Can HMRC stop £5bn in tax avoidance for political masters?

Can HMRC stop £5bn in tax avoidance for political masters?

Jun 13, 2024

As the main parties promise not to raise the big three taxes, HMRC will need to smarten up how they work, use AI and reduce taxpayer errors unless massive funding for new tax investigators is agreed

As political parties vie to gain votes, the Conservatives and Labour have both indicated that they will not raise income tax, national insurance or VAT for average households.

The no tax rise pledge means that many election promises are going to be funded by politicians’ throwaway comments on raising £5bn to £10bn by clamping down on tax avoidance.

There are some potential wins if HMRC was able to reduce the level of errors and mistakes on individuals’ tax returns, while a new cryptoassets disclosure scheme is bound to raise significant sums if only because the guidance is so confusing for taxpayers.

One of the biggest causes of the tax gap is small businesses, which could be given more support to get their tax affairs right, while the quality of online information on the HMRC website could be improved, and the use of artificial intelligence (AI) could create a minefield of data for tax inspectors.

But whether a clampdown on tax avoidance is the secret weapon to fund myriad election promises is another matter altogether. A magic money tree it certainly is not.

So if Labour and the Conservatives have ruled out raising the big three taxes, where is the money going to come from for the promised teachers, police officers and extra GP appointments, to name just a few.

Sophie Warren, tax manager and investigations expert at Pinsent Mason, said: ‘It is going to have to come from elsewhere so rather than increasing revenues, obviously it is going to be squeezing the pipes, so to say, and it probably means that all services are going to be pinched. They will be looking to take money from elsewhere.’

With HMRC service standards at an all time low and helplines on the verge of collapse, the priority for the tax authority will be to improve the fundamentals to try to close the tax gap.

‘The onus is on HMRC and they are operating in an increasingly difficult environment without enough funding or resources to look at the backlog of cases and those that are arising every day probably,’ said Warren.

‘What the government and HMRC really need to focus on is going back to the basics.

Although there is a lot of tax avoidance out there, there’s going to be a lot of money that they can get from tax avoidance What we’re finding is that the language is not always right so people don’t always understand what HMRC wants or the laws are.

‘By going back to basics and simplifying the system it is going to make it far easier for the majority of taxpayers to get it right.

‘There is a lot of human error and misunderstanding that is creeping in so HMRC is having to focus a lot of its time on dealing with enquiries that would not necessarily have been required – HMRC needs to really focus on people that are avoiding and not paying the right amount of tax, and doing it deliberately.

‘So we should see HMRC focus on customer support and look at where they have had a higher yield in their investigations and where there’s scope to increase that further.

‘We saw that with the recent Bernie Ecclestone case – and there are going to be a few cases out there where there’s a huge amount of tax that HMRC can go after, but  going into specific cases like that is very costly for HMRC, but hopefully there’s that deterrent aspect that shows that they can handle these complex cases and successfully.’

Technology is going to have to play an increasingly important role as staff resources are squeezed with pressure on public finances.

Warren said: ‘HMRC needs to be smart with how they use their resources.

‘We would expect HMRC to get on to the use AI to help them target and focus their investigations, and really look into the data that they have before they start spending money on a deeper dive into an individual’s or company’s tax affairs.

‘We have been looking at HMRC’s Connect system and whether they use AI. They don’t specifically use AI but the fact that they don’t shows there is a wide scope for them to use it.

‘HMRC should be able to implement the use of AI to look at patterns of data and to identify industries that they haven’t targeted and also use the various data to target individuals where they can see a pattern emerging, and flag areas of concern where they can do a deeper dive.

‘We’ve seen in the past where HMRC has raised inquiries or opened investigations into fraud and it hasn’t gone anywhere.

‘I think HMRC needs to look closely at the information they have before opening any new investigations so that they better target their investigations that they spend their time, money and resources on.’

What can be raised? Is £5-10 billion realistic?

HMRC expect the amount of money that they can raise is halved by the time they receive the funds – it would be realistic to assume that what a government obtained would be half of what the government hoped for.

But it is not as if HMRC have been sitting back with a record number of ongoing investigations.

‘If you look at the number of enquiries that are opened they are huge,’ said Warren. ‘It is a very stressful, daunting experience for people when they get a letter from HMRC.

‘Yes, there are people that do things so they don’t pay their tax, but the majority of people do want to get it right, but it is very difficult when the language isn’t clear and HMRC’s guidance may be different to what the case is – tax advisers would know the difference but the general members of the public that are looking at the guidance to help them, it is not helpful.

‘If taxpayers have got a question for HMRC the support network is not there for them to get the answers so they’re making human errors and mistakes on their tax returns inadvertently but then HMRC are having to deal with those largely innocent or perhaps careless errors and that takes a lot of time and money.’

Lack of HMRC support

One of the major areas of concerns in the annual HMRC tax gap figures is the level of non-compliance by small businesses.

‘With large organisations they have a CRM so that makes it easier for them as they have a point of contact to talk to someone, so introducing a relationship manager for small businesses might be a step which HMRC could introduce to help with the general compliance questions that they have.

‘Even for tax advisers it is sometimes difficult to get the support. The response times are sometimes quite long and frustrating when you do get a response, or you’re passed from department to department.

‘If resources were streamlined within HMRC it would make it easier, it would speed up the cases for us.’

Warning for crypto investors

One of the potentially new areas for HMRC to target is investors in cryptoassets and from April 2025, self assessment taxpayers will have to disclose their crypto investments on their tax returns. For now HMRC has released a crypto assets disclosure to encourage taxpayers to disclose any untaxed earnings up front.

‘I expect HMRC is aware that individuals have been dabbling in crypto assets and the previous guidance was quite unclear and a lot tax out there that has not been paid,’ added Warren.

‘HMRC is going to give individuals a chance to make their disclosures and I would expect HMRC to open up quite a few enquiries and investigations around that in the next few years.’

Offshore activity

With record information flowing into HMRC about offshore accounts due to the common reporting standards and exchange of information between tax jurisdictions around the world, any taxpayers with unreported earnings abroad should be on the alert.

‘HMRC is looking at the data and questioning some of the data that is coming in; now we’re seven or eight years into exchanges of information, more and more jurisdictions are now signed up. That tax net is getting much smaller,’ stressed Warren.

‘In the UK and offshore they are looking at the CRS data, and I am sure that is going to form part of opening wider investigations.