HMRC » Tax Research UK

Want to know why HMRC bad debt was £10.9 billion? Simple: they sacked the debt collectors

HMRC, Tax gap, Uncategorized 9 Responses »

Feb 072012

It’s been revealed that H M Revenue & Customs’ bad debt in 2009-10 was £10.9 billion.

According to HMRC’s accounts the provision was £10 billion in 2010-11 and £11.5 billion in 2009-10. They did not, as far as I can see (and I’ve searched) disclose a write off figure.

In earlier years write offs of about £4 billion a year were considered normal.

So why the increase? Well that’s easy to explain. If you sack your debt collectors your bad debt goes up, and that’s exactly what HMRC under the direction of Dave Hartnett has been doing. In 2005 HMRC had 100,000 staff. By 2015 it will be 50,000. Many of these were debt collectors.

Total HMRC staff costs in 2010-11 were just over £2.2 billion. Seeking to reduce that has cost many, many times that sum.

No wonder the tax profession, HMRC staff unions and anyone trying to deal with HMRC agree that HMRC is understaffed. Now we know the cost.

When will sanity prevail and more spending on staff at HMRC be sanctioned? It’s the only way to solve the tax gap.

If HMRC bad debt is £10.9 billion their estimate of the tax gap has to be massively wrong

HMRC, Tax gap 8 Responses »

Feb 072012

It’s been revealed that the UK’s national accounts for 2009-10 include tax bad debt of £10.9 billion.

I found this interesting. That’s because, as regular readers will know, I’ve been writing about the ‘tax gap’ since 2006, and pretty much forced this issue onto HMRC’s agenda in 2008, as government papers at the time showed. The tax gap is made up of three parts. The first is tax avoidance (£25 billion in my estimate), the second tax evasion (£70 billion in my estimate) and the third tax paid late (£25 million according to HMRC of which they have said about £4 billion a year has been written off on average in previous years. This definition of the gap is not mine by the way: HMRC agree with it, except they ignore tax paid late and recovered in their numeric calculations despite including it in their definitions.

But if they do include bad debt of £10.9 billion then their latest estimates of the tax gap – supposedly for the same year, 2009-10 are even more wildly inaccurate than we thought, because they claim that in total the tax gap is just £35 billion that year. That would mean there was just £24 billion of tax avoided and evaded, and yet as I have shown using World Bank figures for the UK shadow economy, it’s implausible that we have a tax evasion gap of less than £70 billion (which so happens to agree with my estimate of the same gap based largely on VAT data). If the HMRC claim on the total tax gap were right tax evasion would be little more than £20 billion – and that’s just 3.6% of total overall tax revenues.

No country on earth has a tax evasion rate as low as that. Switzerland is supposedly the cleanest domestic economy on earth and has a shadow economy of 8.5%.

So what this data says is that not only do the national accounts have some surprises in them, but HMRC are lying about the scale of the tax gap. Sorry to use such language, but on this occasion it seems appropriate (and they can always sue me if they wish). But I don’t think they will. What this data reveals is that not only have they not previously told the truth on the scale of bad debts HMRC has been suffering, they’ve also been disguising that data in the figures on the tax gap they have been producing. As I’ve said all along.

There’s no point HMRC saying they’ll penalise people when they don’t

HMRC, Uncategorized 11 Responses »

Feb 042012

The news was full of the story that 1 million people will pay £100 fines for submitting their tax returns late yesterday.

Except they won’t.

I did some research on tax penalties a year or so ago. The data here all comes from my report on small company administration (around page 50). It is all based on parliamentary answers. These showed the following with regard to penalties issued for corporation tax over a number of years:

Vast numbers of penalties were waived: they were simply for returns not due, or that could not be traced.

But staggeringly of those due, almost no recovery was made. Years worth of unpaid penalties were outstanding at each year end.

That’s the price of not having enough staff to collect debt at HMRC. But just think what could have been done with that money if it had been collected. And without a shadow of doubt if HMRC had kept on top of this issue much more could have been collected than was, and cost efficiently too.

In the meantime, assume that due to mismanagement at the top of HMRC the £100 million opportunity for the state that lat payment penalties represent at this moment will just be more money squandered away.

How to tackle the crisis in small business taxation

Corporation Tax, HMRC, Small business No Responses »

Feb 042012

This weeks ‘scandal’ at the Student Loan Company, where a director who appears to be an employee has been paid through a personal service company has excited lots of attention. I know there will be more similar stories: I have been called about them.

But I’m not interested in the stories of the people involved; I am more interested in the systemic issues. There are two of these. The first is the problem that small business tax is too complicated and fails to reflect the economic reality of the way in which many small businesses work. The second is that the government through H M Revenue & Customs and Companies House is simply failing to collect the tax due from small companies.

I deal with the first here. I wrote the following in 2007 when H M Revenue & Customs had lost its last major anti-avoidance case against the use of a small limited company to both receive the income of what was claimed to be a disguised employment and which then split that benefit between a husband and wife. I wrote then:

The Arctic Systems case has been widely reported, but much of the comment made upon it has been high on emotion, but low on analytical content.

I wrote on this case, and as a result was challenged to produce a suitable response. That I have now done. The full paper is available here. The summary says:

This paper analyses the way in which the owners of many small limited companies reward themselves and members of their families out of the income that their labour generates for those companies. This is particularly relevant in the light of the recent House of Lords ruling in what is known as the ‘Arctic Systems’ case. The paper shows that many of these arrangements do constitute tax avoidance because the rewards paid do not much the underlying economic substance of the transactions that are taking place.

In the interests of promoting tax justice for all taxpayers HM Revenue & Customs have a consequent duty to promote new arrangements that will encourage tax compliant behaviour in this sector. Tax compliance is defined as paying the right amount of tax (but no more) in the right place at the right time where ‘right’ means that the economic substance of the transaction accords with the declaration made for taxation purposes.

The paper does then show that this problem is almost insoluble whilst these businesses are operated through the medium of small limited companies which were not designed for and are unsuitable for the type of activity they undertake.

As a result this paper proposes that:

1. A change in company law to allow the re-registration of small limited companies as LLPs. An LLP is tax transparent: its income is taxed as if it belongs to its members even though it is a legal entity that is separate from them for contractual purposes;

2. The introduction of new capital requirements for the incorporation of limited companies undertaking trades, and over time forced re-registration of those that do not meet that standard as LLPs;

3. The introduction of a new investment income surcharge at rates broadly equivalent to national insurance charges that would have the benefit of reducing the incentive to split income, restore the taxation balance between income earned from all sources and allow a reduction in the base rate of income tax without adding substantially to the burden of administration for taxpayers since those liable will, in the vast majority of cases, already be submitting tax returns;

4. Create new, economically justifiable and verifiable standards for splitting income in LLPs so that the risk of legal challenge to such arrangements will be substantially reduced whilst recognising the significant role that the partners of those who supply their services through owner managed corporate entities play in the undertaking of that activity.

If this were done then:

a. The administrative burdens for many small businesses would be reduced;

b. The certainty of the arrangements under which they can operate would be increased;

c. The rewards that they rightly seek to pay to those who contribute to the management of these companies from within domestic relationships will be rewarded, but within appropriate constraints;

d. The attraction of freelance status in tax terms would be retained;

e. The current injustice that sees income from labour more heavily taxed in the UK than income from capital would be eliminated in large part without prejudicing the required favoured status of pensioners;

f. The incentives for tax planning would be reduced, so simplifying tax administration;

g. The tax yield might either rise, or a reduction in the tax rate might result.

The challenge in creating such a system is significant because it requires cooperation across government departments, but far from insurmountable. It is part of the challenge of creating an enterprise culture that meets the needs of the UK in the 21st century, and that is a challenge that any government needs to meet.

As I note at the end of the paper, suggestions and comments are welcome. But please do read the paper first and not just the summary.

That invitation still stands: the problem remains. I remain sure I have offered a viable alternative. I know it was well read and discussed in the Treasury at the time. Is this the time for change?

How did HMRC approve the Student Loan Company deal?

HMRC 3 Responses »

Feb 032012

Those wanting to know how HMRC approved the Student Loan Company deal should read this comment.

People wonder how HMRC don’t spot tax avoidance

HMRC Comments Off

Feb 032012

People are wondering how HMRC haven’t spotted the tax avoidance at the Student Loan Company.

Let me explain why. It’s because HMRC deny there is such a thing as tax avoidance. I have shown it may be £25 billion a year. And that tax evasion may be £70 billion a year. The latter accords with World Bank data, as I have shown.

But HMRC persist in arguing that tax avodiance is only a couple of billion a year and that tax evasion is half or less of my estimate – even claiming there is almost no problem with moonlighters and ghosts in the economy to reach their conclusion.

Well their data is wrong. It’s not just wrong – I believe it is fraudulently wrong: if you start your estimate from tax returns submitted ignoring the fact that tax evaders don’t submit tax returns of course you knowingly get the wrong answer, and that’s just what HMRC bosses demanded their data do to make their own case for their efficiency look better and the case for cutting staff to keep their bosses happy look stronger.

But f course, if you can choose to ignore tax avoidance in your own data you can also ignore it when it stares you in the face. And that’s what they’ve also done. Which is why HMRC is in the mess it’s in and why we end up with a tax system that lets the top paid off their tax liabilities. And only strong leadership at HMRC will change that. I have little confidence we’re going to get it.

Tax haven UK could hide money laundering in football

Companies House, HMRC, Tax avoidance, Tax evasion 4 Responses »

Jan 312012

Bloomberg has reported today that:

European soccer ruling body UEFA is asking U.K. authorities to investigate two so-called letterbox companies that helped Porto (FCP)fund a player transfer.

For Gool Co. and Pearl Design Holding Ltd. provided finance for the two-time European champion to sign Brazilian striker Walter da Silvafor 6.2 million euros ($8.1 million) in 2010, according to Porto’s latest quarterly statement.

As banks ratchet up lending requirements, soccer clubs are seeking alternative ways to raise funds, often in return for a share of a player’s future transfer fee, said Sandalio Gomez, who teaches sports management at IESE business school in Madrid. UEFA officials said this increases the risk of money laundering because it’s unclear who owns the letterbox companies, which have mailing addresses in the U.K. and seemingly nothing else.

“We are urging state authorities to look into it,” UEFA Secretary General Gianni Infantino said. “Because we are a private company, an association, we cannot go to a company when it is a letter box saying ‘please tell us who you are and what you’re doing.’ They will tell us: ‘Who are you to ask me?’”

This is a massive problem facilitated by the UK.

Whilst we in the UK offer limited companies for sale for only a few pounds and utterly neglect the need to then regulate or tax these companies – as I have shown to be the case here – then the UK is undoubtedly losing out heavily to tax evasion as I have suggested (my estimate is £16 billion a year) and may, as UEFA seem to be suggesting, provide opportunities for money laundering.

That’s utterly negligent behaviour by successive UK governments and is all designed to ‘save’ costs for Companies House and H M Revenue & Customs whilst ignoring altogether the tax foregone and the massive cost to the UK of the tax foregone and crime permitted.

If we want responsible business in the UK we start by making sure each and every company files its accounts, delivers a tax return and pays its tax. It’s really not too much to ask. But our government refuses to do it. Why is that?

In support of HMRC staff striking tomorrow

HMRC 6 Responses »

Jan 302012

Up to 20,000 HMRC staff are expected to strike at some time tomorrow. The reason why they’re doing so is simple: HMRC, in the face of damning criticism of its management, has decided to bring in private contractors at two sites to handle calls from the public about their tax affairs.

Wholly reasonably PCS staff are defending the taxpayer against this privatisation move which means that access to data on peoples’ personal tax affairs will be handed over to private companies without any adequate protection in place.

And quite rightly PCS staff are also defending their jobs. They’re hardly well paid now, but call centre operators are bound to create a profit margin in one of two ways. The first is a lower standard of training, meaning calls will be badly managed, and secondly by cutting pay. The combination is a disaster for the effective management of the UK tax system at a time when w know it has been badly managed and when we know the tax gap might be £120 billion a year.

The result is that I support the PCS workers striking tomorrow. It is they who are upholding the standards of public service in this country and the duty of the state to manage its tax system properly without risking the passing of data into the private sector. It’s the management of HMRC who know little of tax and who think they’re running a corporate entity who are failing the British public yet again. And I suspect any sensible person can see that.

Hartnett is right, and yet so, so wrong on the tax gap, for which he’s the main culprit

HMRC, Tax avoidance, Tax evasion, Tax gap, Uncategorized 9 Responses »

Jan 282012

The Telegraph reported yesterday that:

People who receive cash-in-hand payments for goods and services are harming the economy, according to HM Revenue & Customs (HMRC) most senior taxman Dave Hartnett.

Speaking to the Daily Telegraph, he criticised tradesmen and other workers who try to get out of paying tax by asking for their payment in cash and said there will be a crackdown to catch individuals who do so from April 2012 onwards.

Mr Hartnett claimed evading VAT or income tax is ‘diddling’ the economy and will lead to further cuts for things like hospitals and schools.

“Tax provides the funding to run the country: hospitals, schools and everything else. Every time someone pays cash in order not to pay VAT, the nation gets diddled,” he remarked.

Of course Hartnett is right: the tax gap, about which I have campaigned for years, and which I forced (via the TUC) onto HMRC’s agenda and in turn into national debate, is of course a major factor in the management of the deficit. Given that the gap is £120 billion that has to be true.

But let’s be clear, welcome as Hartnett’s recognition of this obvious fact is, he has ultimate responsibility for the fact that the gap is this big for two reasons.

First of all, he’s denied the size of the gap, persistently – and the propaganda his department put out under his direction about how small the gap supposedly is in his view has been used by him and his colleagues to leave this matter alone and to deny its significance. HMRC say the tax gap is just £35 billion right now (see the table, here). The numbers are grossly inaccurate for reasons I explain here, here and at length here. The consequence is obvious: too little attention has been paid to the issue and that is because HMRC worked persistently to hide its own incompetence to hide the fact.

Second, using the incorrect data his department produced Hartnett justified reducing the staff in HMRC. The numbers will fall from 100,000 in 2005 to about 50,000 in 2015. And like it or not collecting criminals requires human activity to detect and prove the crime. Tax evasion is a crime and there aren’t enough people now employed to detect much of it – so the tax gap has grown. Hartnett is responsible for that. And we see the result in cuts in services, pensions, disability living allowances, education, health, defence and so much more.

So sure, Hartnett’s right – people should not pay in cash knowing the cash will not be declared to tax authorities. But the biggest culprit by far in the creation of the massive UK tax gap that threatens our pubic services is Hartnett himself – and he’s just trying to deflect the truth by making the claims he’s now seeking to make in valedictory effort to justify his actions.