Last year almost £24 billion was lost through incorrect tax returns and unpaid VAT. So why is the priority the £2.5 billion lost through tax avoidance?
By Mike Fleming
Last week's Liberal Democrat conference saw Treasury chief secretary Danny Alexander announce the latest government strategy aimed at closing the tax gap - the difference between the tax that should have been collected by HMRC and what is actually collected. This conveniently coincided with the HMRC's release of the figures relating to the year 2009/10, which revealed a deficit of £35 billion and an astonishing £195 billion since 2004.
In response to the HMRC's revelation of the continued enormity of the tax gap, Danny Alexander announced that 2,250 extra government tax inspectors would be tasked with tackling tax evasion and avoidance, including an 'affluence team' to target those in the 50p tax band and ensure that "those with the broadest shoulders bear their fair share of the burden", as he told The Independent on Sunday.
By unveiling this new measure in the same week as the publication of the HMRC figures revealing the size of the current tax gap, the government have positioned themselves as proactively working towards a solution and taking positive steps towards closing the gap.
However, this relies on the assumption that the deployment of 2,250 extra tax inspectors will provide an effective solution to the problem. Which, unfortunately, it will not.
The reason why the government is devoting this level of resource to tackling tax avoidance is political, not practical. While they may gain political points by appearing to crack down on the unpopular super-rich who are avoiding tax, the fact remains that tax avoidance only accounts for a miniscule proportion of the amount which constitutes the 'tax gap'. If you actually study the figures you will see that of the £35 billion lost in 2009/10, only £2.5 billion (7.2%) was due to tax avoidance and in fact £11.7 billion (33.4%) was lost due to incorrect tax returns and £11.4 billion (32.5%) lost through unpaid VAT.
I cannot be alone in thinking that it would be more beneficial for the government to be spending their scarce pennies on recovering lost VAT and creating an education programme to make it easier for individuals - and businesses - to fill in their tax forms correctly, when a massive two-thirds (65.9%) of the lost revenue comes from these areas.
Investing in systems that work properly to avoid the huge losses we are currently experiencing would be a much more effective use of resource and should help to reduce the tax gap quicker in the long run. The HMRC are intent on fronting their story with the "good news" that the Revenue have managed to reduce the gap by £4 billion in the past year and the claim that they are determined to fight rich tax avoiders, but this is nothing more than political propaganda. It's no wonder the country's broke if we allow the political agenda to overrule practical considerations and cannot apply the simplest solutions to problems.
The £35 billion 'tax gap' is an annual loss to the Exchequer, which in any other business would result in catastrophic failure. Who is prepared to accept such a large deficit year on year, how long have they presided over this situation and are they considering their position, given their obvious failure to perform?
A rogue trader at UBS caught the headlines recently due to his underhand activities causing a loss of £1.3 billion – he lost his job and is facing jail. Obviously the situation is not directly comparable as the trader's activities were fraudulent, but this does throw the extent of the annual tax loss by the HMRC into sharp relief. If it is completely unacceptable in business to lose this amount of money due to inefficiency, how can we let the government get away with it by attempting to put a positive "spin" on it? This is cause for great concern.
Mike Fleming, CTA, TEP, is partner at Straughans Chartered Accountant and Tax Advisers.
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