The’ tax gap’ is the difference between the money that HM Revenue and Customs should collect in the UK each year and the money that it actually collects. The difference is mostly tax cheats. Since 2008, the Revenue has published annual tax gap estimates, which, to their credit, is better than any other tax authority in the world. But there is a problem with their tax gap estimates. They’re crap.
That is Completely Rubbish APproximations to the truth. Firstly, because the Revenue marks their own homework, and they have a mysterious bias towards finding that they’ve done well. And secondly, because as the National Audit Office has said this week in a new report, the Revenue has no real idea what tax it does not collect because it has no adequate methodology to work that out.
Invest in HMRC
So, if Rachel Reeves was desperate for more money, and she claims she is, she should be investing a great deal more in HM Revenue and Customs and asking it to do much better when it comes to closing the tax gap.
A billion a year would increase its capacity by at least 20% and restore tax offices in most cities and large towns. People would see the Revenue working in their communities, and have the opportunity to go to see someone face to face to sort out tax problems and get advice.
But more than that, the Revenue needs a lot more well-trained people. Since 2005, their staff has fallen from 100,000 to 60,000. Labour says they might increase the numbers now, but probably not enough.
We know that, because people are kept on the phone for far too long. Some letters have taken years to reply to. So, the Revenue are clearly not able to manage the workload that they have: they simply don’t have enough people.
And, I would add, far too few of those people are well enough trained in tax, let alone accounting, to really understand the cheating that is taking place.
We don’t regulate companies
But most of all, the Revenue doesn’t recognise that the biggest source of cheating inside the UK tax system is the failure of Companies House, the body that registers UK companies but does not regulate them.
You can still form a UK company for next to nothing. It’s now around £35. It used to be only just over £10. You don’t have to prove your identity. You can do it online with no questions asked. And something like 800,000 of these companies are formed every year.
No other economy of the size of the UK allows new companies to be registered on that scale. Companies House does not scrutinise these registrations, and no minister has asked them to do it. So, there is a Wild West atmosphere: anything goes.
A third of tax uncollected
And anything is going because what we know is, even with the limited data that they have, HM Revenue and Customs think that at least 30% of all corporation tax owing by small companies is not paid. I think it might be bigger. But what they don’t then do is extrapolate from that. Significant amounts of VAT are not paid by those small companies, and nor is the PAYE paid on payments to their directors, who are also their shareholders. So, multiple tax losses mean that the total tax gap arising from these shadow companies, across the whole economy, is much bigger than anything that the Revenue estimates.
And then there are the self-employed, where the Revenue reckon that 18% of all tax liabilities are not paid – a figure that they claim, improbably, has fallen from well over 30% in 2013.
And this problem really matters most of all to the honest, small businesses, because the cheats are undermining them. If they don’t pay tax, they can underprice honest companies.
So, the honest are forced out of business, and the dishonest businesses win – at least in the short term. And that leads to a very high turnover of small businesses, very few of whom invest, not least in training, and we end up with an underdeveloped workforce, an under-invested small business community, a lack of productivity, and a failure of UK small business to compete on the international stage.
Permitting cheating on this scale is destroying the capacity of UK small businesses.
What could the government raise?
I think something like £12 billion could be recovered a year. This is an estimate because some cheats will always carry on. But that’s the sort of scale, which is, of course, more than enough to cover the £1.5 billion she will save by taking away the pensioners’ winter fuel allowance.
But more than that, this could provide the funds to give to honest small businesses to do investment; to support training; to ensure that they can be sustainable in the long term; and to help them with business advice.
That would be a virtuous circle: perhaps the most beneficial thing that Rachel Reeves could do to help small business in this country.
Support virtue, not vice
To do this, you have to be on the side of the honest and not on the side of the cheats. But current policy acts as if cheating is good, that honesty needs to be punished and, like some pensioners, those who’ve done their best need to go to the wall.
Labour really could do better than this.
