.

Scooping up HMRC resources and launching a campaign to recover unpaid taxes will undoubtedly be beneficial but the extent must be open to question and it is likely to take years rather than weeks.

In reality, by the end of the next parliament, if everything goes to plan and some serious money is invested in HMRC’s investigatory powers, a fair amount of hard cash could be available to make life better for the population.

Labour recognises this, but suggests that their plan would raise £700m in the next tax year, rising to £5.1bn by the end of the Parliament. Accountants will recognise that this is way short of £6bn a year.

Strangely, even though they must realise that this is the case, those in power at the leading political parties already seem to be earmarking expenditure using funds that will not exist. At the moment, one fears that the winners in this rather tawdry race will be the party that loses the election and doesn’t have to fulfil unfulfillable promises.

Replies (8)

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By Paul Crowley
12th Jun 2024 17:36

Tax gap, avoidance, errors?
All require HMRC to be doing its job.
Spend to speculate on finding stuff is the true answer. HMRC needs to recruit staff that understand how taxes interact, and know where to look during enquiries. Oh, and start some enquiries.

Thanks (3)
Replying to Paul Crowley:
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By FactChecker
12th Jun 2024 18:34

The 'tax gap' is just a 'modelled' figure based on a lot of assumptions whose interaction isn't understood (even by the modellers) - in other words it's a 'guess'.

But even if it was somehow accurate, it's supposed to represent the amount that is due but failing to be collected (with a suggestion that's mostly deliberate plus a little 'user error').
However no-one seems to define the starting point .. 'tax due'.

There are those relatively rare cases where the taxpayer has agreed the amount but failed to pay it (or even disappeared); and there are those cases on which HMRC want us to focus, where they dispute the figures submitted by the taxpayer.
As you say, for all the froth, they don't seem very keen to launch Enquiries - which suggests that at best they think it won't be 'profitable' to chase much of it.

And then there are the cases which aren't even seen as cases, but which have the potential to provide the sums in the headline above. These are all outside of any personal experience of mine but, from temporary windfall taxes to internationally 'transferred' profits, the sums that were *intended* by legislators to be taxed that escape taxation are mind-boggling.

Amazon, Google et al plus Banks and their financial services cousins plus energy and transport utilities and so on ... the amount that evaporates before the UK gets to levy payable tax makes all those individual evasion practitioners look like rank amateurs.

Thanks (7)
Replying to Paul Crowley:
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By sammerchant
16th Jun 2024 13:22

Jim Harra has been knighted for the job he's been doing. Just imagine, if he had managed to get this tax gap sorted, they would have made him a Lord.

Thanks (0)
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By Open all hours
12th Jun 2024 19:21

The tax gap is any figure you want it to be at the time of your own choosing. It will always sound dramatic and it will always be meaningless.

Thanks (5)
Replying to Open all hours:
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By AndyC555
13th Jun 2024 11:56

Yes but you can get grants from unions and charities to produce such figures so the tax gap performs the function of providing income for the otherwise unemployable.

Thanks (1)
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By AndyC555
13th Jun 2024 11:53

" Tax that should be paid by person A but is instead retained by that person and spent with person B will be paid by person B (or person C or D). All the tax avoided or evaded will eventually be paid by someone else. Therefore, there is no tax gap".

Discuss

Thanks (2)
Replying to AndyC555:
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By Graeme Lindsay Abdn
14th Jun 2024 08:58

That is a good point. When I asked this question to HMRC a good few years ago, they said the 'tax gap' assumptions did not include the possibility that the tax underpaid was reinvested into the economy (i.e. they assumed it was under someone's bed!). Therefore, as you say, the 'saved' tax just ends up being used to buy goods and services, generating economic activity and err taxes.

Was MTDfVaT and MTDfIT not going to collect billions of pounds btw? The VAT billions must have started coming in by now?

Thanks (2)
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By listerramjet
14th Jun 2024 09:15

I am assuming the writer understands that tax AVOIDANCE is entirely legal. It exists because we have a significantly complex tax system with plenty of opportunity for arbitrage. And actually a fairly large element of the code isbecause of this
The tax gap is in reality a figment of some people's imagination. In truth the "stone" has no blood in it! HMRC spend a lot of our money attempting to establish what is a biscuit and which biscuits are subject to VAT. Which is but one example of how the tax code is expensive to administer.
The answer is simplification and removing the "minor" taxes, but I doubt you will find a politician from the traditional parties who would prosecute that sort of approach. Parkinson's law is alive and kicking!

Thanks (1)