Well-resourced tax authorities crucial to closing the tax gap
In a welcome move, the UK’s Labour Party has announced that, should it win the forthcoming general election, it would substantially boost the resources available to HMRC’s compliance unit and the pursuit of tax avoiders.
They are pledging to recruit an additional 5,000 staff at a cost of £555mn per annum. But, given each compliance officer typically secures an additional £1.1mn of tax revenue, the projected net return would be £5bn a year by 2029/30. Moreover, the estimated £5bn of extra annual revenue could be overly-cautious. The Association of Revenue and Customs recently estimated that investment of £910mn in compliance and customer service would return an enormous £11.3bn over the course of a parliament.
This follows similar recent moves in the United States, where it has been estimated that $80bn of additional investment in the Internal Revenue Service (IRS) would yield $851bn over the next 10 years. The step-change in resource availability is such that the IRS is now better able to pursue historic cases against the likes of Microsoft with renewed vigour.
It is still the case that, across the globe, close to 40% of multinational profits (US$970bn) are artificially shifted to tax havens each year, leading to a US$250bn reduction in corporate income tax revenue. However, tax avoidance and evasion are by no means confined to large multinational enterprises: the UK government’s Tax Gap analysis suggests ‘small business’ is now responsible for two-thirds of the UK’s corporation tax gap, and this has been on an upward trend since 2012.
Well-resourced tax authorities are crucial to closing the tax gap and to tax justice more generally. It is not enough for clever legislation to be passed and information to be forced into the open – tax authorities need to be well staffed and funded if they are to go after tax dodgers, many of whom have deep pockets.
The return on such investment is substantial. The Chief Executive of HMRC recently stated that every extra £1 HMRC spends on compliance activity leads to a return of £9 in additional tax revenue.
However, additional revenue is not the only reason for such actions to be taken. Aggressive tax avoidance and evasion negatively distort national economies and undermine the ability of businesses to compete fairly, both domestically and internationally. Tax evading corporate ‘cheats’ enjoy a potentially large implicit subsidy that allows them to stay in business despite low productivity. As a result, these ‘cheats’ gain market share even if they are less productive, reducing the market share of more productive, tax-compliant businesses.
Productivity gaps between firms that comply with existing taxes and regulations and those that do not are significant. These large gaps can translate into depressed economy-wide productivity and growth – and the UK has a long and deeply embedded problem with productivity.
Improving trust
The UK public care about many issues, but ‘tax justice’ is consistently at the top of their concerns when it comes to corporate conduct: with the vast majority wanting to see government do much more to ensure that all businesses, both large and small, pay their fair share of tax.
In June 2023, the Fair Tax Foundation released Fair Tax Nation: UK public attitudes to corporate tax conduct, which analysed the results of seven years of polling of the UK public. We noted then that while the UK public heavily favoured HMRC (and Fair Tax Mark accreditation) as trusted verifiers of good corporate tax conduct, trust in HMRC in 2023 had fallen to the lowest seen.
We suggested that this fall in trust was likely a consequence of the much-publicised challenges HMRC has faced as significant numbers of staff were redeployed to work on Brexit and Covid 19 support schemes. HMRC opened fewer tax enquiries and prosecuted far fewer people for tax evasion during the pandemic. Tax revenue directly attributable to HMRC compliance activities fell.
HMRC does excellent work, but it is under resourced. The Fair Tax Foundation warmly welcomes the Labour Party’s pledge to enact a step change in the resourcing of HMRC’s compliance activities – this will not only enable the recovery of billions in lost revenue, but also ensure that trust in this crucial institution is rock solid.
