HMRC
Tallking to AccountingWEB
AccountingWEB published this podcast interview with me yesterday.
We talk about the Taxing Wealth Report 2024 in the main, but also about my concerns about the failings of the Institute of Chartered Accountants in England and Wales.
It was a lively interview, with quite a lot of animated comment by me, if I am honest.
I have an affection for AccountingWEB. I was a contributing editor for about a decade.
The Guardian agrees: Labour’s tax problems can’t be solved by a cosy coterie of old insiders
This comment was posted on the blog overnight by long term occasional commentator Jonathan:
Interestingly, now the Guardian have discovered your Taxing Wealth Report it seems they have started reading this blog – and based tonight’s editorial on this post.
It will be interesting to see if this continues, and whether the Labour Party realise they need more credible advisors.
I did, as a result, search out the Guardian’s editorial today, which has this headline:
The editorial does, I admit, raise a great many questions I noted here yesterday, including about the suitability of both Edward Troup and Bill Dodwell to be appointed to Labour’s new tax advisor panel, and Margaret Hodge’s’ past comments upon them.
They also picked up on my concerns about the appointment of a panel of the supposedly great and good to advise on financial services related issues, which I reposted here yesterday.
In addition, they suggested that a much broader basis for the recruitment of expertise should have been adopted by Labour, as I have said many times before.
And the editorial appears to explicitly support the Taxing Wealth Report line on taxing income from high earnings and wealth more.
So, just for the record, I had no idea that this was being written, and although I did speak to Guardian journalists yesterday, including about my concerns on the membership of this panel, I had no involvement in this editorial in any way, even though its alignment with my views is high. But, that said, I am not complaining. If they stick to this line The Guardian can build a strong policy platform for holding Labour to account, which is essential.
The editorial is here.
Why has Rachel Reeves appointed as her tax adviser a person who has said that tax is extortion and told parliament that he was not too worried about small businesses not paying their taxes?
Rachel Reeves has appointed Sir Edward Troup to be one of her four new tax advisers. He might be a former boss of HM Revenue & Customs, but he is a very odd choice.
First, as his Wikipedia page makes clear, he was a special adviser to Ken Clarke when he was Chancellor from 1995 to 1997. So he was, I think we can safely assume, a Tory set on opposing Labour at the time. I know people do change their spots, but I don't think this is a good start.
Then there is the problem of an article he wrote in 1999 for the FT in which he said:
Tax law does not codify some Platonic set of tax-raising principles. Taxation is legalised extortion and is valid only to the extent of the law.
I know of no one in tax justice or outside the Tufton Street think tanks who would share this view. The power to tax is part of what defines the state. Its power to use tax to organise society is one of the bedrock of left-of-centre thinking. Troup clearly did not share those views on the state or society. It is an exceptionally odd view for someone advising a Labour Shadow Chancellor to have held.
He added:
Tax avoidance is not paying less tax than you ‘should'. Tax avoidance is paying less tax than Parliament would have wanted. Avoidance is where Parliament got it wrong, or didn't foresee all possible combinations of circumstance.
The problem of tax avoidance is reduced to the problem of finding an answer to the question of what parliament intended and making sure that this is complied with. I would not pretend this is a simple task. But recognising this as the issue and dealing with it equitably and constitutionally would be a significant step on the way to tackling avoidance effectively.
Again, I would suggest that no reasonable person thinks now, or thought in 1999 that tax avoidance was the fault of Parliament. Tax avoidance is undertaken by those who wilfully seek to undermine the intent of parliament, aided and abetted by tax advisers (which Troup then was) willing to help them do so, in exchange for a fee.
I was not the only person with this concern back then. I raised my concerns in 2013 in anticipation of a Public Accounts Committee hearing in parliament. As a result, Margaret Hodge, who had read my post that morning (I sent it to her, together with another one), questioned Troup on these suggestions he had made. The record is still available. This exchange took place:
Q399 Chair: Well, the OECD does think that. Is it true that you said at some time that "Taxation is legalised extortion"?
Edward Troup: I am very glad that Mr Murphy and others go back and read the articles I wrote in the FT in the 1990s.
Q400 Chair: Did you say that?
Edward Troup: I wrote a whole series of articles.
Q401 Chair: People go back the whole time to stuff I did in the 1990s and 1980s, I can tell you. You never get away from your past.
Edward Troup: The article was making the point-indeed, it is relevant to a lot of what we discussed today about tax being a matter of law-
Q402 Chair: Did you say "Taxation is legalised extortion"?
Edward Troup: In the context of that article, which you read, I was making the point that it should not be left to the discretion of tax administrators to decide how much was due; it had to be left to the rule of law, and that is quite an important principle.
Q403 Chair: Did you say "Taxation is legalised extortion"?
Edward Troup: In the context of that article, those words appeared. If you read on-
Chair: You said it-thank you.
Edward Troup: Would you like me to read it?
Chair: No. I was interested; I would never dream of putting those four words together.
Hodge is now a colleague of Troup's on Reeves' new panel.
This, though, was not the only time Troup was called to account before parliament when he expressed contentious views. In 2004, he said when questioned by the Treasury Select Committee that:
I would not like to support anything which is perceived as tax avoidance, but you have got to remember that this is money left in the economy and this is not necessarily a bad thing for the economy. It may give a bit of an imbalance of incidence of tax between certain groups of people, but all we are actually saying is that some small, self-employed owned and managed businesses are actually paying less tax than the Government might have intended, which is not necessarily a bad thing, except to the extent that it creates inequity between equivalent classes of individuals.
In other words, he was indifferent to tax abuse by small businesses, did not care about inequality, the impact of tax abuse on honest smaller businesses, or the undermining of the rule of law that this activity represented.
So, the question is, if he thinks the tax is extortion and is apparently indifferent to the abuse of tax law, why is he a suitable person to advise Rachel Reeves? Could it be that, as quoted in a Guardian article in 2016:
“If you think the world needs to be changed you don’t appoint Edward Troup to that job,” said Jolyon Maugham QC, an expert in taxation law.
I agree with Jolyon.
In that same article, Margaret Hodge said, referring to the matters I note above:
The fact that he had written that draws into question whether or not he should be in charge of our tax system.
Hodge's question still remains relevant, not least with regard to his appointment to advise Rachel Reeves. Troup looks like a most unwise choice by Reeves.
The Taxing Wealth Report and tax justice
I posted this video on YouTube this morning:
The transcript is as follows:
Right at the very heart of the Taxing Wealth Report is the idea of tax justice.
Fairness matters when it comes to taxation. People should be treated equally when they are in equal situations, and people who are wealthy should contribute more to society than those who have less income and wealth. Those ideas are absolutely fundamental to the concepts of tax justice, and they are fundamental to the ideas within the Taxing Wealth Report.
Let me explain those in a little more detail. When we're talking about people in a similar situation in the sense that they have the same overall level of income then we are discussing horizontal tax equity when we discuss their tax affairs. It should, in my opinion, be the case that whatever the source of a person's income they should pay the same amount of tax.
In other words, if a person earns their income from working, or if they get their income from rent or dividends or interest, or if they make their income from capital gains, which are the profits that people make on the sale of assets, they should still pay the same amount of tax, whatever that source might be.
That is not what happens in the UK at present. We are a very long way, in fact, from that happening here in the UK. That’s because of the allowances and reliefs and exemptions that are within the tax system mean that those who work for a living pay the most tax on their income and that those who live off capital gains, that is, the wealthy who can sell assets to realise money on which they can then live, pay the least amount of tax.
We saw that very vividly in 2024 when Rishi Sunak published his tax return for the year 2022/23 and his overall rate of tax was just 22% or so. If the recommendations in the Taxing Wealth Report had been in place and had been applied to his tax return, he would have paid tax at well over 50%. Now, let me explain why these inequalities arise, very briefly, and why the Taxing Wealth Report tackles them.
The inequalities are quite easy to explain. Capital gains tax is charged at roughly half the rate of income tax, and that's ridiculous. There is no reason why a person who makes money from profiteering should pay tax at half the rate of somebody who has to work for a living. That's crazy. It's wrong.
But there's another bias within the tax system which heavily favours those with wealth. And that is that income from interest and from dividends and from rents only results in the payment of income tax. But when a person works for a living, they also pay national insurance. In fact, not only do they pay national insurance, but their employer pays national insurance as well, at a much higher rate than the employee does now.
So, the consequence is that earnings from employment are much more heavily taxed than anything else. So, in the Taxing Wealth Report, I recommend that the rate of tax paid on capital gains should be the income tax rate, and I suggest that income from rents and dividends and interest and capital gains should all be subject to what is called an investment income surcharge.
That is an extra tax equivalent to national insurance at an approximate rate which combines both the employee's contribution and the employer's contribution, so that the person who gets income from those sources has to also makes a fair contribution to the overall costs of running our society, and makes a fair contribution to the way in which the government must operate if we are all to live in an appropriate fashion.
That is the way to create horizontal tax equity. And there's one other change as well. And that is, that people in the UK should all get tax allowances at the same rate. So, people who make a contribution to their pension should get tax relief at the basic rate of income tax, I suggest, whatever their overall level of income. That means that the 85 percent of the UK who only pay the basic rate of income tax should get the same rate of tax relief as a person who earns a million pounds. Pension contributions should only get tax relief at this lower rate, as should donations to charity also only get tax relief at that rate, because it's totally unfair that the wealthy are subsidized when it comes to their donations to charity or their contributions to their pension fund in a way that those on lower incomes are not. Those allowances create bias. That’s unreasonable because it destroys horizontal tax equity.
Then there is the concept of vertical tax equity. Vertical tax equity means that we should have a progressive tax system. It's quite simple. Those on low income clearly should be taxed less than those on high income. And the economic logic is quite straightforward.
If you pay a person on low income, an additional pound, they will value it much more than if you pay an additional pound to somebody who earns a hundred thousand a year or a million pounds a year. I think that's pretty obvious. The person on low income will actually notice the difference. The person on high income frankly just won't care whether they've got an extra pound or not.
Therefore, the person on a high income can afford to give away more of their income to pay tax and still be relatively as well off and suffer no more harm to their economic well-being than the person on low income, who should pay much less tax because the relative cost to them of tax paid is much higher given that every pound is worth a lot more to them.
Now again, this is a basic concept of fairness. But we don't have such a system in the UK at present. In fact, those who are on the lowest incomes in the UK pay the highest overall rates of tax. And right across the middle bands of income, the rate of tax is pretty much flat. There's very little difference in the overall rate of tax paid by people who are earning £25,000 a year and people are earning £60,000 a year.
But when it comes to the highest rates of income, when we take into consideration overall increases in financial wellbeing in a year, which combines their capital gains with their incomes to look at how much their overall wealth has increased - which is an entirely fair thing to do in accounting terms - then they pay much lower rates of tax than anybody else in the country as a whole.
In fact, if those on the lowest levels of income pay around 44% of their income in tax - not income tax by the way, but taxes like VAT or the BBC license fee or council tax and so on - and when we compare their situation of paying this extraordinary rate of tax of 44% to the situation of those who are on the highest levels of income, they only pay just over 20%, as we saw Rishi Sunak do. His overall rate of tax was just over 22%. Now, what that means is that we have a completely regressive tax system in the UK. In other words, the system works exactly the opposite way from that which it should if we were to deliver tax justice, and real fairness.
We have vertical inequity rather than vertical tax equity. The Taxing Wealth Report recognises that, and it tackles those issues because it says everybody should make their contribution to society in a fair way. We aren't doing that. The Taxing Wealth Report basically tries to knock off the rough edges within the tax system, which creates this unfairness and bias towards wealth, and seeks to restore a situation where the tax system is biased towards the person on ordinary levels of income.
That's most people in the UK, of course. I'm not being disparaging by saying ordinary. I just mean average. And the bias in the tax system should be in their favour, not in favour of wealth. That's what the Taxing Wealth Report tries to achieve with the recommendations it makes. And I think as a result, it represents fairness, it represents tax justice, and it represents what a government interested in the fair treatment of people in this country should be doing.
We need the tax system to work, which means Rachel Reeves will have to do a lot more than she’s planning
The Guardian has reported that:
Labour has appointed an expert panel to advise the party on ways to tackle tax avoidance following its plan to reap £5bn from a crackdown on tax dodgers.
The party’s shadow financial secretary, James Murray, said the independent group would also advise on how to modernise the tax authority, which has come under fire from MPs for failing to claw back an “eye-watering” amount of owed tax. He said the panel offered decades of experience.
So, who are they? The Guardian suggests that:
Sir Edward Troup, a former Treasury special adviser on tax and head of HMRC, will be joined on the panel by Bill Dodwell, former tax director of the Office for Tax Simplification and a retired senior accountant at Deloittes.
The four-person group will also include the Labour MP Dame Margaret Hodge, a former chair of parliament’s public accounts committee, and Mike Bracken, founding partner at the consultancy Public Digital, and founder and former executive director of the UK Government Digital Service.
I should note that I know three of the four: the exception is Mike Bracken.
There are a number of things to note.
The first is that this panel is a long way short of being an Office for Tax Responsibility, which is what we really need to monitor the preparation of tax gap data and to undertake tax spillover assessments to really understand just what is not functioning properly within the UK tax system. This panel does, in that case, fall seriously short of a plan for what is needed.
Second, if this group is meant to tackle the tax gap, 56% of which arises amongst small businesses according to HMRC's own data, picking Ed Troup, who has only worked with large corporate clients, and Bill Dodwell, who did likewise at Deloitte, and Margaret Hodge, who has no tax experience at all - as she once willingly told me - is not the way to go. Nor is picking a data specialist when HMRC's Making Tax Digital programme is not an answer to any known question.
We need an Office for Tax Responsibility. But what we also need is that people with experience of the real problems that we face should advise on solutions.
The Federation of Small Business should be advising.
So should a small accounting practitioner.
HMRC staff need to be represented.
And given the history of the impact of the tax justice movement, it too needs to be on board so long as the representative knows something about tax, and right now, almost none of those engaged in those campaigns have any actual tax experience at all.
Then, this panel needs to ask the awkward questions:
- Is the tax gap data right?
- How do we know?
- What is motivating abuse?
- Why has the small business tax gap got very much worse of late?
- To what extent does HMRC's own behaviour encourage the tax gap?
- Is the tax system riddled with loopholes that could be closed, with ease, and how could that be done?
- Is there a problem with the ease of access to limited liability in the UK?
- What is the plan to co-ordinate action on all these issues, and others?
- What is the budget for this panel to commission work to assist the delivery of advice they supply to Rachel Reeves?
We need the tax system to work better than it does.
To achieve that, we need a stronger panel than Rachel Reeves is appointing, and that panel needs to have teeth as an Office for Tax Responsibility.
Rachael Reeves will not close the tax gap by looking overseas. Pretending that the problem is elsewhere is no longer realistic. It’s in her own backyard.
Rachel Reeves is making an announcement today on how she will plug the gap that she thinks exists in her financial plans as a consequence of Jeremy Hunt stealing her intention to close the domicile rule.
As the Guardian notes this morning, she has resorted to the age-old intention of politicians who do not know how to balance their supposed books by claiming that she will close the tax gap.
Firstly, let me make it absolutely clear that I welcome that intention. It is entirely appropriate. I discuss it at length in the Taxing Wealth Report 2024. I look at the issue in chapter 15 of that report, where in four subsections, I deal with the need to better estimate the tax gap, to undertake tax spillover assessments, to set up an Office for Tax Responsibility to monitor delivery on this issue, and to reform HM Revenue & Customs so that its presence in local communities might be recreated so that it might deliver on this promise.
It would also be well worth looking at chapter nine, and in particular subsection 9.1 on reforming the administration of corporation tax and subsection 9.3 on the reforming of Companies House, both of which are essential if we are to close the tax cap.
In that case, given my enthusiasm for this topic, it would be churlish in the extreme to not welcome Rachel Reeves' intention to tackle this issue.
That said, excepting her comments on domicile, which are appropriate because the Tories are very clearly trying to manipulate the replacement rules for this in favour of the wealthy, Reeves’ comments this morning do appear to have an inappropriate focus to them.
In particular, she is highlighting another age-old mantra, which is that we must pay great attention to offshore tax abuse use if the tax gap is to be closed. Whilst there will, inevitably, be some outstanding opportunities for tax investigations during the period when the domicile rule is closed as matters, previously unseen come to light, I overall doubt that this is where the focus of attention for HMRC should now be. After all of my years campaigning on offshore, I am not saying the issue has gone away. It has not, but it has reduced, considerably. All the effort expended on it has now paid a considerable return. As a consequence, the evidence is now very strong that the problems in tax recovery are not to be found offshore. Nor, by and large, are the problems created by tax avoiders. It seems that HMRC is catching up with them. Instead, the problem that we face is in collecting tax from those who owe it and choose not to declare it within the domestic economy.
As I note within the Taxing Wealth Report 2024, whilst the overall claim of HMRC is that the tax gap is falling (which I doubt) what is also unambiguously true is that the tax gap for the self-employed and small businesses is very high, and in the latter case, in particular, rising rapidly.
In the case of small companies, it is estimated that 30% of all corporation tax liabilities owing or not now paid. Although HMRC never seems to extrapolate a tax loss in one tax to imply that there must be a consequent loss of revenue in another tax, it necessarily follows that if this is the case, then those same companies that do not pay the corporation tax that they owe must also fail to pay the VAT and PAYE that they owe, meaning that it is my belief that both those estimates are seriously underestimated as a consequence. In addition, I do not take seriously HMRC’s claim that the tax gap amongst the self employed is now only 18.5%, representing a decline over the last few years from a peak of 32.5%. If small companies fail to pay 30% of the tax that they owe there is no reason to think that small businesses do anything significantly different.
If Rachel Reeves is serious about closing the tax gap, this is where she would start looking for money. And, as I note in the Taxing Wealth Report 2024, if she wants to collect the significant sums involved in this loss, then she would require that HMRC begin to reopen its local tax offices because only by having a presence in the communities that it serves, and which pay tax, can it understand who is not paying that money, and who is helping them to evade it.
Simultaneously, she should be transforming the information that UK banks are required to submit to HM Revenue and Customs each year so that all those companies trading in the UK can be properly identified, and she should be massively increasing the resources available to Companies House to increase the effectiveness of its operation in tracking down corporate data in the UK.
There is a real opportunity to reduce the tax gap in this country, but Rachael Reeves will not close the tax gap by looking overseas. Pretending that the problem is elsewhere is no longer realistic. It's in her own backyard.
Radio 2 – 1 pm today
I will be on the Jeremy Vine Show on BBC Radio 2 today at 1pm discussing the fact that HM Revenue & Customs is shutting down much of its telephone support service for taxpayers.
HMRC often like to claim that they are doing MTD - Making Tax Digital.
I agree with them: they are doing MTD, but they are actually Making Tax Difficult.
The Taxing Wealth Report 2024 might get a mention...
Are HM Revenue & Customs intent on making the right amount of tax as hard as possible?
One of my arguments in the Taxing Wealth Report 2024 was that HM Revenue & Customs should be transformed to make the UK tax system a public good. By implication, I made clear that it was a long way from being so at present.
The argument I made was that at least £1 billion should be invested into making help from HM Revenue & Customs more accessible to taxpayers who wished to be tax compliant but who found that hard because of the inevitable complexity of the UK's tax system. Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.
HMRC are clearly not listening. As AccountingWEB has reported today:
HMRC has announced that its self-assessment phoneline will close between April and September every year, while permanent cuts are also being made to both the PAYE and VAT helplines. The ICAEW and CIOT have strongly criticised the move. Between April and September, self assessment customers will now be directed to self-serve through HMRC’s online services.
Amongst the changes announced are:
- between October and March, the self-assessment helpline will be open to deal with priority queries, with those that can be “quickly and easily resolved online” again being directed to the online services
- the VAT helpline will be open for five days every month ahead of the deadline for filing VAT returns – outside of this time, customers will again be directed to use HMRC’s online services
- the PAYE helpline will no longer take calls from customers relating to refunds but will instead be directed to the online services
The goal of HM Revenue & Customs would appear to be to make paying tax as hard as possible.
This is not the way in which a democracy should behave.
This is not the way in which a tax authority should behave.
This is not the way in which tax revenues are maximised. This is, instead, a way to alienate people.
As I said in the Taxing Wealth Report 2024 report on this issue, there is much that can be done. We are moving in the wrong direction. This would be how to move in the right direction:
Brief Summary
This note suggests that:
- HM Revenue & Customs governance structures are no longer fit for purpose. They are based on the ethos of a public company and are focused almost entirely on meeting the needs of large companies and the wealthy. Both sectors are well represented amongst its non-executive directors; no other group in society is. That is no longer acceptable.
- HM Revenue & Customs has for too long emphasised cost control as its focus of concern rather than serving taxpayers or raising all the revenue owed to it. This has been inappropriate and has prevented the creation of a tax system suited to the needs of society in the UK.
- HM Revenue & Customs' drive to reduce the cost of collection of tax in the UK has largely failed but has as a consequence:
- Seriously reduced the quality of service that it supplies to taxpayers in the UK, with the quality of everything, from face-to-face services to the answering of telephone calls, to the time taken to reply to letters, all deteriorating significantly leaving many taxpayers without any of the help that they need to pay the right amount of tax that they owe.
- Seriously reduced the number of staff at HM Revenue & Customs.
- Reduced the average real pay of staff at HM Revenue & Customs.
- Considerably reduced the number of tax investigations undertaken each year.
- Lost control of some major parts of the tax gap, which is the difference between the tax that should be paid and the tax that is actually paid in a year.
- Tax gap measurement has been used by HM Revenue & Customs' management as the indicator of its success, but as has been explored in other parts of the Taxing Wealth Report 2024, the claims made with regard to the tax gap in general are open to question.
- One of the two tax gaps where it is very apparent that matters have got out of control is that for small companies, where around 30 per cent of corporation taxes owing now go unpaid each year, which is way in excess of any reasonable level of loss. The likely annual cost of this loss is now £5.9 billion per annum.
- Another tax gap that is likely to be out of control is that for the 5 million small businesses that pay their taxes via the income tax system. HMRC say this tax gap has fallen from around 32.5 per cent of these taxes owing going unpaid in 2014 to only 18.5 per cent being unpaid now. They have not, however, provided any convincing reason for this improvement in taxpayer compliance, which is not matched by improvements in equivalent rates for small companies or in the overall rate of timely tax return submission, half of which returns come from self-employed business owners. The claimed current rate of loss is unlikely to be realistic in that case and an excess loss of maybe £3.4 billion is likely to arise as a result in this area, largely because HMRC has withdrawn from local tax offices that previously supported these taxpayers and from active monitoring of their onsite activities through their now largely abandoned programme of business compliance visits.
- In combination, the losses from just these two tax gaps amount to maybe £9.3 billion and can be attributed to HM Revenue & Customs mismanagement of its activities in the community, whether that be through maintaining local offices where face-to-face help is available or by visiting businesses at their own premises.
- It also seems that HM Revenue & Customs' claims for the benefits of its Making Tax Digital programme seem to be seriously overstated, which is a fact repeatedly noted by the House of Commons Public Accounts Committee. The costs of creating this programme appear to be out of control. The costs it imposes on business taxpayers are excessive. Worst of all, it is likely to alienate millions of people from the tax system and most likely increase the tax gap as a result, rather than reduce it. It also makes the UK a significantly worse place in which to run a business, which is likely to impose serious costs on society at large.
- As a result, this report recommends that:
- That HMRC reforms its governance structures and objectives.
- HMRC restore its local office help centre presence in towns and cities across the UK, and widely advertise the availability of this support service.
- HMRC's should restore its programme of site visits of businesses to monitor their tax compliance to cover checking both PAYE and VAT records.
- HMRC should stop the rollout of its Making Tax Digital programme so that no business that is not VAT registered will never be enrolled in this programme.
- The cost of restoring these services will be very much less than the sums that might be raised by reducing the two gaps that have been noted to reasonable levels (i.e. those that were maintained during periods when HMRC was better resourced in the past), but since some of those sums capable of recovery have already been noted elsewhere in the Taxing Wealth Report 2024 no additional account of such recovery is made here. That said, because other tax gaps would also undoubtedly improve if HM Revenue & Customs were to re-establish its presence in UK towns and cities the likely cost of this programme – which might be £1 billion a year, or twenty per cent of the current cost of running HMRC - is not taken into account either. Nor is the likely significant gain from reducing taxpayer strain taken into consideration, or the gain from making the UK a more tax-friendly environment, to which considerable harm has been done since 2010.
Removing the domicile rule would be a rare smart move by Jeremy Hunt
As the Guardian reports this morning:
Jeremy Hunt is considering scrapping Britain’s non-domiciled tax rules in next week’s budget, it has been reported, in a move that would see him poach one of Labour’s key fiscal policies.
If it is announced in next week’s budget, the Conservatives would be mirroring a Labour policy that Hunt has previously criticised. Abolishing the non-dom tax regime would raise an estimated £3.6bn a year.
As a very long term campaigner for abolition of the domicile rule I do not care who delivers this policy, which has always ensured that taxation in the UK is profoundly unjust because it has directly discriminated between people on the grounds of their place of origin. That would be illegal if undertaken by anyone but the government itself. My reason for wanting rid of this rule has always been ethical in that case.
In reality, this rule would need to be replaced by a short term residence rule. In the Taxing Wealth Report I have suggested that this means that the claimed revenue raising capacity of this change is open to doubt, whilst accepting the noted estimate because there are so many unknowns around this particular issue that any estimate is bound to be much more approximate than almost any other I have made when undertaking that work. Both Hunt and Labour might be disappointed by the outcome as a result, but I will not because the unethical discrimination will have gone.
Politically I would also add that this is a rare smart move by Hunt. He is going to lose the election, come what may, but removing Labour’s position on this, undermining the very many ways in which they say that this money is going to be spent (which just shows that they have not the slightest idea that taxation never funds government spending) is a clever thing to do. Reeves has always been on the back foot when claiming she can deliver balanced finances when glaringly obviously she cannot and will not. Her position will now look to be even more untenable. I cannot see her reacting by talking sense, however. That would be too much to hope for.
Reforming the organisation, goals and funding of HM Revenue & Customs
I have this morning published the last substantial chapter of the Taxing Wealth Report 2024. Some introductory and concluding sections have still to be completed, but this note focuses on the need to reform the organisation, goals, and funding of HMRC and is the last that makes substantial recommendations that will be included in the report.
When I started work on the Taxing Wealth Report 2024, I thought that this section would be one of the first to be completed, largely because I have looked at issues relating to the underfunding of HMRC since 2010. However, as my research on the subject developed it became clear that to discuss funding in isolation made no sense because to do so would have ignored the context within which this matter is of concern.
As the House of Commons Public Accounts Committee has noted in the latest of their many reports on the failings of HMRC, published this week, there is a long-term and marked downward trend in the quality of service supplied by HMRC to taxpayers. They also imply that many of the claims that HMRC's management is making concerning its own performance have to be open to doubt.
Within this context, looking at the claimed improvements in efficiency that HMRC suggest have resulted from the substantial reduction in its workforce cannot be justified. HMRC‘s costs are now rising, significantly. This issue is addressed in detail in this chapter.
Worse, a detailed review of the tax gap, the reduction which is used by HMRC to justify its supposed ever-increasing control of tax collection, cannot support that claim. HMRC admit that around 30% of corporation tax owing by smaller companies goes unpaid each year. They also accept that 18% of tax due by unincorporated small businesses goes unpaid, which they suggest to be a significant improvement on 2015, when more than 30% of those taxes went unpaid. However, data on on-time tax return submissions and data published by HMRC in 2022 showing that they had discovered that more than 8% of the UK population might be involved in the shadow economy, almost all of whom are self-employed, sharply contradicts this claim of an improvement performance in this area. As such this tax gap is highly likely to be at least as large as that for small limited liability companies.
This evidence then suggests that those most in need of help from HMRC to comply with their tax obligations are not getting that help. As a result of HMRC economies, tax offices have been closed, face-to-face taxpayer support has ended, telephone helpline support has become incredibly difficult to access, and online help has proved to be no substitute. Txaayers have been left bewildered by their obligations and alienated from HMRC, and it is not surprising that tax gaps are out of control.
That this is the case might also be due to the fact that HMRC is managed as if it is a large public company and not as a public service. The fact that all its non-executive directors represent the interests of the wealthy and large companies only reinforces the inappropriateness of its focus.
The consequences of all this are that a substantially more radical approach to the reform of HMRC is required than is currently proposed by the House of Commons Public Accounts Committee. It is time to re-organise HMRC so that its focus is on providing taxpayers with the support that they need to meet their tax obligations. At present, far too many of those taxpayers are alienated by IT systems and the demands that they create that taxpayers, quite reasonably, cannot comprehend.
It is, as a result, time for HMRC to restore its local office presence so that people can be provided with face-to-face advice on their taxes.
In addition, HMRC also needs to restart its programme of support to small businesses that are struggling to meet their obligations by reinstating its programme of active engagement with small traders by reviewing their books and records on-site to make sure that they are tax compliant.
What all this also implies is that HMRC‘s headlong rush towards Making Tax Digital is not just inappropriate but is the totally wrong way in which the UK should manage its tax system.
A tax system should be a public good, meaning it is a service supplied without the intention of profit arising by an agency that is seeking to maximise public well-being. The UK tax system does not meet that criteria at present, largely because of failure on the part of HMRC's senior management.
We need a radical overhaul of the management of the UK tax system if it is to be fair, transparent, accountable, open, accessible, and dedicated to creating equality within the UK because everyone is required to pay the taxes that they owe.
The summary of this chapter, which is of 33 pages in total, is noted below. A PDF version of the whole chapter is available here.
A copy of this chapter will be sent to the Public Accounts Committee.
Brief Summary
This note suggests that:
- HM Revenue & Customs governance structures are no longer fit for purpose. They are based on the ethos of a public company and are focused almost entirely on meeting the needs of large companies and the wealthy. Both sectors are well represented amongst its non-executive directors; no other group in society is. That is no longer acceptable.
- HM Revenue & Customs has for too long emphasised cost control as its focus of concern rather than serving taxpayers or raising all the revenue owed to it. This has been inappropriate and has prevented the creation of a tax system suited to the needs of society in the UK.
- HM Revenue & Customs’ drive to reduce the cost of collection of tax in the UK has largely failed but has as a consequence:
- Seriously reduced the quality of service that it supplies to taxpayers in the UK, with the quality of everything, from face-to-face services to the answering of telephone calls, to the time taken to reply to letters, all deteriorating significantly leaving many taxpayers without any of the help that they need to pay the right amount of tax that they owe.
- Seriously reduced the number of staff at HM Revenue & Customs.
- Reduced the average real pay of staff at HM Revenue & Customs.
- Considerably reduced the number of tax investigations undertaken each year.
- Lost control of some major parts of the tax gap, which is the difference between the tax that should be paid and the tax that is actually paid in a year.
- Tax gap measurement has been used by HM Revenue & Customs’ management as the indicator of its success, but as has been explored in other parts of the Taxing Wealth Report 2024, the claims made with regard to the tax gap in general are open to question.
- One of the two tax gaps where it is very apparent that matters have got out of control is that for small companies, where around 30 per cent of corporation taxes owing now go unpaid each year, which is way in excess of any reasonable level of loss. The likely annual cost of this loss is now £5.9 billion per annum.
- Another tax gap that is likely to be out of control is that for the 5 million small businesses that pay their taxes via the income tax system. HMRC say this tax gap has fallen from around 32.5 per cent of these taxes owing going unpaid in 2014 to only 18.5 per cent being unpaid now. They have not, however, provided any convincing reason for this improvement in taxpayer compliance, which is not matched by improvements in equivalent rates for small companies or in the overall rate of timely tax return submission, half of which returns come from self-employed business owners. The claimed current rate of loss is unlikely to be realistic in that case and an excess loss of maybe £3.4 billion is likely to arise as a result in this area, largely because HMRC has withdrawn from local tax offices that previously supported these taxpayers and from active monitoring of their onsite activities through their now largely abandoned programme of business compliance visits.
- In combination, the losses from just these two tax gaps amount to maybe £9.3 billion and can be attributed to HM Revenue & Customs mismanagement of its activities in the community, whether that be through maintaining local offices where face-to-face help is available or by visiting businesses at their own premises.
- It also seems that HM Revenue & Customs’ claims for the benefits of its Making Tax Digital programme seem to be seriously overstated, which is a fact repeatedly noted by the House of Commons Public Accounts Committee. The costs of creating this programme appear to be out of control. The costs it imposes on business taxpayers are excessive. Worst of all, it is likely to alienate millions of people from the tax system and most likely increase the tax gap as a result, rather than reduce it. It also makes the UK a significantly worse place in which to run a business, which is likely to impose serious costs on society at large.
- As a result, this report recommends that:
- That HMRC reforms its governance structures and objectives.
- HMRC restore its local office help centre presence in towns and cities across the UK, and widely advertise the availability of this support service.
- HMRC’s should restore its programme of site visits of businesses to monitor their tax compliance to cover checking both PAYE and VAT records.
- HMRC should stop the rollout of its Making Tax Digital programme so that no business that is not VAT registered will never be enrolled in this programme.
- The cost of restoring these services will be very much less than the sums that might be raised by reducing the two gaps that have been noted to reasonable levels (i.e. those that were maintained during periods when HMRC was better resourced in the past), but since some of those sums capable of recovery have already been noted elsewhere in the Taxing Wealth Report 2024 no additional account of such recovery is made here. That said, because other tax gaps would also undoubtedly improve if HM Revenue & Customs were to re-establish its presence in UK towns and cities the likely cost of this programme – which might be £1 billion a year, or twenty per cent of the current cost of running HMRC - is not taken into account either. Nor is the likely significant gain from reducing taxpayer strain taken into consideration, or the gain from making the UK a more tax-friendly environment, to which considerable harm has been done since 2010.