Last week the Guardian reported that a senior minister, Nadhim Zahawi, has paid a penalty of around £1m to HMRC for being “careless” with his taxes. This might seem galling to those who are spending this month carefully filling out their tax returns, or those who automatically pay their taxes through PAYE.
According to HMRC figures, £6.1bn a year is lost to people “failing to take reasonable care” with their tax returns. Some of this will be caught by the tax authorities, but much of it will go unnoticed.
Then there is a range of ways in which individuals and companies purposefully slash their tax bills. Some of these methods are illegal – deemed to be tax evasion – and can result in criminal prosecution and even jail. Somewhere in the middle there are ways in which people can use laws in unintended ways to pay less tax – known as tax avoidance. At the other end of the spectrum are deliberate gaps in tax rules that allow some people to pay much lower rates of tax than others.
Tax evasion might mean taking cash in hand for work, not reporting business income or hiding the proceeds of crime. HMRC estimates that the government loses £8bn a year from tax evasion and the hidden economy.
Another way of earning money from work without paying tax on it is to receive a loan instead of a salary, with the understanding that the loan is never repaid. These “disguised remuneration” schemes are usually pushed by unscrupulous professionals who are often based offshore. They rarely work and it’s usually the worker, not the professional, who is punished.
Over the past decade, tax avoidance by big global companies shifting their profits to low-tax countries has received a great deal of media attention. The Fair Tax Foundation has shown how tech giants such as Apple and Google continue to pay small amounts of tax. A country such as Ireland, with its low corporate tax rate of 12.5%, scoops up much of the money that tech companies make across Europe. Governments have to play whack-a-mole, trying to shut down the tax loopholes that allow this behaviour – with mixed success.
The way the tax system is designed allows some people to pay very low levels of tax, even if it doesn’t strictly count as tax avoidance. A good example is that if you have income from wealth, such as investments or second homes, you pay lower tax rates than if you work for your living. This is why an investment banker can have a lower tax rate than his secretary. Taxing income from wealth at the same level as income from work could bring in tens of billions of pounds a year, according to academic Arun Advani.
On top of this, non-doms can live in the UK but not pay British taxes on their overseas investments. The jet-set crowd will often have an employee whose job it is to make sure they don’t stay too long in a particular country to avoid accidentally paying tax there. In practice, HMRC is now so under-resourced that it struggles to offer effective deterrence against even quite blatant abuses.
This is just a small peek behind the curtain of how people and companies get away with paying less tax. HMRC calculates that in total £32bn a year goes unpaid – about the same as the government spends each year on defence. However, this figure is likely to be a significant underestimate, as it doesn’t include most tax avoidance by global businesses.
The good news is that it is possible to tackle this problem. Since the financial crisis, governments have made some progress. It is now almost impossible to have a Swiss bank account, conveniently forget to tell HMRC and pay no tax on money stashed offshore. This is because tax authorities now automatically exchange taxpayer information with each other.
But there is still a lot more that can be done. The first step is to properly resource our tax collectors. Analysis from the thinktank TaxWatch shows that the government has invested much more in going after benefit fraud than tax fraud, despite the fact that tax fraud is a much bigger problem. Every tax inspector brings in many multiples of what they cost in recovered revenue.
Law enforcement and regulators also need to go after professionals who sell tax avoidance schemes, as none of these tax dodges would work without an expert guiding hand. At the moment it’s possible to offer tax advice without being regulated, or being only lightly regulated.
Over the past decade politicians have introduced more transparency to the tax system in response to various scandals. A missing piece is that companies can still hide from the public how much money they make – and what taxes they pay – in each country they operate in. Introducing public reporting of multinational companies’ accounts on a country-by-country basis would make a big difference.
Finally, politicians must grasp the nettle and close down loopholes and gaps in the current system that allow people to slash their tax bills. Ending non-dom status would be a start, as would taxing income from wealth at the same rate as income from work.
Ultimately this comes down to trust. Ordinary people need to feel that they are playing by the same rules as everyone else when it comes to tax.
• Robert Palmer is executive director of Tax Justice UK
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