Tax avoidance: how the Chancellor could crack down on tax dodgers in the Budget

Here’s how Hammond could crack down on tax avoidance and evasion, and how much that might raise for the country’s coffers.

Almost 60% of loveMONEY readers say it’s time for a tax avoidance crackdown, according to our Budget predictions poll.

Around 1800 of you voted and you’ve been pretty clear about what you think Hammond’s priority should be. At the time of writing, just 19% of you said he should prioritise cutting Stamp Duty for new buyers and only 6% said it’s time to freeze student loans, but tax avoidance was the clear winner.

That’s not really surprising given the stories contained in the Paradise Papers, which followed hard on the heels of the Panama Papers, show that for many high net-worth individuals, taxes seem optional.

It’s generally expected that this week’s Budget will contain some action against tax avoidance and evasion. Public anger is running high and Hammond will almost certainly want to be seen to be acting.

Of course, it’s worth remembering that evasion is illegal but avoidance complies with our laws.

That means that cracking down on evasion can be done by injecting HMRC with the money it needs to pursue those individuals who outright ignore their obligations.

However, finding the right line to walk on cutting back avoidance has been a challenge for a succession of governments.

Now read: Why Hammond's Budget won't please anyone

Just recently two fairly major new penalties for tax non-compliance came into force, including a substantial penalty for enablers of defeated tax avoidance and for failure to correct relevant offshore tax non-compliance.

The first should help tackle marketed tax avoidance, the second clamps down on offshore tax evasion.

However, there’s little point outlining what HMRC could do without looking at the budget it has to do it.

In a letter to the Guardian newspaper, Prem Sikka, professor of accounting at the University of Sheffield, warned: “In April 2005, HMRC had staff of 104,670 and a budget of £4.4 billion, compared to a staffing of 61,800 in April 2017 and a budget of £3.8 billion.

“This is a massive reduction in real terms. Unsurprisingly, HMRC has investigated only 72 high net worth individuals for potential tax fraud since 2011, and there has been only one successful prosecution.”

There’s a case to be made that we need to beef up the budget in order to crack down on both evasion and to police avoidance. That could be a good place for Hammond to start.

Here’s what more could be done.

Penalise VAT fraudsters – £1.5 billion a year

It turns out that the taxman is using a website with no budget or staff to tackle VAT fraud, which is said to cost taxpayers £1.5 billion a year. 

The vatfraud.org website, run entirely by volunteers, collects evidence of foreign retailers using retailers like Amazon and eBay to sell goods in the UK wihout paying the duty. The Times reported that in the four months to October HMRC investigators had spent 70 hours on the site and visited it more than 1,200 times.  

HMRC could do more to clamp down on these sneaky fraudsters, including putting more resource behind this website. After all, it does have a dedicated annual budget of £22.5 million to tackle VAT fraud. 

Crack down on large company tax avoidance – £11 billion a year

According to the pressure group Tax Justice UK, increasing the funds HMRC has to pursue large companies really pays dividends.

It reports that for every £1 spent on enforcement, there’s a yield of £97.

The organisation argues: “Tax avoidance by large companies costs the UK at least £11 billion every year. The UK has consistently failed to take the necessary steps at the domestic and global levels to curb corporate tax avoidance, despite its rhetoric on the issue.”

Finance ministers from France, Germany, Spain and Italy wrote to the European Commission to make the case for an ‘equalisation tax’ to be paid on turnover instead of profits.

They were responding to concerns that firms operating online, including tech giants like Amazon and Google, have been dramatically cutting their tax bills by avoiding corporation tax by declaring their profits abroad instead of in the same countries as their customers.

A turnover tax or equalisation tax would ensure that countries recouped some of that lost corporate tax.

“We should no longer accept that these companies do business in Europe while paying minimal amounts of tax to our treasuries. Economic efficiency is at stake, as well as tax fairness and sovereignty,” the letter argued.

The amount such a tax might generate is difficult to pin down but it would certainly be attractive to anyone angry at the amount of money a company like Amazon can generate in the UK without paying significant levels of tax.

For example, Amazon Web Services paid £404,000 in UK tax on a turnover of £53.5 million. Meanwhile Amazon’s retail arm paid £16.5 million in EU taxes last year on sales of £21.6 billion.

However, a number of critics including the Chartered Institution of Taxation have expressed concerns that such a tax would have a great many unintended consequences, including raising international firms’ tax burdens to unrealistic levels.

Now read: Rumours and predictions for Wednesday's Budget

An ‘ABC’ approach to offshore tax havens – £24.4 billion

The Tax Justice Network has also called for its ‘A, B and C’ measures to be implemented by global governments to beat international tax avoidance by multi-national companies.

These are:

• Automatic information exchange that works from tax havens;
• Beneficial ownership of companies on public record;
• Country-by-country reporting.

Richard Murphy, the political economist behind Tax Research UK and Professor of Practice in International Political Economy at City University, has estimated the UK’s tax gap to be £122 billion a year.

He believes that offshore and international tax abuse probably makes up no more than 20% of this gap, meaning there’s potentially £24.4 billion of taxes that the country’s coffers miss out on.

Even if tightening the rules meant 10% of it was collected that would still be a substantial sum.

Reintroduce the tax disc & clamp down on non-payers – £107 million a year

It’s not all giant corporations though, a lot of regular people are also guilty of avoiding their fair share of tax.

For example, the latest figures show that since the paper tax disc was abolished there has been a significant increase in untaxed vehicles on our roads, costing the Treasury more than £107 million over a full year.

RAC public affairs manager Nicholas Lyes says: “It appears that having a visual reminder was an effective way to prompt drivers into renewing their car tax – arguably more drivers are now prepared to try their luck and see if they can get away with not paying any vehicle tax at all, or are simply forgetting to tax their vehicle when they are due to.

“What’s more, a third of untaxed vehicles were those that changed hands which is a strong indication that many drivers are still not aware that tax does not carry over when ownership changes.”

He called for more to be done to demonstrate to drivers that they can and will be caught if they fail to tax their cars.

Cut cash-in-hand – £2 billion a year

How many of us are guilty of working for or paying with cash-in-hand? It might seem like a relatively harmless way to keep a little back for ourselves but a few years ago then-Treasury minister David Gauke claimed it led to a shortfall in tax revenue of £2 billion a year.

Grand total: £39 billion a year

It's safe to say that closing these gaps would have a significant impact on the public purse, covering things like the funding shortfall in the NHS and a much-needed boost to spending in education.

Now read: Is dodging taxes on cash-in-hand payments acceptable?

What do you think? What should Hammond do to crack down on tax avoidance? Or should evasion be the main priority? Have your say using the comments below.

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