How to beat tax evasion in the UK

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I was asked yesterday how we could beat tax evasion in the UK.

This line of questioning usually starts with the person asking (often, as in this case, a journalist) suggesting that this task is impossible and that we had better just grin and bear things because they cannot see how we could trace those who might owe tax, but don't want to pay.

I do not, perhaps surprisingly, disagree with their suggestion as to the implausibility of achieving this goal using the approach they suggest. The trouble for those adopting a case-by-case approach to beating tax evasion (and I fear HMRC does adopt it, too often) is that you are almost immediately overwhelmed by the obvious implausibility of individually tracking down hundreds of thousands, and maybe many more, people who might be under-declaring their income or not declaring it at all.

But to move from that position to pessimism about beating tax evasion is misplaced, precisely because the logic of achieving that goal this way is wrong. To beat tax evasion you cannot start with the tax evader. The cynics are right; there are too many of them for that to be the starting point. Instead you have to realise that the goal of any tax system is to extract the maximum voluntary compliance from the tax paying population. Nothing else can achieve the goal of collecting the tax due.

There are many ways to increase this voluntary compliance but what almost all of them demand is that the taxpayer know that the chance that they are cheating will be discovered. In other words, greater transparency has to be used to open up the spaces where cheats can operate now.

Tax justice activists have promoted this idea to great effect in the campaign against tax havens, or secrecy jurisdictions as I helped rename them from 2008 onwards, with some success. What we began to argue from the time that the Tax Justice Network Financial Secrecy Index was launched (the first iteration of which I directed) was that it was not tax per se that induced people to use tax havens, it was the secrecy that did. No one would use tax havens for cheating if they could be found out to be doing so was our point. And therefore, we argued, transparency was the answer.

The result, and I think we can fairly argue it flowed pretty directly from our work, has been the massive change in culture on this issue where the USA and OECD have in combination lead a significant change in government approach to tax havens, away from the information exchange on request approach to such places adopted as recently as 2009 towards automatic information exchange of data on accounts held by persons in such places where the beneficial owner is resident in another place with data on that account now to be automatically sent to that person's home jurisdiction, starting in 2016.

It is thought that this will work for one simple reason, and that's not because lots of tax authorities will open tens of thousands of new enquiries (although one hopes that the resources will be allocated to let them do so if the data shows that to be necessary: the lessons of HSBC need to be learned). The process will work because it will no longer be worth hiding money in these places. The change will be behavioural. The aim is to start putting these places that trade in tax cheating out of business.

And we need to do the same in our domestic economy now. If we can demand that a tax haven supply information to our tax authority on who owns a bank account, either in their own name or indirectly via a company or trust, in that secrecy jurisdiction and that certain data, such as account balances, must also be supplied, then I can see no reason at all why we cannot demand that the same data, and maybe more, be supplied by banks and others in this country to HMRC.

So, I have argued for some time now that UK banks should be required to supply annually  to HMRC, and in slightly more abbreviated form to Companies  House, information on all the companies for which they maintain accounts in this country (whether UK registered or not) including details of which company it is, where they correspond with it, who they have proved the beneficial owners and directors to be and how much is deposited in each of its account each year.

There are several reasons for wanting this data to be supplied. The first is obvious: if a company has a bank account it is highly likely that it will be trading, and so might have a potential tax liability. At present HMRC fails  to collect tax returns from at least 300,000 companies a year that it requests them from, and lets at least 600,000 other companies off any requirement to submit a return for periods of up to 5 years without making any detailed enquiries on their claim that they are not trading. The opportunity for fraud in the system is enormous, because it is all too easy within the corporation tax system as it is at present to trade and yet fail to file a return. The information that I am suggesting should be supplied by all banks would allow very simple data matching on the basis of the company's number to prove whether, or not, it did trade during a period, and whether, as a consequence, it might have a tax liability, and whether as a result a tax return should be demanded from it, or not.

Immediately, the focus of HMRC's work in this area would be improved enormously. And, what is more, those companies that are failing to comply with the law would be  readily identifiable. If that failure is then matched to a penalty on the directors failing to file accounts and tax returns, which would be equivalent to a personal liability on them for the tax not paid, the chance of enforcement would improve enormously.

Important as this is though, other measures are necessary. Not all tax evasion will take place in this way. Some companies that are filing tax returns will, of course, be doing so fraudulently. So, for example, 400,000 companies a year file tax returns saying that they have no income, but this may not be true,  not least because they may get round having a corporate bank account by mixing online trading under a corporate name with a personal bank account, for example.  In that case additional information is needed.

Firstly, I think the time has come when all credit and debit card payment processors must be required to supply full information on the people for whom they manage accounts  and the annual sums processed to HMRC.  It is a nonsense to believe that all tax evasion is now in the cash economy: much of it will be electronically recorded somewhere, but not captured by the tax system. Steps have to be taken on a formal basis to reduce this risk, and this is an obvious way to do that.

It is also obviously necessary that this requirement should be extended to online payment processes, such as PayPal  and in due course to the telecoms companies who are seeking to support mobile phone payments. Anyone collecting cash through these mechanisms has also to be known to HMRC.

As does anyone who is undertaking persistent online trading need to have their identity disclosed by the platform that is providing them with that opportunity. So, for example, eBay and Amazon must be required to disclose information on all people trading via their platforms  who make more than, say, 20 sales a year with a combined value of more than, say, £1,000.

If all this data was supplied electronically then HMRC would be able to sort it as it wished. Very clearly a focus on high-value would be appropriate. It is obvious that every small trader on eBay cannot be investigated.  But, and this is the important point, if these measures were not only put in place, but were publicly known about, the chance that fraud would take place through these mechanisms would be dramatically reduced. I am not saying for a minute that it would be eliminated: the aim is to dramatically reduce it.  And, if that can be achieved, I am not sure what the objection to supply this information might be.

Remember, this is the type of data we are already demanding from tax havens.  In the case of banks the information systems to find this data, and to forward it to HMRC, must already exist. The data  requirements in the case of other institutions may differ a little, because, for example, they are not required to prove the identity of all their users for money-laundering purposes, but the fact is that  they will know to whom payments are made via the banking system, and that is the key information required to secure information on who might be trading.

And since  we now believe it reasonable to request this type of data from tax havens why can't we have it from within the UK economy as well?  Tax cheating costs us all a small fortune.  I believe that maybe £50 billion a year is lost as a result of tax not paid in the UK trading economy. That is, to me,  sufficient reason in itself to justify such changes, and the allocation of resources within  HMRC to make sure that a programme of enforcement based upon it is put in place.