Government agencies taking a “blind eye” to non-compliance are losing the Exchequer up to £16bn a year in lost tax, according to tax justice campaigner Richard Murphy.
In a 68-page report published this weekend, Murphy found that in the year to March 2010 more than 500,000 firms were dissolved after failing to file accounts with Companies House.
“Rather than chase or prosecute them Companies House simply gets rid of the offending companies – so sweeping the problem of non-compliance with the law out of view,” the report concluded.
The agency’s reluctance to pursue non-compliant firms, combined with HMRC’s failure to collect tax from a majority of registered companies means that up to £16bn in tax goes uncollected every year, Murphy estimated.
Analysis of the Companies House register found that a majority of the 500,000+ companies dissolved during the year to March 2010 were removed from the Register of Companies because they did not file documents required by law. Roughly a third of all companies dissolved were less than two years old and had never filed accounts.
“Maybe hundreds of thousands of companies a year are struck off before they ever have to file a set of accounts with either Companies House or HM Revenue and Customs, meaning that the directors of these companies can avoid all their obligations to declare any of the income that they have earned as a result of the actions of a UK regulatory agency,” the study noted.
Evidence from the study suggested HMRC’s stance with non-compliant companies was equally lax. According to Murphy, HMRC does not appear to demand information from companies struck off if they are less than two years old. “In many cases we know almost nothing at all about those companies that disappeared forever,” the study stated. It also found:
- Only 70% of companies are asked to file tax returns by HMRC.
- Of those companies asked to file tax returns in the year to March 2010 only two thirds actually did so.
- As a result of these two figures, only just over 45% of all companies filed tax returns for the year to March 2010.
- In the year to March 2009 (the last year with data available) just 33.6% of all UK companies actually paid corporation tax.
The report is also critical of HMRC’s penalty regime, pointing out that more than £220m of penalties were outstanding March 2010. “This suggests that H M Revenue & Customs are running a system that, even after penalty waivers, appears seriously out of control. The result is that the penalty system must be a wholly ineffective deterrent to those determined not to pay tax,” the study concluded.
While detailing “a catalogue of failure, mismanagement, error, and official neglect” in the report, Murphy, the director of Tax Research, explained that they stemmed primarily from inadequate resourcing: “It is clear that they do not have the resources they need in terms of staffing to undertake the duties demanded of them by parliament. [HMRC] has already lost more than 30,000 staff in the last few years and is going to lose 15,000 more by 2014. Companies House has just announced plans to reduce its staffing by 25% even though it is already very clearly failing to undertake the role demanded of it.”
Among 18 recommendations, the report suggested that UK-based banks should be required to advise HMRC and Companies House of bank accounts operated by UK-registered companies in order to pursue those that do not pay taxes nor file their accounts. It also suggested increased personal penalties for directors of non-compliant companies.
The study was aided by Green Party leader Caroline Lucas MP, whose parliamentary questions helped to uncover information used in the report. She commented: “This report reveals the shocking complacency of HMRC and BIS, who seem to be taking an ‘out of sight, out of mind’ approach to following up and collecting corporation tax from limited companies. This horrifying catalogue of failure to regulate properly means that the UK government is forgoing literally billions in taxation every year.
“At a time of savage cuts to public spending, it is outrageous that these enormous tax loop-holes remain available. The government must not be allowed to continue turning a blind eye to the need for better regulation.”
The report, '500,000 Missing people: £16 billion of lost tax' can be downloaded from the Tax Research website.
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