Short debate in the House of Lords on Tax Gaps 2019-20
Extract
... [on
the issue of tax dodging] You could call this the Shell-Amazon
problem for shorthand, given that just this week we learned that
for the fourth year in a row Shell has paid no
tax on North Sea oil and gas extraction. Picking up the point
about international comparisons, I say that in Norway last
year Shell paid $4.5 billion
in tax, production entitlements and fees in a very set of similar
circumstances, and Amazon paid £3.8 million in corporation tax on
£1.8 billion in sales. I am sure the Government will say they
have a strategy for that. I have just been looking at their
report from last year Tackling Profit Diversion by Multi-national
Companies, which proudly proclaims that in five years £5 billion
has been clawed back. That is less than double what Norway got
from Shell in one year.
Full debate
Tax Gaps 2019-20
Question for Short Debate
3.00pm
Asked by
To ask Her Majesty’s Government what assessment they have made of
the HMRC report Measuring tax gaps 2021 edition - tax gap
estimates for 2019 to 2020, published on 8 February.
(Lab)
My Lords, it is a pleasure to bring this debate. I will raise
three broad questions with the Minister: first, on the quality of
HMRC’s analysis of the tax gap; secondly, on the composition of
the tax gap; and, thirdly, on the administration of it.
What is the tax gap? It is a broad measure of non-compliance,
defined by HMRC as the difference between the amount of tax that
should, in theory, be paid to HMRC and what it actually collects.
It says that the tax gap is around £35 billion a year or about
5.3% of the taxes that HMRC collects. In proportional terms, the
tax gap has declined since 2010, though in absolute terms it has
hovered at around £35 billion. That is assuming that one accepts
HMRC’s methodology, which I do not. Even by its own standards,
HMRC says that it has failed to collect nearly £400 billion in
taxes since 2010. I will argue that that amount is not
appropriate either.
HMRC attributes the tax gap to eight broad categories—what it
calls taxpayer behaviours. These relate to criminal attacks,
evasion, the hidden economy, avoidance, legal interpretation,
non-payment, failure to take reasonable care, and error. This
categorisation by HMRC of the tax gap does not connect with its
priorities and legal duties. In court cases brought by HMRC, it
frequently argues on three grounds. The first is fraud, the
second is negligence and the third is honesty. But that is not
how HMRC analyses the tax gap—that is entirely different.
The reason for the tax gap and putting a name to it is important
because it frames how the issues are understood and the policy
options that can be exercised. HMRC states that tax fraud is:
“Any deliberate omission, concealment or misinterpretation of
information, or the false or deceptive presentation of
information or circumstances in order to gain a tax
advantage.”
That is a broad definition of fraud. If one applies that to the
elements of the tax gap in the information published by HMRC, one
can see that £15.2 billion of the tax gap is attributed to fraud.
That raises serious questions about what is to be done about it.
My first request to the Minister is this: can the Government
please look at ways in in which to improve the analysis and
presentation of the tax gap so that it links up with policy
priorities and legal duties, rather than the departmental
headings that HMRC uses at the moment?
Secondly, I have major concerns about HMRC’s methodology for
estimating the tax gap. Typically, the HMRC estimate is based
upon errors and omissions in tax returns, but we know that many
individuals and companies do not file tax returns. Some 300,000
to 400,000 companies are struck off by Companies House every year
for failure to file annual accounts, even though they may have
traded and made profits—they just become invisible. Many
companies are invited to file tax returns but do not do so. They
may even have employees but do not make PAYE payments or pay
national insurance. That, again, suggests that just a focus on
tax returns will not help to estimate the tax gap. Many
individuals do not file tax returns and escape consideration by
HMRC’s tax gap model altogether. The number of tax audits
undertaken by HMRC is not really that high either, so, again, it
is extrapolating from a very small sample. In short, without
going into a lot of technical details, the methodology for
estimating the tax gap is highly questionable.
There are alternatives to HMRC’s tax gap model, and they estimate
that the gap is somewhere between £58.6 billion and £122 billion
a year. This suggests that, since 2010, between £400 billion and
£1.5 trillion of taxes have not been collected. That is a vast
sum. However, even these models do not fully capture the leakage
of tax revenues. Let me provide three illustrations —I could do
more, but we do not have the time.
I refer first to a well-known case. In 2005, the parent company
of BHS paid a dividend of £1.3 billion, £1.2 billion of which
went to Lady Green, its main shareholder. She is resident in
Monaco, which does not levy any income tax. So the dividends were
not taxed in the UK or in Monaco—they were not taxed anywhere. A
UK resident recipient would have ended up paying at least £300
million in tax on that dividend. This is not an old or isolated
example. Social care, water, train and many other companies pay
dividends to offshore entities which are not taxed in the UK or
anywhere else. This tax loss does not form any part of HMRC’s tax
gap, and the Government have done absolutely nothing to curb this
kind of tax avoidance.
My second example relates to the use of related-party
transactions; again, the example is from BHS. In 2001, BHS sold
some of its properties for £106 million to Carmen Properties Ltd,
which is based in Jersey and controlled by Lady Green. Carmen
then immediately leased the properties back, because BHS needed
to use them. So from 2002 to 2015, BHS paid £153 million in rent
to Carmen. These rents were tax deductible expenses in the UK and
reduced BHS’s tax liability, but on the other side, in Jersey,
they were simply not taxed and were paid over to Lady Green—a
nice way to dodge taxes. This type of financial engineering is
highly common among companies and results in tax avoidance adding
up to billions of pounds. This does not form any part of the tax
gap, and the Government have done nothing to check this form of
avoidance either.
My third example has been the subject of the OECD’s base erosion
and profit shifting—BEPS—project. It involves shifting profits
from the UK to low or no-tax jurisdictions through intragroup
transactions. Profits are shifted through interest payments on
artificial loans, royalties and management fees, and now
profit-sharing arrangements. Numerous companies are doing this.
HMRC has done nothing to challenge this type of avoidance and has
let off companies such as Starbucks, Microsoft, Boots, Facebook
and many others. It entered into secret sweetheart deals with
Google, Vodafone, Goldman Sachs and others, which then end up
paying less. The cloak of confidentiality has prevented even the
Public Accounts Committee investigating these deals.
HMRC’s report says:
“Some forms of base erosion and profit shifting … are included in
the tax gap where they represent tax loss that we can address
under UK law … The tax gap does not include BEPS arrangements
that cannot be addressed under UK law and that will be tackled
multilaterally through the OECD.”
This means that HMRC has absolutely no idea of the taxes lost due
to profit shifting, and there is no estimate provided in the tax
gap figures. My question to the Minister is this: can we have a
more meaningful number for the tax gap, please?
I will say a few words about tax administration. HMRC staff do a
heroic job. Dealing with the tax gap is very labour intensive,
and investigating just one company like Google can tie down
between 10 and 30 people for up to 22 months on average—that is
an empirical number that I have just cited. In 2021, HMRC
concluded 437 criminal investigations, compared to 864 the year
before. Fraud investigations have also declined. In 2005, HMRC’s
staff was 105,000; most recently, it was just under 62,000. I
urge the Government to pay attention to HMRC’s resources, which
have recently increased but are in real terms still well below
the 2010 number.
Finally, can the Government be tougher on the tax avoidance
industry? As far as I am aware, unless the Minister wishes to
contradict me, not a single accounting firm whose tax avoidance
schemes have been judged to be unlawful has ever been
investigated, prosecuted or fined by the Government. Could the
Minister explain why the Government are easy on the enablers? If
they are easy, we cannot really address the tax gap.
3.11pm
(Con)
My Lords, I congratulate the noble Lord, , on securing this important
debate.
The HMRC report in question here today states that:
“We use a range of internal and external data and different
analytical techniques to produce annual estimates, which we
revise as more accurate data becomes available. These are our
best estimates based on the information available, but there are
many sources of uncertainty and potential error. For this reason,
it is best to focus on the trend in the results rather than the
absolute numbers when interpreting findings.”
As the noble Lord, , pointed out, it certainly is
not a complete and full way of measuring things. Generally, the
VAT tax gap, which is where I am going to focus my remarks, is
measured using the top-down approach: that is to say finding the
tax base—in other words, the theoretical amount of tax that
should be paid—and comparing that to the amount actually paid.
The alternative bottom-up approach uses HMRC operational
knowledge to identify areas of loss and then the two are combined
to find some sort of common ground or estimate. Even HMRC does
not seem to have confidence in its own figures. They are
frequently revised and, as I say, it urges us to look at the
trends rather than the absolute amounts.
My interest in the tax gap stems from learning about the work
undertaken by vatfraud.org and RAVAS—Retailers Against VAT Abuse
Schemes—led by the very able and admirable Richard Allen. This
organisation pointed out many years ago the VAT loophole that
existed as retailers, believe it or not, transported goods to the
Channel Islands and then back to the UK, simply to avoid VAT
under the low-value consignment relief scheme. HMRC was in
complete denial about the problem and did not take adequate steps
to alert Ministers to the issue. What was the shortfall to HMRC?
HMRC estimated £85 million, but realistically it would have been
much nearer to £300 million, and of course many businesses in the
UK went bust at the time.
Subsequently, RAVAS looked at the much bigger issue of VAT abuse
by online offshore retailers. In 2015, Mr Allen was approached by
businesses which found themselves having to compete with Chinese
traders who were not charging VAT but were sending goods from UK
warehouses. The sums of money involved were eye-watering: it was
estimated that at least £1 billion in VAT was being evaded every
year on sites such as Amazon and eBay.
A dossier was given to the then Chancellor, , with the assistance of my
noble friend and myself. Over the next five
years, HMRC again gave every possible reason not to take
effective action, claiming that the sums of money we said were
being lost had been exaggerated. Eventually, an exposé by
“Panorama”, numerous debates in Parliament and the involvement of
the National Audit Office resulted in measures that now bring in
£1.4 billion per year of VAT that was otherwise being lost. This
figure was confirmed by , no less, to the Public Accounts Committee in November
2021. In February this year, at question 39, he admitted that the
new measures were
“bringing in much more of the previous lost VAT yield that we had
anticipated”
and that
“we had a level of registrations far in excess of what we had
forecast.”
I was a witness to and a participant in all this. So, my point is
twofold: first, a top-down approach would not have revealed this
loss of tax; and, secondly, we must learn to listen to
whistleblowers like Mr Allen for these types of abuses. Can the
Minister tell the House what processes are in place to look at
all possible tax loopholes and investigate whistleblowers’
reports? I am sure there are many more opportunities to close the
tax and VAT gap, but we must listen to the people on the ground
who are good enough to let us know of the problems. By the way,
it is to HMRC’s eternal shame that Mr Allen was never recognised
or thanked for his role in closing the loopholes. In fact, he
ended up having to pay HMRC for the cost of his freedom of
information requests. I hope the Minister picks this up and
reflects on what happened.
Interestingly, Mr Allen has identified another area where there
is undoubtedly a huge tax gap. This is a new form of abuse
involving sellers who operate outside the jurisdiction of the new
rules. They are not registered for VAT and have no need to be as
they are based mainly in China and, as such, impossible to
pursue. They sell their products directly to UK customers. Their
websites target UK customers and are filled with reviews—probably
fake—from UK customers, and the goods are sent by post so there
is no VAT collection. Yes, HMRC does undertake some checks on the
border, but it is impossible to look at every item, and attempts
to ascertain value by, for example, weighing clothes are somewhat
primitive.
Let us be clear: at the moment, if a seller is in China or any
other country and posts a package to the UK with no VAT added, as
they have not registered for VAT as they should have done, HMRC
is in reality powerless to collect the VAT due. The simple
solution could be a VAT passport on all goods, via a QR code,
which closes down a VAT gap that has yet to be quantified or
recognised. So it is a digital solution: a QR code is essentially
a VAT passport. A foreign seller will then have to prepay any VAT
due and a bar code scan can easily inform HMRC of the exact
details of the consignment.
As every seller has a unique QR code, it will be easy to identify
them and of course the recipient. As tax becomes digital it is up
to us to embrace opportunities such as these. It is just one idea
to reduce the real VAT tax gap which TaxWatch advises me is €23
billion in the UK. Embarrassingly, that places us second out of
European countries in terms of absolute VAT loss and seventh in
the table of VAT loss as a percentage of total available
revenues. Perhaps the Minister tell the House if HMG are looking
at bringing in a VAT passport. If they are not, do they have
plans for an alternative method of capturing this VAT owed? The
status quo is clearly short-changing the UK taxpayer. We can do
better.
3.18pm
(Lab)
My Lords, I thank the noble Lord, , for raising this important
issue and providing us with an opportunity to discuss the report
from the Inland Revenue. I strongly support everything he
mentioned in his questions to the Minister. I also thank the
noble Lord, , who has snaffled one
or two of my best lines.
What was clear from what was quoted of how the gap is defined is
its uncertain nature and the uncertain way the figures are
derived. The conclusion in the report itself is that it is not
the absolute numbers that are of real significance but the way in
which they move, which suggests we should focus on the trend, and
I am sure that is correct.
These figures are derived using a variety of methods, and it has
to be said that some are more convincing than others. My first
question is: to what extent is it a priority for HMRC to refine?
What work is it doing to refine the derivation of the figures? We
know that it is hard-pressed, particularly with the impact of the
virus, but it would still inform the House if we could be told
how much work is being done to improve the figures. Ultimately,
it is like trying to prove a negative and we are never going to
get it absolutely right or have absolute certainty about the
figures.
A particular point of concern on which I would value the
Minister’s comments is that there is a subjective element to what
is being produced here. The report refers to what “should” be
collected. Should is a subjective word; it is open to
interpretation and depends on the Revenue’s own view as to what
should be collected. There is a question of interpretation
involved. Were it to adopt a more lenient form of interpretation,
the tax gap would decline. The converse is also true: if it had a
more aggressive definition, the tax gap would increase. There is
always going to be an element of uncertainty, but I would still
urge the Minister to demonstrate that this is really more than
just a PR exercise and that we are working towards to getting
some sort of real figure.
Let us accept then that it is a form of performance indicator. If
it is a measure of corporate effectiveness, how good is HMRC at
collecting the money that it is due? It has to be said that the
record is not all that impressive. There is lots of detail in the
report, but if we simply look at the graph on page 5, we see that
there has been a decline over the past 10 years or so, while the
latest figures show a slight increase. I dare say that the
figures for the following year will be unusual, to say the least,
because of the impact of the pandemic, but given the extent of
uncertainty about them, the figures have to all intents and
purposes stayed the same. I may be asking too much, but I seek
some commitment that the Government want to see the figure
declining over time and not staying stable.
Other people have looked at this. The National Audit Office drew
attention to it in July 2020 and praised the fact that the gap
had been successfully reduced—two years ago, it appears there was
a reduction; the more recent increase was not available there—and
said it was good value for money. However, it also said that,
where there had been success, the way it had been achieved had
not been applied more broadly. This comes back to it being an
issue of not just measurement but what lessons are being learned.
Are the right lessons being applied?
The Commons Treasury Committee had a go at this as well. It asked
for a strategic plan for reducing the tax gap. It puzzled me that
the Government did not adopt the proposal. It would appear that
they did not want to give the game away by telling the people who
were creating the tax gap what steps would be taken to close it.
I do not know what precise plan the Commons committee had in
mind, but I would have thought that some strategic approach to
reducing the tax gap would still be welcome.
Finally—this is more of a question—there was at some stage a
supposition that making tax digital would help the situation, and
that, were all the figures collected digitally and filled in
online by everyone, the opportunity for the tax gap would be
reduced, but that does not appear to have been the experience.
Perhaps the Minister could enlighten us on that.
In my remaining two seconds, I will have a go at the suggestion
made by Ministers, on occasion, that the tax gap is one of the
smallest in the world. I come back to VAT. Claims based on
international comparisons of the tax gap are almost impossible,
in general, but they are possible for VAT—the European Union did
it—and there our record was not particularly good. Attention was
drawn to the fact that we were seventh in terms of the proportion
and that many other countries are much more successful. Does the
Treasury regard this issue as a priority? In this area, the most
recent figures—this is going back a few years—show that we were
not doing very well. What steps are being taken to improve the
situation?
3.26pm
(GP)
It is a pleasure to follow the noble Lord, , and to join the
small and distinguished pre-Recess group in this debate. I thank
the noble Lord, , for securing our chance to
discuss this important issue.
Since it is this time of the Session, I want to be optimistic. I
will look at how we can see some optimistic political directions,
in the context of the tax gap. I begin by quoting Oliver
Bullough’s Butler to the World: How Britain Became the Servant of
Tycoons, Tax Dodgers, Kleptocrats and Criminals:
“It will only be by imposing rational regulations and laws across
the entire British archipelago, by enforcing them robustly and
remorselessly and by investigating and exposing failures to do so
that Brits appalled by the country’s butlering industry can force
it to seek a different way to earn a living. And they should not
be afraid to do so. Thanks to the combined dislocations of COVID
and Brexit, Britain is questioning its position in the world in
ways that may not be repeated for a generation.”
The noble Lord, , referred to the way
in which this report looks very much at trends, rather than hard
facts. There is clearly a political trend of great concern about
these issues and of calling for action on them.
For those who have not read the book, there is another cause for
optimism in it: the situation that we are in now, with the
massive inequality, massive tax dodging and massive tax gap, has
come forth only in the last few decades—it has not been sitting
there through centuries of tradition. There has been big
inequality and we had a trend known as the “great levelling” that
went in a different direction between the 1950s and early 1970s,
but different directions have been taken in the past and can be
in the future.
Only by adopting a long-term consensus across the political
spectrum to have an economy that meets the needs of people, while
acknowledging that we have to live within the resources of our
share of this one fragile and much-abused planet and are not
competing with other nations to grab a fast buck by putting out
the welcome sign to the dodgy, the shady, the straight-out
corrupt and those who service them—the “enablers”, in the
jargon—can we tackle the official tax gap, as measured by HMRC
but highly inadequately, as the noble Lord, , outlined. As he also said, the
enablers have escaped being investigated, let alone prosecuted,
for tax dodging and other issues.
It is worth picking up the point of the noble Lord, Lord Davies,
that we are talking of subjective things here. We may get all
these really tight numbers and percentages but, as HMRC itself
says, the tax gap is one between what
“should, in theory, be paid … and what is actually paid”—
so we are talking about theory.
It should be interesting to read this debate alongside that on a
Motion of the noble Lord, , agreed in this Room
on 3 February, which took note of
“the impact on global democratic norms and values from autocrats,
kleptocrats and populists and the case for a coordinated response
by the United Kingdom and her allies.”—[Official Report, 3/2/22;
col. GC 289.]
One could very easily add “tax dodgers” to that and acknowledge
that, again, there is huge public concern about the security
implications of this.
That is the dark side of it; there is also the grey side—the
shady side, you might say. This is where we come to the theory of
who should be paying tax. There is probably an even bigger group:
the rootless multinational parasites which suck profits from
communities around the globe and—where they are allowed to get
away with it, such as in the UK—pay little or nothing back. They
rely on the infrastructure paid for by all, such as the roads,
policing, schools and hospitals. They rely on the natural
resources of these islands, which should be there for the use—or
non-use in the case of fossil fuels—of all, and the labour of the
workers produced and reproduced by society. Yet they do not pay
their way.
You could call this the Shell-Amazon problem for shorthand, given
that just this week we learned that for the fourth year in a
row Shell has paid no tax
on North Sea oil and gas extraction. Picking up the point about
international comparisons, I say that in Norway last
year Shell paid $4.5 billion
in tax, production entitlements and fees in a very set of similar
circumstances, and Amazon paid £3.8 million in corporation tax on
£1.8 billion in sales. I am sure the Government will say they
have a strategy for that. I have just been looking at their
report from last year Tackling Profit Diversion by Multi-national
Companies, which proudly proclaims that in five years £5 billion
has been clawed back. That is less than double what Norway got
from Shell in one year.
I have talked “big picture”. What, aside from electing a Green
Government who actually want to tackle the official and
unofficial tax gaps, could be practically done? Here are a couple
of practical suggestions for the Minister. First, we could
establish Her Majesty’s Revenue & Customs as an independent
agency of government, answerable to Parliament. That would remove
the power of politicians to strike secret deals with corporations
and individuals, as the noble Lord, , referred to. Secondly, we
could entrench the anti-avoidance principle in UK tax law and
oblige banks to provide information about companies automatically
to HMRC. We used to hear a lot of talk about the anti-avoidance
principle, and we really need to revive that.
What is happening instead? As was highlighted in the Spring
Statement, HMRC is investing £161 million to ensure that
businesses pay what they owe—although we seem to have a lot of
focus on cab drivers and hairdressers, which is not what we are
talking about here. The DWP is also spending £510 million—roughly
four times as much—to prevent fraud and error in the benefits
system and to collect more debt from people on universal credit.
The DWP estimates that it can claw back £3.15 billion from
benefit claimants. HMRC estimates that it can get £3 billion from
putting additional resources into chasing tax dodgers.
Back in 2015, I was saying that we have to stop making the poor,
the disabled and the young pay for the greed and fraud of the
bankers. Yet, visibly, it is those groups that the Government are
continuing to chase for the pennies they have not got, while
failing to act against the people who are truly causing massive
damage to our society.
3.33pm
(LD)
My Lords, I can only agree with the noble Lords, , Lord Leigh and Lord Davies,
and with the Public Accounts Committee of the other place, that
the tax gap is always cited as if it were a number of some
precision. It is nothing more than a general estimate and it
should be treated that way, not as divine truth. The Public
Accounts Committee had some good ideas, particularly for sectoral
tax gaps, so at least we could try to tie it up with the
underlying real economy. At the moment, there are no correlations
at all.
To me, what really matters most about the whole concept of the
tax gap are the behaviours that it drives. HMRC appears to be
absolutely fixated on it. In committee after committee, evidence
from HMRC officials has convinced me that their primary mission
in life is reducing the tax gap. By contrast, the fair treatment
of taxpayers is a woeful irrelevance. This attitude means that
they go after the low-hanging fruit.
I cannot rehearse all the arguments around the loan charge. We
all believe that everyone should pay the tax they owe. I should
declare that I am a member of the Loan Charge APPG. It has
recently, yet again, written to the Government with 10 questions
which tackle this issue of the lack of an adequate legal basis
for the charge. A legal case found against the companies that
hired contractors, not against the contractors. I could go on
about retrospection. One of my main beefs with HMRC is that it
issues tax claims with no actual calculations to show how the
numbers are derived. For years, its treatment of individuals
against whom it had claims was brutal and threatening. This has
improved—but only after eight suicides. The APPG has again been
pushing HMRC to set up a suicide prevention hotline.
I was on the Economic Affairs Committee, which looked at changes
to off-payroll working which gave larger, private companies
responsibility for assessing compliance with IR35 for the
contractors they hired. The online CEST tool provides no
determination in 20% of cases. The CEST assessment gives no room
to the fundamental test of “mutuality of obligation”. Blanket
rulings are common because companies do not want a fight with
HMRC, so they simply decide to say that everyone is on payroll
for tax purposes—although not, of course, for employment rights
purposes. The company then subtracts its NIC payment from the fee
normally paid to the contractor. Contractors are usually afraid
to challenge such rulings for fear of being blacklisted. A
contractor who appeals a decision made by a company hiring him or
her can only appeal back to the same company. Consequently,
self-employment has fallen by nearly a million—down 20%. The
consequences are genuinely serious for our economy, which needs
the kind of project skills that are embedded in that freelance
and contractor market, particularly at the high-tech end.
I do not always agree with everything that the noble Baroness,
Lady Bennett, says. However, I agree with some aspects of her
speech. HMRC deals very differently with big companies with their
expert advisers and deep pockets. They negotiate and do deals. I
am not going to repeat the cases that she and the noble Lord,
, used to illustrate this, but
it is incontrovertible that most major companies have managed to
arrange deals in which they pay very little, compared to the
revenues that they generate in the UK. I join in asking the
Minister why we do not have the full amount of transfer pricing
and base erosion included in the tax gap. It is a major hole in
all the numbers that we present.
I want to say something quickly about Making Tax Digital. I have
often heard HMRC say that it will close the tax gap. Everything
is motivated by it. The Chartered Institute of Taxation is pretty
sceptical about it. The noble Lord, , gave us the
numbers. It has not worked. One of my frustrations is that HMRC
has insisted that, to make tax digital and to collect more of it,
it has to combine this with a change in the base period. All UK
companies will now have to have a tax year-end between 31 March
and 4 April, regardless of the seasonal patterns of their
business. Little seasonal businesses, whose logical year-end is
different, are now to be punished. The hospitality sector,
farmers whose revenues depend on commodity prices and the
weather, and retailers with seasonal goods, will have to guess at
their future revenues for tax purposes. They will be hit very
hard if they get it wrong. Making Tax Digital should have offered
the possibility of flexibility and variation. Instead,
simplification has been used to minimise the effort that HMRC
needs to put into any of its activities. It is part of the
failure to behave fairly to taxpayers.
I do not have much time to talk about fraud, and others have. One
of my angers at HMRC in this process, if it is so dedicated to
closing the tax gap, is that, after Covid struck, for six months
it stopped answering its fraud hotline—the phone just rang and
rang—and the online reporting form contained so many intrusive
and personal questions that many whistleblowers were too
frightened to use it. I am not at all surprised that we are
looking at £15 billion of Covid-related fraud and an annual loss
to fraud of £29 billion. I have some serious questions now about
the future fund and may write to the Minister with a particular
case where it looks as though misuse is being condoned.
I accept that there have been attempts at improvement; in the
Spring Statement, the Government announced a new public sector
fraud authority. I would like to hear from the Minister that this
is not just Action Fraud rebadged, because that service has been
damned for its failings by the public—there were scandals in the
media—and declared unfit by the police. I want to know in more
detail how this new body differs. HMRC has a new hotline. How
does it differ from the old one, which was reasonably hopeless
even when it worked? The Large Business Directorate is supposed
to be getting tougher on big businesses. Can the Minister tell us
how?
I always think that treating taxpayers fairly is the way to close
the tax gap. It is not a side issue; closing the tax gap should
dominate every decision that HMRC makes.
3.41pm
(Lab)
My Lords, I congratulate my noble friend on securing this short
debate.
As has been said, the tax gap for 2019-20 is currently estimated
at 5.2%. That is down 0.1% from the initial estimate but remains
marginally higher than the gaps for both 2017-18 and 2018-19. We
will not see further figures from HMRC until 23 June, and it is
far too early to know what impact this year’s tax changes and
other initiatives will have in future years. However, can the
Minister comment on whether there is cause to believe that the
gap will increase for 2020-21 and 2021-22?
As the HMRC report outlines, there are several reasons for tax
not being paid. Some are perfectly innocent but, as the
Government acknowledge:
“Legal interpretation, evasion, avoidance, and criminal attacks
on the tax system also result in a tax”
gap. Can the Minister specify the balance between genuine errors
and these other, more sinister causes?
The report states:
“It is impossible to collect every penny of tax that is
owed.”
That may be true but, as we have heard on far too many occasions
recently, it is not clear that the Government are doing enough in
this area. Concerns over HMRC’s ability to identify and tackle
tax evasion and avoidance have existed for many years. The
department lacks capacity and expertise, and the well-documented
gaps have not yet been sufficiently plugged. Media sources have
disclosed various dodgy dealings, whether by firms or
individuals, but the Government’s decision-making in the
aftermath of such revelations has often failed to live up to
their tough rhetoric.
The Chancellor chose to hike taxes on working people yesterday,
despite a manifesto commitment not to. That follows his previous
decisions not to build safeguards into his coronavirus support
schemes, allowing fraudsters to get away with billions of pounds
of public money. At the same time, benefits have been cut in real
terms. The Chancellor could have eased the burden on the lowest
paid but chose not to. These are not the only choices the
Government have made. For years, the Treasury has funded expanded
investigatory units at the Department for Work and Pensions, to
identify mistakes or fraud in the social security system and
ensure that moneys are recouped.
We do not disagree with stamping out benefit fraud—far from it.
People should not abuse the system. However, the resources put
into the DWP to tackle benefit fraud and errors far outweigh
those given to HMRC to tackle tax evasion and avoidance—and to
recoup money claimed fraudulently from the Treasury’s coronavirus
schemes. The Minister will no doubt be aware of the work done by
TaxWatch UK in December last year, which highlighted the
significant disparity in the treatment of social security
claimants and corporate fraudsters.
In December, the DWP was given £510 million of additional funding
to tackle benefit fraud. This funding, covering a three-year
period, was in addition to £103 million already allocated at the
spending review. It expands what is already a significant
anti-fraud operation at the department. Last March, the
Chancellor announced the £100 million Taxpayer Protection
Taskforce to recoup money wrongly claimed under coronavirus
support schemes. An additional £55 million came in the Autumn
Budget.
Why has tackling coronavirus fraud been given just a quarter of
the budget given to the DWP, even though the amounts lost to
coronavirus-related fraud are higher? The Minister will no doubt
tell us that we need not worry, as the Chancellor corrected the
disparity in the Spring Statement; £48.8 million was allocated
over three years to the establishment of a new public sector
fraud authority. But it is not clear how much will be recouped
because of that investment. Can the Minister clarify? Some £161
million is being invested in HMRC compliance efforts over five
years, but how many additional investigators does this amount
to?
The 2021 Spring Budget predicted that, despite additional
spending on compliance at the time, less would be collected year
on year until 2023-24, due to HMRC focusing its efforts
elsewhere. What difference will this new funding make? With some
HMRC staff being reallocated to the new Covid fraud task force,
are there enough people left to adequately deal with day-to-day
tax investigations? If not, how quickly can additional staff be
recruited and trained?
This top-up to HMRC’s budget is estimated to secure an additional
£3 billion in tax over five years. That amount is not
insignificant, but, equally, it is just £0.6 billion per year—or
0.1% of the 5.2% tax gap. These amounts and initiatives give the
impression of a Government who are tinkering at the edges, rather
than getting to grips with long-running problems. That is a
political choice and it is simply not good enough.
3.48pm
(Con)
My Lords, I thank the noble Lord, , for securing this debate, and
all noble Lords for their contributions. Although these ranged
over a wide number of areas, I think the common thread of
agreement was that every effort should be made to narrow the tax
gap, and that is something that the Government will continue to
bring forward further measures to achieve.
As set out by the noble Lord, , HMRC publishes comprehensive
estimates of the UK tax gap, including both direct and indirect
taxes, annually. In fact, HMRC is one of only two tax authorities
in the world to do this in such a comprehensive manner,
underlining its belief in transparency. The latest publication
estimates the 2019-20 tax gap as 5.2% of total expected
liabilities, or £35 billion. The Government recognise that this
figure is still too high.
However, this estimate also underlines the long-term downward
trend in the tax gap, which, in 2005-06, stood at 7.5%. In fact,
the most recent tax gap is at a near record low, which means that
almost 95% of total tax due is paid. None the less, as has been
acknowledged today, the current tax gap is slightly larger than
that of the previous year, which stood at 4.9%—although, as
several noble Lords have noted, I encourage the Committee to
avoid drawing strong conclusions from a single year’s results. By
way of explanation, the increase was mainly driven by changes in
the VAT tax gap. My noble friend Lord Leigh is right to say that
the VAT gap is, at times, subject to change. Such revisions are
evidence of HMRC’s commitment to transparency and the complexity
of the calculations. As the noble Lord, , said, they also
underline the importance of considering trends rather than
figures for individual years. However, I stress that HMRC’s VAT
gap estimate, and the methodology, are robust and in line with
international best practice.
The noble Lord, , asked whether there is cause
to believe that the tax gap will increase for the following year.
Although it is difficult to predict the potential impact of
Covid-19 and the related recession on the tax gap, it is not
necessarily the case that the tax gap will rise, as there are
complex interactions that could change both the drivers and
opportunities for tax non-compliance to occur. The VAT gap for
2020-21 has already been published and is at 6.7%, down from 8.4%
in 1920. The tax gap for 2020-21 will be published on 23 June.
Following the recession brought about by the financial crisis in
2007-08, the tax gap due to non-payment increased as businesses
became insolvent while owing tax. The impact of the pandemic on
businesses may be different, but if businesses fail, the tax gap
due to non-payment may increase. The noble Lord also asked about
the balance between genuine errors and more sinister causes, and
other noble Lords talked about the breakdown in the tax gap
provided. The breakdown by behaviour is illustrative, but the
latest publication shows that, in 2019-20, failure to take
reasonable care and error collectively accounted for around 29%
of the tax gap. Legal interpretation, evasion and criminal
attacks were at a similar size at 16%, 16% and 15% respectively.
Non-payment was at 11%, the hidden economy was at 8% and,
finally, avoidance accounted for the smallest proportion of the
tax gap at 4%.
The noble Lord, , asked about the Government
looking at ways to improve analysis of the tax gap so that it
better matches the Government’s priorities and policies. As I
have said, tax gap breakdown by behaviour is illustrative and
more detailed breakdowns are not available at a granular level.
However, HMRC does not agree with TaxWatch figures and estimates
that fraud and evasion account for 30% of the tax gap. HMRC has
previously published levels of specific fraud, such as missing
trader intra-community—MTIC—fraud, and has seen a decline from a
peak in 2005-06 where it was £2.5 billion to £3.5 billion, to
zero to £0.5 billion—as published in Measuring Tax Gaps 2019
Edition. HMRC did not publish an updated time series for MTIC
fraud in its 2020 publication as fraud has remained at lower
levels.
The noble Lords, and , asked about HMRC’s
methodology in calculating its tax gaps. The tax gap estimates
are official statistics produced in accordance with the Code of
Practice for Statistics. This ensures that the statistics
published by the Government serve the public and are of high
quality. In May 2019, the Office for Statistics Regulation
conducted a compliance check on the extent to which HMRC’s
publication meets the standards of the Code of Practice for
Statistics and commended HMRC’s preparation, production and
publication. The tax gap methodology has also been extensively
reviewed and given a clean bill of health by the International
Monetary Fund. Tax gap estimates are reviewed each year to
reflect updated data and methodologies.
On the points raised by my noble friend Lord Leigh, the
Government are grateful to him and Retailers Against VAT Abuse
Schemes for their work to highlight areas of non-compliance from
overseas businesses selling goods into the UK. Now the UK has
left the EU, the Government have used this freedom to create a
fairer and more robust system for the collection of VAT on
overseas goods. On 1 January 2021, the Government abolished
low-value consignment relief, which was subject to widespread
abuse, and moved the collection of VAT on most goods from
overseas with a value not exceeding £135 away from the border.
Now, overseas sellers and online marketplaces, where they
facilitate a sale to UK customers, must register, charge and pay
VAT to HMRC. The new treatment ensures the continued flow of
goods at the UK border, clamps down on non-compliance and
protects revenue.
In 2021, the Office for Budget Responsibility estimated that the
changes will raise over £1.4 billion, with similar levels in
future years, reflecting a change in where VAT liability falls
following Brexit. HMRC continues to review the impact of the
policy, including which options exist to tackle non-compliance by
overseas sellers. Officials are aware of the VAT passport
proposal and are considering it, alongside other proposals to
tackle non-compliance.
The long-term reduction in the size of the overall tax gap has
not happened by accident. This improvement is a result of the
Government’s focus on tackling the small minority who
deliberately try to defraud the Exchequer, as well as on helping
taxpayers to get their tax right by promoting good compliance and
reducing opportunities for error. That is why, within little more
than a decade, the Government have introduced over 150 measures
to tackle tax avoidance, evasion and other forms of
non-compliance. These measures, alongside HMRC’s wider work, have
secured and protected over £250 billion since 2010.
We also continue to play a leading role in clamping down on
international tax avoidance and evasion, through the G20 and
other bodies. Several noble Lords asked about some of the
international dimensions to this, in tackling profit diversion,
the base erosion of profits and other international actions. To
the noble Baroness, Lady Kramer, I say that the UK has led the
way internationally in making sure that multinational companies
pay their fair share. HMRC has secured more than £6 billion in
extra tax from multinationals, thanks to the diverted profits tax
introduced in 2015 to tackle those who shift their profits abroad
to avoid paying tax that they rightly owe in the UK.
Several noble Lords asked why base erosion is not included in the
tax gap. As noble Lords noted, HMRC does include some forms of
base erosion and profit shifting where it represents tax loss
that we can address under UK law, but not BEPS arrangements that
cannot be addressed under UK law. It is worth noting that, as new
measures introduced in accordance with the OECD’s BEPS project
take effect, the Government’s ability will be greatly
strengthened to address BEPS under domestic law.
The noble Lord, , asked why resources were being
put into the DWP to tackle benefit fraud and about other measures
to tackle public sector fraud more widely. Just like other forms
of fraud, benefit fraud is stealing from taxpayers and the
Government do not tolerate any fraud in the benefit or wider
government system.
The noble Lord, , and the noble Baroness, Lady
Kramer, asked about the new public sector fraud authority. Its
aim is to reduce fraud levels across government. We might expect
the most immediate benefits to come from actions such as
bolstering our data-analysis capabilities, which represent around
£22 million of the package the Chancellor announced and are
expected to have an audited return on investment of three to five
times that. It might be worth my writing to noble Lords with more
detail about how the new public sector fraud authority will work,
because there is a lot more information coming on that.
Noble Lords asked a number of specific questions about additional
investment in HMRC. I will also write on that, given the
time.
The noble Lord, , and the noble Baroness, Lady
Bennett, made some claims about sweetheart deals. I must be
absolutely clear: HMRC does not do deals with anyone. Tax
disputes are resolved in accordance with the law, as set out in
the published code of governance, overseen by the Tax Assurance
Commissioner.
I am afraid I am running out of time. The noble Baroness’s point
about HMRC treating taxpayers fairly was very important. I know
it is something HMRC has worked on recently and will continue to
work on. The Government think Making Tax Digital has been
effective in helping to reduce the tax gap.
To conclude, closing the tax gap is an incredibly important area
for the Government, on which we have taken real action. I welcome
this opportunity to debate it and we will strive to reduce the
tax gap through compliance work and improvements to the tax
system.
