Labour’s plans won’t scratch the surface of the tax gap

Nimesh Shah CEO says

Labour’s claims of a ten-fold return on investment in additional tax revenue seem incredibly ambitious at a time when HMRC are struggling to answer the phones.

Over the last decade, the Government has poured record levels of funding into HMRC, as well as increased legislative powers to tackle tax evasion and aggressive tax avoidance. Over the last 3 years, the Government has announced additional funding to HMRC of £900 million – to support tax compliance efforts, tackle more serious cases of tax fraud and manage tax debts.

Despite the increased investment in recent years, the tax gap remains at around 5% – a level which has been broadly maintained since 2017/18. But as tax revenues have increased, the absolute amount of the tax gap at £36 billion has never been higher.

Nimesh added:

With the UK facing the highest tax burden in 50 years, there remains a major doubt at HMRC’s ability to actually properly focus its time and efforts collect the right amount of tax. It’s fine for the government to increase taxes as they see appropriate, but I fear that HMRC’s lack of accountability and drive to ultimately collect tax means the absolute tax gap increases further.

The Labour Party have said that they will bolster HMRC compliance officers by 5,000, invest in digitisation and work with businesses and the tax profession to modernise HMRC, including greater use of AI. This all sounds very sensible, but HMRC’s customer service and standards are at an all-time low, with regular stories of shutting down phone lines and taxpayers not being able to access the right information. There is significant work to do for HMRC before we can start thinking about raising £5 billion additional tax revenue.

The Government and Labour Party opposition need a proper strategy on tax and the future direction of HMRC – piecemeal investment and associated claims of generating vast sums of additional tax revenue does not offer any confidence for the taxpayer that the tax gap issue will be properly addressed in the long-term. The major issue remains the complexity of the UK’s tax system – the longest tax code in the world. And I am sympathetic towards HMRC in the fact that it simply cannot keep up with the swathes of new legislation.

A tax reforming future Chancellor would take a step back and develop a long-term and sustainable strategy – history suggests that throwing money at HMRC will not scratch the surface, let alone address the problem.

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