Lord Sikka
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.
Lord Sikka (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.
Lord Leigh of Hurley (Con)
My Lords, I congratulate the noble Lord, Lord Sikka, 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, Lord Sikka, 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, George Osborne, with the assistance of my noble friend Lord Lucas 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 Jim Harra, 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.
Lord Davies of Brixton (Lab)
My Lords, I thank the noble Lord, Lord Sikka, 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, Lord Leigh of Hurley, 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?
Baroness Bennett of Manor Castle (GP)
It is a pleasure to follow the noble Lord, Lord Davies of Brixton, and to join the small and distinguished pre-Recess group in this debate. I thank the noble Lord, Lord Sikka, 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, Lord Leigh of Hurley, 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, Lord Sikka, 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, Lord Browne of Ladyton, 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, Lord Sikka, 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.
Baroness Kramer (LD)
My Lords, I can only agree with the noble Lords, Lord Sikka, 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, Lord Sikka, 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, Lord Davies of Brixton, 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.
Lord Tunnicliffe (Lab)
My Lords, I congratulate my noble friend Lord Sikka 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.
Baroness Penn (Con)
My Lords, I thank the noble Lord, Lord Sikka, 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, Lord Sikka, 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, Lord Davies of Brixton, 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, Lord Tunnicliffe, 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, Lord Sikka, 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, Lord Sikka and Lord Davies of Brixton, 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, Lord Tunnicliffe, 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, Lord Tunnicliffe, 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, Lord Sikka, 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.