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image of businesswoman riding a snail across a gap | accountingweb | Labour targets the tax gap
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Labour proposes to reduce the tax gap at last

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With the country in desperate need of additional funds to boost the economy, Labour has come up with an obvious but much-needed proposal – and not before time.

11th Apr 2024
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Although she put a brave face on it in the House of Commons, Rachel Reeves cannot have been overly enthusiastic when Jeremy Hunt stole a key element of Labour’s prospective economic recovery plan with the proposed abolition of non-dom status in the Budget.

Since then, the Shadow Chancellor of the Exchequer has remained cautiously silent regarding what the media described as “a black hole” in her fiscal planning.

Her biggest problem lies in a commitment to freeze borrowing to fund day-to-day expenditure. Effectively, for reasons that many economists regard as spurious, she is wearing self-appointed handcuffs.

As a result, Labour has announced few concrete plans on either the taxing or spending fronts to date, meaning that the announcement of new proposals, which appear to have been thought through in some detail, is refreshing.

Thought for today

On Tuesday Ms Reeves came out fighting in support of a decision to boost HMRC’s investigative powers. She needed to in the face of a particularly aggressive interview on the Today programme as Nick Robinson repeatedly refused to let his guest explain her proposals, much more interested in pressing his own agenda.

He did make one valid point, which is that although boosting the economy by £5bn at the expense of those feeling the tax system sounds good, it is a relatively small drop in the vast economic ocean.

However, given the choice between saving £5bn and saying: “Why bother to do anything for the country?”, it is hard to imagine that many who are struggling to put food on the table would sit in the Robinson camp.

The principal idea is one that has been rehearsed on these pages many times. It is also a favourite topic with the House of Commons Public Accounts Committee, not to mention the National Audit Office, both of which promote the blindingly obvious strategy of re-building HM Revenue and Customs staffing closer to past levels in an effort to reduce the tax gap.

This amorphous concept gives rise to much debate, but the official figure is £36bn at present, although there is a strong body of opinion that it could be up to three times that number.

Beefed-up systems

Labour’s relatively modest proposal is to employ an additional 5,000 people to investigate tax avoidance and prosecute fraud using beefed-up IT systems that begin to incorporate artificial intelligence (AI).

As Margaret Hodge (of whom more later) pointed out this week, many of HMRC’s problems result from a 56% reduction over the past five years in the size of the unit that investigates offshore, corporate and wealthy taxpayers.

According to the independent think tank Taxwatch using the latest HMRC data, each £1 of compliance expenditure targeted at common or garden individuals brings in £6.60, at wealthy individuals £11.40, and when directed towards large businesses a stonking £39.20.

From memory, the National Audit Office (NAO) most recently estimated that the average tax take from each extra individual on the HMRC payroll is 18 times their cost.

Given that Reeves’s intention is to plunge £555m into the project, her £5.1bn estimate of annual savings by the end of the next Parliament seems very modest.

Doing the basic maths on the NAO multiple comes to a figure in excess of £10bn, which might be chicken feed to the likes of Nick Robinson but could do quite a lot of good if invested in healthcare or education. Theoretically, if the investment were directed exclusively towards large businesses and the numbers held up, the relevant figure would be over £22bn.

Lousy job

It has been apparent to accountants for many years that HMRC is doing a really lousy job when it comes to compliance and an even worse one with regard to recovering taxes that have disappeared through evasion, abusive avoidance or merely slipped through the net as a result of laziness or ignorance.

It could also be argued that a more combative approach from HMRC would be great news for the majority of our own profession, since clients will begin to care far more about their tax affairs and require expert professional support as investigators attempt to recover sums that may or may not be due.

The only ones who might be licking their wounds are the facilitators of tax schemes that might never have been effective and will belatedly be challenged.

Welcome resurrection

Annoyingly, the first draft of this piece had included the radical suggestion that these goals might best be achieved by resurrecting the Office of Tax Simplification (OTS), perhaps with a new slant.

Within hours, this idea has been effected, with the announcement that an expert panel has been instituted to support the proposals. The expertise is impressive with Dame Margaret Hodge, former chair of the Public Accounts Committee and Sir Edward Troup who used to run HMRC, joined by Bill Dodwell, at one-time tax director of OTS and Mike Bracken, former executive director of UK Government Digital Service.

If Labour does get into power and implements these proposals, it will be fascinating to see whether the savings by the end of the next Parliament are only £5.1mn or considerably higher. Either way, they will be very welcome.

Replies (19)

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By Justin Bryant
11th Apr 2024 14:24

The majority of the tax gap is basically small traders dodging VAT etc. with undeclared cash in hand jobs (rather than RM's view of things re bottom of the harbour schemes etc.), so good luck to them with all that (as that will never be stopped, short of introducing a death penalty for it).

Also, why is the negative tax gap never mentioned? i.e. people unnecessarily overpaying tax.

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Replying to Justin Bryant:
By Ruddles
11th Apr 2024 16:10

Justin Bryant wrote:
The majority of the tax gap is basically small traders dodging VAT etc. with undeclared cash in hand jobs ...

You may want to consider adding a couple of hyphens ;¬)

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Replying to Ruddles:
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By FactChecker
11th Apr 2024 16:28

At least he didn't mention bottom dwellers (as an Aussie acquaintance did when trying to invent a group noun for those who partook in that scheme)!

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By FactChecker
11th Apr 2024 16:41

"If Labour does get into power and implements these proposals, it will be fascinating to see whether the savings by the end of the next Parliament are only £5.1mn or considerably higher."

Indeed it would IF ONLY there were any established, reliable metrics in the first place ('tax gap' is a label - not an entity with a clear definition let alone any methodology for measurements).
Worse, as any good statistician or even general scientist will tell you, if you want to measure change as an effect of doing X ... then you first have to eliminate all other factors that may be contributing to the change (and if you can't properly eliminate them - as per randomised control trials - then at least come up with weighting factors that are themselves derived from an evidential base).

Of course none of this exists with the 'Tax Gap' so, what was once a useful if ill-defined concept, has now become a meaningless phrase for insertion into any soundbite that lacks financial gravitas (aka to provide window-dressing as a means of distraction from the empty window).

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Replying to FactChecker:
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By johnjenkins
12th Apr 2024 11:44

Rachel said with conviction that HMRC would be given funds needed to close this hypothetical tax gap. She is going to bring forward the non dom scenario. So this only leaves MTD. Quite how she thinks this will close the tax gap is beyond me. If someone is dodgy, which according to Justin is just about everybody bar himself, then they will be dodgy 4 times a year instead of once a year.

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Replying to johnjenkins:
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By Justin Bryant
12th Apr 2024 12:31

I never said that (but by that I'm not saying I'm dodgy of course!).

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Replying to Justin Bryant:
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By johnjenkins
12th Apr 2024 14:13

If the tax gap is £36B and the majority of that is because of dodgy traders (according to you) then there's not much left is there?

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By mumpin
11th Apr 2024 20:34

"From memory, the National Audit Office (NAO) most recently estimated that the average tax take from each extra individual on the HMRC payroll is 18 times their cost."

I really doubt this. It might be true if measured using assessments issued. But I'm sure that the fact of limited liability companies knocks a huge hole in the actual amount collected.

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By North East Accountant
12th Apr 2024 10:04

HMRC don't need more staff......here are the facts about HMRC staff.

Total Staff - FTE
2011-66,951
Dec 2023-63,224
Minus - 5.57%

Grade - AO/AA (those that answer phones, letters, etc)
2011-34,819
Dec 23-19,152
Minus - 55.00%

Higher up grades as follows;
2011 - 32,132
Dec23 - 44,072
Plus - 37.15%

So whilst HMRC moan on they have no staff they have had a 37% increase in staff at the higher grades....the question is what are they all doing?

Cos they are not answering phones, letters, or doing compliance checks (hardly).

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Replying to North East Accountant:
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By jon dickinson
12th Apr 2024 15:25

They are all "working" from home, walking the dog, minding the kids and providing a third world service.

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Replying to North East Accountant:
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By john corbett
13th Apr 2024 01:29

The reason for the decrease in AO/AA grades was the AA grade was scrapped. So for the two lowest grades in Dec 23 you now have to look at AO/O grades and you should find a true comparison. The AO/O grades do most of the clerical support answering phones and letters, and work under very strict management conditions having to book leave months in advance and have imposed unrealistic targets. They work from national work list so do not get to know any of the taxpayers or accountants or what happens to the case after they answer a query. There is no job satisfaction and most would leave HMRC if they had the chance.
The compliance staff are mostly HO/SO and do an excellent job but they too are being hit with unrealistic targets and managers who actually don't have the technical knowledge to understand who they are managing and what support they need. Managers are really only able to offer welfare and diversity support, they are overrated and are not worth their grade's.
There are still some older managers from the 1980's early 90's who have technical knowledge but as these retire things will get worse. HMRC seem to think if you had outside management experience even in corner shop or sports club then your fit to manage but then this only suits top management who find these people willing to blame their teams and not stand up to the idiots at the top.

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By RICHARDBIBBY
12th Apr 2024 10:04

I always like the idea of spending to save. It reminds me of Alice in Wonderland.

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By listerramjet
12th Apr 2024 10:39

The tax gap is a fiction designed to spark a dull Islington dinner party. Based on the spurious notion that we all love paying tax. Tax avoidance is thus rebranded as tax dodging. And the progressive left carry on trying to squeeze blood out of stones.
The elephant in the room is government spending. Ever expanding as they squeeze the productive sector by competing for scarce resources and by prosecuting policies designed to export jobs. Funded by borrowing, or taxing our great great great grandchildren.
When it explodes it will get very messy.

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By Mr J Andrews
12th Apr 2024 17:37

One comment in this article is a key toward filling the fiscal black hole :
.................the blindingly obvious strategy of re-building HM Revenue and Customs staffing closer to past levels in an effort to reduce the tax gap...............
Apart from the cuts , the dumbing down of Revenue staff generally under the clearly incompetent C.E.O. has contributed to the falling coffers into the Exchequer. Non-doms aside there are so many areas for easy pickings. Just walk down any street and see the flourishing black economy. How many properties purchased and sold are flaunting the tax take on lettings - and CGT. { If the police are involved with a spurious council house sale , this might be worth a look......... }.
Its common sense that a boost in competent HMRC investigators - coupled with a competent C.E.O - will go a long way towards filling the hole.

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By AndyC555
15th Apr 2024 08:49

"there is a strong body of opinion that it could be up to three times that number."

No there isn't. One person sat in his bedroom making up numbers isn't a 'strong body of opinion'.

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By AndyC555
15th Apr 2024 08:58

Here's a thought.

Joe the self-employed plumber decides not to declare £1,000 income. He evades paying £200 income tax and £60 NIC. The tax gap is £260.

But Joe has £260 more to spend at John the butcher who does declare all his income and so will pay more tax and NIC. After he's paid that tax/NIC he also has more to spend.

Sooner or later income on which tax has been evaded will be spent in the economy where it will be taxed.

Of course, everyone should be paying the tax they ought to, according to the law.

But if Joe, rather than John or anyone else, pays the tax, it's still the same amount of tax being paid. The 'tax gap' is at least to some extent illusory. If it disappears, it won't result in more tax being paid overall, just in different people paying it.

Discuss.

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Replying to AndyC555:
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By johnjenkins
15th Apr 2024 10:00

So if the "tax gap" is £36b x3 = £108b = approx. £415.38b undeclared income. Yeh sounds about right. So where is this undeclared income?

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Replying to johnjenkins:
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By FactChecker
15th Apr 2024 14:35

Well that's 'only' (and very approximately) £10,000 pa per taxpayer ... so who's got my £10k and can I have it back please (I promise to pay tax on it)!

Hold on - it's beginning to sound more likely (although I still maintain the quoted figures are just 'fingers in the air' generated through this kind of logic rather than anything actually measured) ... but, given the multi millions squirreled away by the relatively few, the average figure may well be skewed upwards to that extent.

And that's the point, the big figures could be (but aren't) targeted with rifle-shot accuracy ... but it's much easier to claim everyone's on the take and so come up with procedures/systems that penalise us all needlessly.

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Replying to FactChecker:
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By johnjenkins
16th Apr 2024 09:19

They do this all the time. They can't figure out who the real crooks are so they penalise everybody. You know who "they" are.

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