Tax office admits further shortfalls to come, despite additional funding to combat avoidance
Tax avoidance and evasion cost the taxpayer £9bn from 2020-2022, according to the National Audit Office (NAO).
The news follows the promise of further funding for HMRC at the Autumn Statement, with £79m committed to the tax office to bolster its compliance activities.
The loss was incurred due to a reallocation of HMRC’s staff from compliance activities to administering the business support schemes introduced by the government during the pandemic.
This has had a significant impact on the tax office’s ability to monitor compliance in the subsequent tax years. As a result, tax revenues from compliance activity over 2020/21 and 2021/22 were below average.
Meanwhile, HMRC’s own analysis also indicates that there will be further shortfalls over the coming tax years.
Increased budget for compliance activity
The £9bn loss is estimated as just 1% of the total ‘tax gap’ – the difference between the tax revenue owed, and what HMRC successfully collects – for the 2020/21 tax year. The government publishes an annual report on the tax gap.
The tax gap has remained stable over the 2019/20 and 2020/21 tax years, and as a result, the government has promised additional funding to HMRC over the coming tax years to combat tax fraud, avoidance and evasion.
The funding – £79m over the next five tax years – is on top of the £292m provided in the previous tax year, and will “enable HMRC to allocate additional staff to tackle more cases of serious tax fraud and address tax compliance risks among wealthy taxpayers”, according to the Autumn Statement.
While the tax office has stepped up its compliance activity over 2022 – identifying a number of tax avoidance schemes – there is still more work to be done, according to industry commentators.
“A bitter blow” for umbrella workers
However, HMRC’s approach is at odds with what experts believe is needed. With the government recently abandoning the idea of a single enforcement body (SEB), experts have been critical of the move.
The proposed single enforcement body – intended to protect workers’ rights and prevent bad practices across the labour market – would have also introduced regulation to the umbrella sector and therefore help minimise tax avoidance.
Additionally, the lack of regulation means that workers are often “lured into working through tax avoidance schemes”, according to Julia Kermode of IWORK.
This presents a significant financial risk to contractors, who are liable for any unpaid taxes, rather than the scheme operators. Calling the abandonment of the SEB “a bitter blow for workers”, Kermode called out “the risks of an unregulated umbrella sector” which cost workers “millions of pounds collectively”.
Similarly, Fred Dures of PayePass – a payroll auditor – called the abandonment of the single enforcement body “extremely disappointing” and…
“yet another broken promise from the government that continually fails to deliver on the promise to regulate the umbrella industry”.
As long as the umbrella sector remains unregulated, contractors and freelancers are responsible for conducting their own due diligence to ensure that the provider they appoint is compliant, to avoid operating through a tax avoidance scheme.