While tax avoidance continues to be in the government's sights as it attempts to close the tax gap, the time has come to find the resources to tackle evasion head on
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This article was first published in the September 2017 UK edition of Accounting and Business magazine.
At £36bn, it is little wonder that the government, and HMRC in particular, is keen to reduce the so-call ‘tax gap’. This is the latest estimate (from 2014/15) of how much money should be coming into the public purse but, for various reasons, isn’t. It has fuelled the argument that everyone, from individual taxpayers to large corporations, should be paying their fair share.
But while most of the tax collection headlines have been rooted firmly in tackling avoidance (think Google tax and the recent attempt to increase NIC for the self-employed), there is still a significant level of evasion that is starting to look as if it is being left in the ‘too difficult to tackle’ box.
According to the latest figures produced by HMRC, tax avoidance accounted for £2.2bn of the overall £36bn. There is also the £5.2bn that HMRC defines as ‘legal interpretation’. This is the same amount that is attributed to ‘evasion’, but one should also include £6.2bn lost to the ‘hidden economy’, and perhaps also the £3.6bn in ‘non-payment’. This latter figure might represent a ‘can’t pay, won’t pay’ attitude, whereas evasion and the hidden economy represent a ‘can pay, but won’t anyway’ stance.
Yet the focus remains on avoidance, which experts believe represents a softer target, albeit a visible one. And HMRC has been pretty successful in tackling it – back in 2010/11, the avoidance figure stood at £3.5bn (0.7% of theoretical total tax liabilities), but by 2014/15 this had fallen to £2.2bn (0.4%).
Meanwhile, evasion would appear to be stuck in the 0.9% to 1.0% range of the overall tax take, and in pure cash terms has risen from £3.8bn in 2009/10 to £5.2bn in 2014/15.
‘We have been saying for a while that the government needs to focus much more on those that are evading tax and not the soft targets who are actually in the system,’ says ACCA’s head of tax Chas Roy-Chowdhury. ‘It is a real shame that the government hasn’t got to grips with those who are evading rather than those who are getting it wrong or perceived to be entering into schemes and tax mitigation plans.’ He cites the infamous case of HSBC’s Swiss banking arm, where leaked documents relating to hundreds of UK customers implied that the bank was being used for evasion. But only one customer was prosecuted.
Roy-Chowdhury adds that, with the introduction of the Professional Conduct in Relation to Taxation code, tax avoidance should be taken out of the equation, allowing HMRC to switch resources to the fight against evasion. Indeed, there are signs that this is happening: law firm Pinsent Masons recently commented on the 10% increase of investment in HMRC’s fraud investigation service staff (from £186m in 2015/16 to £204m in 2016/17). This increase, says Pinsent Masons, is in part the reaction to the Criminal Finances Act, which makes the failure to prevent tax evasion a criminal offence.
And technology is increasingly coming into play – HMRC’s $45m Connect computer system is quietly sifting through data to identify potential tax dodgers. And no doubt, data received under international tax treaties will deliver more grist to the mill.
However, RSM’s George Bull is sympathetic to HMRC’s plight: ‘Anything that can bring the overall tax gap down would be worth doing, but you would look to get the best payback. However, you can’t go on quarrying into just one element [tax avoidance] indefinitely. There’s an injustice in that tax evaders aren’t seen to be treated the same.’
Bull explains that the profile of tax evaders can be broken down into two groups – a large number of small situations and a limited number of high-value, well organised, criminal organisations that can hide their tracks. Both groups would be very resource- intensive for the taxman to tackle.
Not that HMRC is sitting on its hands. At the beginning of the year, it published details of its successful cases that had been prosecuted in 2016. Its criminal investigations led to 679 individuals being convicted for their part in tax crimes, with sentences totalling more than 730 years. Some of those involved were accountants.
No victimless crime
Simon York, director of HMRC’s Fraud Investigation Service, said at the time: ‘Tax evasion isn’t a victimless crime: it is stealing money from our vital public services and it undermines honest traders. We’re working hard to take the profit out of organised crime, create a level playing field for honest businesses, and use the full range of our powers and capability to ensure that no one is beyond our reach.’
The Conservative’s 2017 manifesto was relatively reticent on the matter, dedicating five sentences to it, and inevitably lumping avoidance in with evasion under the heading ‘Stopping tax evasion’. The Tories promised vigorous action, and even managed to pull out a pro-Brexit line, saying that the party would improve HMRC’s capabilities to stamp down on smuggling, ‘including by improving our policing of the border as we leave the European Union’. The manifesto also promised to take further action on online VAT fraud. Both of these are sensible targets given that the VAT and excise duty ‘gap’ stands at £15.5bn.
But with changes at the very top of HMRC – director of counter-avoidance David Richardson has taken over from Jennie Granger as director general of customer compliance, but only on an interim basis – there is a question mark over recruitment at all levels. With the closure of local offices and a move to centralise resources, together with the organisational changes resulting from Making Tax Digital, it is possible that, with the best will in the world, resources will not be enough to take evasion out of the ‘too difficult’ box.
Philip Smith, journalist
CPD technical article
"Tax evasion isn’t a victimless crime: it steals money from vital public services and it undermines honest traders"