It is time to return to my theme of tackling tax avoidance and evasion in the UK. These are three more ideas on ways to tackle tax evasion in the UK:
- Regulating the digital economy
Much attention is being given to the need to better regulate the digital economy to make sure that large companies, such as Google and Amazon, pay the right amount of tax in the UK. They are not, however, the only companies to abuse the sales opportunities available on the Internet. Many individuals now undertake trade through this medium without necessarily paying the resulting taxes owed to HMRC.
As a result there should be an obligation placed upon the following organisations to supply information to HMRC on any person who has an account from which they appear to be trading, with full account of information and details of annual receipts being disclosed at least once a year:
- Paypal
- eBay
- Amazon
- Visa
- Mastercard
If this information was supplied then the chance that people might undertake illicit trade on the Internet would be significantly reduced because they would know that their chance of being identified would have significantly increased.
The cost of supplying this information would be very low since it must be available to any of these organisations as a matter of course as a result the conduct of their business.
- Tackling hidden self employment
Not all trade in the UK shadow economy is undertaken using limited companies or through the internet. A great deal is also undertaken by individuals who do not declare their self-employment, or their second employment. It is commonly assumed that much of this illicit activity will involve cash, but that need not necessarily be the case: many of the proceeds of these activities may be banked by those undertaking them and still not be declared to HMRC.
In that case it is vital that UK banks be required to supply reports to HMRC on all those people who they think might be receiving self-employed earnings. There will, of course, be some uncertainty on this issue, but those in receipt of benefit are easily identified, and likewise those who are in regular employment tend to have a very persistent and repetitive patterns of lodgement of money from their employers. It is those with erratic deposits in their bank accounts of varying amounts on whom information might be required by HMRC to check whether or not they are declaring a potential self-employed source of income, or not. It would not be for the banks to decide whether there was such an income; it would be for them to declare the possibility and for HMRC to use the data.
- Tackling hidden capital gains
It is likely that there is significant under declared capital gains tax in the UK, whether resulting from the sale of buy to let properties or from the activities of those trading in shares who do not declare that fact. Automatic information exchange is also suitable for tackling these abuses.
It should be made a legal requirement that all persons conveyancing domestic property who cannot be satisfied that it has genuinely been used as a person's main domestic residence must report that suspicion, and the identity of the person who is making the sale, to HMRC.
There should also be a legal obligation that any person assisting another UK based individual or company to buy or sell shares should report the fact that they are aware that the person is undertaking such trades to HMRC and they should be required to supply details of any account that they might maintain for them to HMRC at least once a year.
As with all the preceding recommendations, the focus is upon creating automatic information supply to HMRC to provide a deterrent effect to those considering evading their obligation to declare their tax liabilities.
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re. share dealing.
For conveniencce, these days most people use a share dealing account, even those on PAYE. Passing on details of income and collecting the basic rate taxes to HMRC should be the norm, mine takes tax from any dividends, not sure about capital gains. That got me thinking if capital gains were to be be collected on all stocks annually, based on the average price increase then the income for the government would be more consistent, rather than getting a windfall only when the market is jittery. A small allowance for losses could also be made anually to incentivise prudent investment. I think this would also incentivise the government to help business as it becomes a beneficiary in UK PLC
Andy
I can hear the howls already
Unfortunately, HMRC is not moving in anything like that direction because it looks like a wealth tax
Richard
My share dealing account only knows my income from dividends – is that what you mean?
Capital gains, or losses, are exactly that. Not some estimate by someone based on a made up figure.
MNy brokers do keep CGT records
Automatic reporting of share trades to HMRC could be used to generate capital gains tax calculations, so the taxpayer only has to check whether it looks correct, and enter figures for any other capital gains that aren’t covered by the automatic reporting. This would have a number of benefits:
– evasion would be reduced (the main idea of this blog entry).
– taxpayers wouldn’t have to dig up the figures and run calculations which many don’t fully understand.
– it would make it more practical to have a much lower CGT annual allowance (though I don’t think practicality justifies making it as high as it is, even now).
– the data could also be used to introduce an annual tax on unrealized gains (as Andy suggests), which would count as advance payment on the tax due on the eventual realized gain. Though that is just for securities; would you also try to do this for real estate, where the market price is not so clear without a sale? I do think taxing unrealized gains is logical in theory, because otherwise gains have an advantage over income, in that they can be compounded untaxed for many years, with tax only due at the end. I’m not sure about the details.
Agreed
CGT on gains not made but assumed? What happens if, as in the case with shares, the price goes to zero, and a loss is made, but tax has been paid on assumption of gain? Perhaps an assumption of loss is equally valid?
OK: suppose you bought an asset for 100; then the price rose to 150, and you were taxed on the 50 unrealized gain, but it subseqently became worthless. That gives you a loss of 150. What can you do with that loss? I’d say:
1) first you add it in with all other gains and losses in the same tax year (both realized and unrealized). If you have net gains for the year, then your 150 loss has been used, i.e. it’s made your total gains 150 less than they would otherwise be.
2) if you have net losses for the year, then to the extent that they are due to previously taxed unrealized gains that evaporated, perhaps you get a refund of tax previously paid – i.e. you get a refund of the tax on 50, not on the tax on the full 150. This bit is new / debatable.
3) any gains on which you don’t get a refund are carried forward to future years.
So basically, (1) and (3) are the current system; (2) is new.
This would only make sense if HMRC produced automated CGT calculations. Otherwise, it adds too much complexity.
“So, you re-buy them less tax”
I’m sorry but what are you talking about? Our hypothetical investor would have nothing to buy anything with because he has been forced to sell part of his investment and used the proceeds to pay CGT.
The longer this conversation goes on the more concerned I am that you just haven’t thought things through.
Please engage y6our brain
You repurchase the same shares
Yes, fewer of them because yuou have paid tax
But then, you see that is because the tax belonmgs to someone else, not you
That’s how tax works
The more I engage in thbis conversation the more worried I am that you just do not know how the system works
Pragmatic and reasonable IMHO.
What is? Assumed gains tax? Surely there is only a gain when it is realised?
Why?
That is not true of all profit
Taxing unrealised capital gains would cripple long term investment.
It is an idiotic idea.
Phil Lanch almost gets it but then misses. Shares can increase and fall in value on a yearly or shorter period. You might have non-realised gains taxed, then relieved as the share price fell, then taxed again the next year then again a bit more the next year then relieved…..and all the time the investor would not actually have any realised income to pay the tax….chaos and stupidity.
and unquoted companies? Having to value themselves every year? The owner of a successful growing company phaffing about every year to agree an increase to pay tax on gains he has no money to meet.
You people suggesting this have a serious disconnect from the real world!
KRs
Tim
Gains on quoted shares can be realised at any moment
As a result there is really almost no such thing as an unrealisable gain on them. Maybe you should connect with the real world
“Gains on quoted shares can be realised at any moment”
Only by selling them.
Thus you vindicate my comment that long term investment would be crippled.
A share would rise, everyone holding would be forced to sell to meet CGT and of course with a glut of sellers the share price would fall.
With a single ill-thought out idea you have bought chaos to the markets.
KRs
Tim
So, you re-buy them less tax
Next problem?
For quoted shares, you could just sell enough of them to pay your unrealized CGT bill: simple.
This has nothing to do with long-term investment. The stock market is almost entirely about secondary trading of shares, not real investment; and this wouldn’t make it any more volatile. There are important questions about what encourages companies to invest, rather than hoard cash, or return it to shareholders, but this has no bearing on that.
For assets other than quoted shares, where the current price is less visible (somebody would have to carry out a valuation), I’m not sure how to apply this. The main question is about real estate; that’s surely by far the greatest value of assets other than quoted shares.
http://www.constructionenquirer.com/2015/03/19/taxman-calls-time-on-umbrella-companies/
Note in the above:
“If HMRC has its way, direct employment in industries where umbrella is common will experience an increase in the cost of labour approaching 20% through increased National Insurance and paid absence”
Hammer the little guy time again.
Please define the ‘little guy’ would you?
Richard
I wonder how much experience you have of the digital world. You list just a few of hundreds of sites involved in internet selling. Autotrader? Alibaba? to name just two who would be obvious to someone who knew what they were talking about.
And how exactly would you police this? Foreign companies are involved. Would you be blocking free access to the internet, like China and North Korea?
KRs
Tim
I was looking at the most significant.
I was not suggesting I was writing legislation. In practice secondary legislation always lists who would actually have to provide information.
And of course I would not be blocking free access to anything. I would be permitting access to data to assist collection of tax. We have a very, very long history of doing just that.