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.
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The level of state intrusion into people’s affairs necessary for effective tax collection is extremely high and would necessitate the application of the “if you are doing nothing wrong you have nothing to fear” police state justification. Perhaps, in the same way that utilities give discounts for customers paying by direct debit, HMRC should offer a lower rate of tax for individuals entering into a voluntary transparency protocol that enabled automated corroboration of tax declarations. Such a protocol might be obligatory for limited liability entities.
I don’t believe in tax discounts
I do believe in penalties
Discounts are better marketing than penalties – especially if buying voluntary cooperation, but in effect the same thing.
Just FYI, Electronic POS kit seems to be one big playground for the crims at the moment – use cash & they’ll hide the takings from the tax man ( see http://www.oecd.org/ctp/crime/ElectronicSalesSuppression.pdf ) Use a card and they’ll just rip the cash direct from your account – and the OECD report suggests that there’ll be no shortage of willing recruits in eg the restaurant trade to give themselves a ‘heads we win, tails you lose’ attitude towards choice of payment method as well.
Weird comment.
Funny that the level of state intrusion into benefit claimants, which is pretty much the same as Richard wants for tax, is ok with the gov……so much so that it has contracts with credit reference agencies to obtain it (and by definition credit cards and bank accounts)
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/221235/foi-719-credit-checks.pdf
After all, if people ever read the T&C of banks/cards….about using third parties etc…
That amount of data implies getting some IT that works! Not a great track record of that in any part of government, let alone HMRC!
The problem has been crap suppliers
Fair’s fair, Richard – often times the customer has not understood what it wanted, then changed the goalposts halfway through. Those commissioning the systems were speaking a totally different language to those trying to design and implement them, and the only people around to translate were the contract lawyers. Even if the suppliers had been any good, I’m still not convinced we’d have had the right systems at the end of it…
It all begins with political will; and in the current situation, it will require the refoundation of a ‘captured’ department with compromised leadership.
Also: I note that you’re talking about minnows – small-to-medium enterprises failing to register activity – rather than the leviathans of the FTSE-100: a billion here and a billion there, and soon you’re talking serious money.
And does anyone argue that a publicly listed company has a right to privacy? Or, for that matter an ordinary limited company? The ‘Ltd’ shield against personal liability is given in return for transparency – audited accounts must me submitted every year – and it seems odd for your correspondents to argue that compliance with these obligations need not or should not be automatically verified.
Rather than bulk reporting it might be better if HMRC had the legal right to demand prompt financial information from any organization under severe penalty if not produced so.
Nothing wrong with beginning with old fashioned Investigations e.g. on evidence of life style or conspicuous consumption. That requires Inspector of Taxes boots on the ground. Technology can’t do everything, tax is a people business after all.
That is an argument in favour of not finding the data
We’ve already shown this dopes not work internationally
Do we really have to go through the same argument with the tax profession all over again domestically when the sole aim of the profession is to let some get away with their crimes when professing such arguments?
HMRC does have the right to demand information from organisations under threat of penalty. I’ve been dealing with a lot of requests for information from letting agents about the landlords they work for, for example – names, addresses, gross rents, and so on.
This isn’t targeted stuff where HMRC think there may be a particular issue, this is making sure they have a fuller picture of what’s going on so they can match it all up. They’ve been doing similar things with the Land Registry for a while, and I’ve also had a recent spate of enquiries along the lines of “your name is on this bank account, why isn’t this bank account on your return?”
All good stuff, in my opinion – so long as they keep track of the answers and don’t keep repeating the questions year after year, that is.
You miss the point: the time wasted asking costs a lot and only yields a little
I seek to change that ratio
You seem to be saying that HMRC should be provided with vast amounts of unsorted data, and this would be more useful to them than smaller amounts of data that they have chosen for its relevance.
I’m not entirely convinced that your way would be more efficient.
Andrew
Maybe you haven’t heard of a databse
I hope HMRC have
And I can even use one
Richard
“Maybe you haven’t heard of a databse”
Yes, I can use them too. One of the important things about databases is that it’s very easy for them to get clogged up with extraneous data. Even if you assume computing power can crunch the numbers instantaneously, you still need to have a load of human input to do anything useful with the data.
Like most tools, databases are best used with a little thought and care. Simply chucking information into a database never got anyone anywhere. So I think the targeted requests are a better way to go.
I am asking for 20,000 extra people at HMRC
I know that data needs processing
Could we not have 20,000 extra HMRC staff who have the time to do something with the interesting data, rather than 20,000 staff who are busy processing uninteresting stuff?
You don’t find the interesting unless you first learn to sort the uninteresting
I understand the ‘intrusion’ arguments but I can’t say I agree.
The easier way to ‘hearts and minds’ is to be clear about the level of criminality that our current weak systems sponsor.
The evils of the black economy are pervasive and widespread. America has proved since the 1930’s that the way to take down criminals is through their tax returns (it worked in the case of Al Capone where everything else had failed).
I think if the case is made for measures that tackle everything from drug dealers and people trafficking to online rogue traders the public will have much more sympathy.
If all are swept in that’s fine by me
But you can’t have a system that only finds drug dealers
Totally agree, Richard, but conversely, a system that exempts millionaires also exempts criminals and gangsters. As we saw in the Jimmy Saville case jurisdictions that shroud their affairs in tax secrecy also tend to hide much darker secrets.
The point I trying to make was with regard to the public resistance Franklin Scrase was talking about, is that, for most people the idea of increased tax diligence would be more attractive if they understood the enhanced protections for society and the individual that would come as a result. Incentive enough I think.
Any Party that has the political will to tackle tax avoidance must have supporting arguments that the electorate understands and supports, particularly in a society where the Right Wing Media will make every effort to misrepresent such measures as ‘statist meddling’.
Make the case for crime prevention through taxation and it becomes so much harder (for the media) to justify such an attack.