Tax Gaps 2019-20

Baroness Kramer Excerpts

Thursday 7th April 2022 Grand Committee

[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.