Plans to tackle tax avoidance need to be at the heart of the general election campaign

Major political parties have made much of their proposed crackdown on tax avoidance, but none have provided meaningful policy details

An image showing bank notes and pound coins

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

Taxation has been a major battleground ahead of the next weeks’ general election in the UK. That isn’t surprising as public services are in a dire state. For example, in England alone there are some 7.57m unfulfilled hospital appointments. Due to lack of healthcare 2.7m working-age adults are chronically ill and unable to work. Most roads are in a serious state of disrepair and need £16bn investment. Education is in crisis as spending per school pupil in England has not increased in real terms since 2010, teacher pay is at 2001 levels and investment in building is 25% lower in real terms than in the mid 2000s.

In terms of funding, major parties have a number of choices, but have boxed themselves in. They have not embraced Modern Monetary Theory (MMT) and won’t create money to fund infrastructure investment. They don’t want to borrow more money or engage in another round of quantitative easing. So they are stuck with the traditional logic of tax and spend to explain their economic policies.

In a game of smoke and mirrors parties make claims and counter claims about whether they will cut or increase taxes to fund public services and economic growth.  The independent opinion is that taxes will need to rise. To some extent that is inevitable, as since March 2021 income tax thresholds have by 2028/29. Due to fiscal drag, in 2024/25 29.5m individuals pay income tax at the rate of 20%, compared to 27.4m in 2021-2; 6.31m individuals pay tax at the marginal rate of 40% in 2024/25, compared to 4.431m in 2021/22; and 1.13m pay income tax at the marginal rate of 45% in 2024/25 compared to 0.52m in 2021/22. The freeze is expected to last until 2028 and neither Labour nor Conservatives have pledged to abandon it. In 2028/29 £33.5bn extra income tax a year will be levied. This is before any additional taxes are unveiled.

Both Labour and Tories are promising a crackdown on tax avoidance, evasion and fraud and raise additional revenues. Conservatives say that the clampdown will generate £6bn, but recent record raises serious questions. The Criminal Finances Act 2017 was introduced to enable the government to check corporate tax evasion and the tax avoidance industry. To date, no company or any of the enablers (accountants, lawyers and finance experts) have been prosecuted. The number of civil investigation cases involving offshore, corporate and wealthy taxpayers has declined from 1,417in 2018-19 to 627 in 2022-23.

Labour claims that it will raise £5.2bn a year by 2028-29 by closing non-dom tax loopholes and reducing tax avoidance. Labour’s tax plans are also a moving feast. Its manifesto  said that it would raise £0.565bn by taxing carried interest on private equity as income i.e. taxing the income of private equity managers at income tax rates of 20%-45% and not as capital gains taxed at 10%-28%. However, following lobbying from the private equity industry it has backtracked and said that income accruing to fund managers from investment of their own capital will continue to be taxed as capital gains and not as wages and salaries. These exceptions will be exploited and will have unintended consequences.

Neither Labour nor Conservatives provide detailed calculations of their estimates of additional revenues from tax avoidance crackdown though the amounts are not too dissimilar to the estimates included in Labour’s 2019 manifesto which built upon the 2017 manifesto. It was the first time that any party provided a fully costed manifesto and pledged to crackdown on tax avoidance and reduce the tax gap. Those manifestos also included a series of additional steps. For example, they promised a public inquiry into the finance industry; tackle the use of trusts and tax havens, a General Anti-Avoidance Rule (GAAR), denial of public contracts to tax dodgers and public filing of tax returns of large companies which would have enabled parliamentary committees to scrutinise secretive ‘sweetheart deals’ between HMRC and large corporations. Currently, companies and HMRC hide behind ‘confidentiality’ of tax information and thwart parliamentary scrutiny. The 2024 manifesto shuns such commitments.

How much tax is actually lost due to avoidance, error and evasion? This week HMRC published its annual estimate of tax gap i.e. the difference between the amount of tax that should have collected and the amount that it actually collects. For 2022-2023, it estimated the tax gap to be £39.8bn which relates taxes collected by HMRC, such as income tax, national insurance, VAT, capital gains tax, etc. There are methodological questions about HMRC’s model for estimating the tax gap. Alternative models put the gap at around £100bn a year.

This means that since 2010 HMRC failed to collect £500bn to £1,400bn of taxes. Even then the tax lost is likely to be grossly understated. For example, major corporations shift profits to low/no tax jurisdictions through a variety of concocted intragroup transactions. HMRC does not estimate the taxes lost.

Taxes are also lost through related party transactions. The parliamentary report on the collapse of BHS provided a vivid illustration. BHS Group sold a number of BHS stores to a Jersey-registered company ultimately controlled by Lady Green, biggest shareholder in BHS and wife of BHS chief executive Sir Philip Green. The stores were then leased back to BHS and it paid rents to the Jersey-based company. This helped to reduce BHS’s taxable profits in the UK. The rents paid to the Jersey-based company were not taxed in Jersey and the company paid out almost all of its income as dividend to its sole shareholder, Lady Green, who was resident in Monaco which does not levy any income tax. HMRC does not estimate the taxes lost due to related party transactions.

HMRC admits that it has no idea how much tax is being evaded by UK residents holding around £850bn in foreign assets, including £570bn in offshore tax havens. No party wants to deal with taxes lost due to financial engineering by large corporations or wealthy elites.

The tax gap to be £39.8bn can’t be reduced without additional investment in HMRC. Labour’s additional promised investment of £855m per year is unlikely to be sufficient. In 2009-10 HMRC had a budget of £4.3bn compared to £4.7bn in 2024.25, a massive real term cut. Tax enforcement and investigation is Labour intensive. HMRC staffing numbers have declined from 77,758 in 2009-10 to  67,621 in 2022-23.  In 2022-23 it had only 397 staff working on international tax issues.

HMRC states that “the tax gap attributed to small businesses has increased over the last 5 years, from 44% of the overall tax gap in 2018 to 2019 to 60% in 2022 to 2023”. This means that nearly £24bn a year is not being collected from small businesses, defined as having turnover between £10m and £200m, or typically 20 or more employees. A major reason for this is the closure of local offices which offered guidance to concerned citizens. Long delays over telephone consultations don’t help. Due to austerity and cuts in real wages of public sector workers, many experienced staff have left for a career elsewhere. The closure of local offices has also resulted in loss of local intelligence about the cash economy. As no party is offering to reopen local offices or give real term wage increases to staff, significant reduction in tax gap relating to small businesses remains in forlorn hope.

Major political parties have made much of their proposed crackdown on tax avoidance, but none have provided meaningful policy details. None have promised to deal with leakages due to financial engineering by corporations, offshore excursions or deal with the rampant tax avoidance industry. None have explained how they will empower citizens or parliamentary committees to scrutinise HMRC. None have explained how they will reduce the tax gap attributed to small businesses. In coming years, we can expect a lot of fudges but without serious policies tax gap is unlikely to be significantly reduced.

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