AccountingWEB has a chilling article out this week by tax commentator Philip Fisher. As he notes:
In November 2021, the National Audit Office (NAO) issued the first salvo entitled Managing tax debt through the pandemic. Last week, using and updating some of the data from that report, the Public Accounts Committee (PAC) followed suit with its 48th report on HMRC's management of tax debt.
Both are chilling in their conclusions that our taxing authority is failing to follow up debts in far too many cases. Indeed, during the early months of the pandemic, tax collection ground to an almost complete standstill, relying on those with tax liabilities to do the decent thing. In very many cases, they couldn't or didn't.
As he adds:
Pre-pandemic, HMRC was owed £16bn; that sounds like a terrifying amount, until you discover that the figure now stands at £39bn, having peaked at £67bn in August 2020. The number of taxpayers in debt had risen from 3.8 million to 6.2 million by September 2021 and the average duration of repayment is 14 months.
To put this in context, that is 20% of all taxpayers now, apparently, being in debt. To put that another way, that's all self-employed people and half of all tax-paying companies.
The average debt is £6,290, which is very high and must mean that there are some very big debtors out there.
The worry I have is a simple one. If the Public Accounts Committee are right - and they usually are - then what is happening is that HMRC is turning the payment of tax by those who do not have it deducted at source from their pay into a voluntary activity by those who wish to be compliant, leaving the rest to pick up the bill if others choose not to pay.
This matters. It means that the macroeconomy is destabilised.
The failure to collect tax owing means that inflation is permitted (and this may be an issue right now).
Non-payment of tax undermines the delivery of social, economic and fiscal policy.
It also provides an unfair subsidy to the businesses not paying.
And it fuels the deficit, which matters when we have a government looking for any reason to impose austerity through spending cuts.
And then I note the last point, and wonder whether this is simply deliberate policy by the government? Do they simply not care about operating a proper tax system? Is that really possible now? Given their failure, the possibility has to be considered. Why else are they so bad at collecting debt owing?
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I am not sure I see the problem in quite the same light.
The numbers you talk about are tax identified as owing. These are the “honest folk” who have declared what they owe but the fact that these people and businesses can’t find the cash to make the payments is VERY worrying and speaks to the fragility of our economy and the precarious position of so many in our country (and made worse by last week’s budget). The fact that HMRC is showing some considerable forbearance is not necessarily a bad thing since in many cases the alternative is to send in the administrators or send individuals bankrupt. All I would ask is that HMRC does actually manage these debts properly rather than pursue a policy of neglect.
All your points about tax being “optional” ARE correct but that relates to an entirely different number – the tax that is not declared… and I think you have already written extensively on that!
You are right: the issue is much bigger than just this
But my experience is that many business owners when they realise they can take HMRC for a ride do so, and take the money for themselves instead, then letting the business go but before it re-emerges, phoenix like….
yes – lots of examples of appalling behaviour towards other (non-owner) stakeholders (HMRC, employees, creditors etc). Directors need to understand that they are not obligated only to shareholders….. and the Government needs a few high profile fines “our encourager les autres”. Not sure a law change is needed – just proper interpretation and enforcement of existing law.
But, as you say – another story!
shurely the debt should follow the person not the company? No rebirth without a payout
Limited liability breaks that link
“…. what is happening is that HMRC is turning the payment of tax by those who do not have it deducted at source from their pay into a voluntary activity by those who wish to be compliant, leaving the rest to pick up the bill if others choose not to pay.”
I have always believed that tax-at-source was the only way taxation does not fall victim to the one law that cannot be avoided: entropy. Accountants and Lawyers have risen to prominance in our society by servicing the mechanism that destroys the power of taxation; dead.
The problem with tax-at-source is that it is a contingent matter whether it is a progressive or regressive tax. There is no way round this. Tax-at-source is really the only way to go; it disarms the accountants and lawyers and renders them powerless. Not taxing at sourcebecomes a form of tax injustice because the accountants and lawyers loophole-finding-advantage can always stay one or more steps ahead of the legislators. Of course the law drags it feet on these matters, but even so – longterm, it can’t ever quite win.
How do you tax profits at source John?
Or VAT?
VAT has a long tight audit trail, and the tax is picked up early, closely linked to the specific transaction that creates it, and the final consumer has VAT paid at point of sale. I think that is close enough, virtually to be considered tax-at-source; at least good enough for me. I only have one test; does it work efficiently and effectively, and repay the effort consumed? As for ‘profit’, profit is an intellectual construction (the size of a piece of string, with no universal standard of measurement). I have never thought it an effective tax. I think I its inadequacy, the extent of its exploitation, and its failure can be demonstrated from the facts. Indeed it simply gives cover to the appearance of being an effective tax, without actually being one. To work, I suspect it would require a level of resource on such a scale to calculate it, and audit it that would still probably be beyond its capacity to make work.
VAT his one if the highest abuse rates – about 10% is unpaid in the U.K.
I am currently advising the EU on VAT gap issues
It is, I am afraid, far from at source
I take your point, but I was finding the closest point of compromise. I say that because VAT is generally a powerful tax, on which government rely and will never give up. My point was that because it was generally effective I was willing to be loose in my application of my rule. The corollary is that VAT is a great deal more effective and effcicent than profit. So while I am happy to concede your point on a strict reading of VAT, it does not overturn my hyotohesis, and it merely underscores how difficult it is to tax fairly and effectively/efficiently. Tax-at-source is the best route; nothing else works well. In my view taxing profit is among the worst tax methods of all. It will never be fair, effective and efficient. I believe that is just a fact: entropy.
Failing state. On a practical level, it has become more and more difficult to deal with HMRC, with closing offices and less skilled staff, all compounded with the loss of bandwidth due to Brexit.
Agreed
Judging by its actions, perhaps this government does believe that payment of tax should voluntary.
Just as it seems to believe that fire safety should be voluntary. https://www.bbc.co.uk/news/uk-60933005
After two fatal fires, Lakanal House in 2009 and another in Manchester in 2013, coroners warned that the relevant regulations were not strong enough, and civil servants advised ministers that some action needed to be taken. (The original mistake was a Labour one, having “reformed” and weakened the regulations in 2005 to replace inspection by fire brigade with private sector “fire risk assessors”, but failing to take action when the mistake is revealed is just a bad, arguably worse.)
The Conservative minister decided against tightening up the regulations again, on ideological and practical grounds. He was ideologically opposed to more “red tape”. Rather than the state making appropriate regulations – and just as importantly, enforcing them – he decided the “fire safety industry” should “regulate itself”. (Perhaps he expected some “invisible hand” to appear from thin air and magically make everything perfect.)
Well, cutting “red tape” around health and safety increases risk of injury and death. People die when fire safety (or indeed pandemic response) becomes a matter of ideology.
Even if the minister had stirred himself to introduce stronger regulations, his “practical objection” was one of enforcement – what if people carried on breaking the new regulations anyway. Pathetic. Let’s decriminalise murder, because people will carry on killing each other anyway, and we might not be able to catch them all.
Underlying that is a chronic lack of resources. Just as the atrocious state of the UK’s rivers is due to the Environment Agency having insufficient resources to monitor and enforce effectively. And (back to your point) just as HMRC has been starved of the resources to enforce tax collection.
Agreed
Your point about the Conservatives and “red tape” is unaswerable. I have referred to Grenfell, and the cladding crisis ruining the lives of thousands of leaseholders in England, in this context here before. Nevertheless, the Conservative phony rage against “red tape” still disgraces the pages of Conservative newspapers; as if Grenfell did not prove the simple-minded imbecility of the ‘red tape’argument, once and for all; but nothing is too imbecilic for the Conservative Party.
I was always PAYE throughout my working life. As such I was rated on the amount that I earned each month and had to adjust my lifestyle accordingly. Surely to adopt the analogy to the private sector why not have a fixed rate of tax based on turnover of the company with no exceptions. Auditors that were shown by HMRC to have “cooked the books” would be prosecuted and disbarred from holding such a position in future.
Because there is no such thing as a fixed profit margin
I’m not talking about a fixed profit margin. PAYE had no regard to my lifestyle and I had to live within my earnings. I am talking of a set rate maybe 0.25% to 1.0% of total turnover for all businesses large or small. It may be rough and ready but all would then have to pay.
I am sorry – but you had an income. Some businesses have noine. This really is the opposite of tax justice and a complete non-starter. And I say that as a tax justice campaigner
Only a suggestion. Maybe they have set target for tax recovery by numbers rather than amounts. So 1000000 businesses recovering £5 is better than 10 businesses delivering £10000000
In 1990 around the 1 april I received a note stating baldly: pay £1500. No explanation. I wrote again: is this a 1 april joke. Reply: pay £1500 pounds. Discovered very indirectly via a Collector of Taxes that THEY had mistakenly given me a double mortgage allowance..Pay immediatley no tax code variation.
I am not convinced by the suggestion
Money matters too