Business & Finance Legal Money

HMRC in context

  • March 26, 2024
  • 5 min read
HMRC in context

For most of its customers, as it refers to taxpayers in the current vernacular, HMRC is either that seemingly increasing blot on a PAYE slip, vaguely menacing demands for extra tax on P11D benefits-in-kind (which are often anything but a benefit), or for that phalanx of IR35, terrorised self-assessment soldiers, around 13% of all taxpayers so a significant minority.

We are bombarded with politicised statistics from the lies and damned lies school of economics, so it is useful every now and then to put tax in context. The message from the Public Accounts Committee’s 2022–23 Report focuses on the short-term challenges following the redeployment of 4,000 compliance-staff to work on the government’s new COVID support schemes. The report’s summary claims, ‘without sufficient numbers of prosecutions, HMRC cannot demonstrate a credible deterrent effect.’ The regular reader, if there is such a person, will know that statistical evidence demonstrates that honey catches more than vinegar, and that street wisdom tells us that it is the fear of being caught rather than draconian punishments that is the most effective deterrent.

PAC 49th Report of Session 2022-23 shows us where the political masters of His Majesty’s Revenue & Customs think we should be going. Have a look for yourself. You might be surprised by the number of recommendations with which His Majesty’s Government disagrees with the professional tax collectors.

The PAC does not seem to focus on the tax gap. This is the area where tax accountants find themselves at odds with the Revenue. Routine compliance goes smoothly. Whether because ‘a firm’s unique selling point is its integrity’ as my firm’s website claims, or because we have a healthy fear of being caught, our own clients’ Returns are subjected to considerable scrutiny. We are no different from any other firm in that regard. It is not worth our reputation to risk claims the client is unlikely to obtain. In any tax planning exercise, the most important word a client will hear is “no”. That means the tax gap is all the more important to define. Almost all contentious enquiries will take place in the tax gap. The tax gap is the amount of tax that should be collected statistically by taxing the economy and comparing the amount that is collected.

The gov.uk website has a useful summary of the tax cap and its components. The headline figure is 4.8% of total theoretical tax liabilities or 35.8 billion pounds. The tax gap has fallen from 7.5% in 2005–2006 and while the constituent parts have fluctuated within that, presumably HMG regards the trend (and it is a trend) positively.

Some commentators including Richard Murphy of Tax Research UK argue that a broader definition of the tax gap indicates a far greater problem. Murphy claims that the hidden economy, legal (including borderline legitimate tax havens) and illicit (proceeds of crime) are underestimated in the official figure by a factor of three or four times.

The emphasis on tax prosecutions is worrying. Punishments are unlikely to achieve a positive result. Presumably those breaking other than tax laws will be prosecuted for the originating crime first before the ancillary crime of tax evasion. The PAC Report on 2002-23 may have preceded the escalation of The Great Post Office Scandal, but Chair Dame Meg Hillier must have been aware of the serious damage being done to taxpayers’ and indeed all citizens’ faith in state institutions including the entirety of the legal system and HM Revenue & Customs following the harrowing tales of loan charge persecutions. Has the country had enough of simplistic populist solutions?

HMRC’s Annual Report and Accounts 2022-23: performance analysis strategic objection 3: maintain taxpayers’ consent through fair treatment and protect society from harm. Really?

My client invested hard earned and fully tax paid money in software development businesses. They made that decision knowing that the several hundred thousand pounds, if lost, could be offset against income in future years. After they had made the decision, HMRC restricted the loss relief to £50,000. This was arbitrary, retrospective taxation and in my opinion unconstitutional. There aren’t many votes in protecting middle class investors from state-initiated tax theft, but the tax profession will look askance at HMRC’s claim of fair treatment. The hairdressers probably will win their fight against the crippling VAT burden that the usually independent firms face. If your salon turns over £85,000 you do not pay VAT. If your turnover rises to £86,000 you pay £17,200 in VAT whether or not your business makes a profit. This is on top of the jobs tax, 12% employers’ NI and of course business rates, profitable business or not. Time and again we see clients mortgaging their family home to fund rates and national insurance over and above start-up trading losses as they invest everything in their dream. Then as often as not it’s the government agencies that shut them down.

The PAC and HMRC documents refer to tax cheats. Well quite.

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Douglas Shanks

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