Senior tax professionals have today (Wednesday) condemned Government cuts to tax office funding as ‘self-defeating’ and ‘grossly counter-productive’, saying the Coalition Government risks causing an upsurge in tax avoidance and a widening tax gap in years to come.
The Association of Revenue and Customs (ARC), the body representing senior officials in HMRC, warned ministers that proposed budget reductions could significantly undermine HMRC’s ability to identify, prioritise and prosecute those guilty of tax avoidance.
The Government announced in its Spending Review last October that £3bn was to be cut from HMRC budgets over the coming four year period, including a 25% reduction in frontline resources.
ARC President Graham Black said the Government’s refusal to adopt ARC’s proposals for greater investment in HMRC is akin to “offering someone next week’s winning lottery numbers, only for them to turn their nose up at the offer, because they did not want to pay the pound for the ticket”.
The Government has promised to reinvest £917m of the savings made into targeted HMRC resources but Black warns this reinvestment does not go nearly far enough. Black claimed an additional investment of £260m over the next four years in key compliance areas, notably corporate tax avoidance, could recoup an extra £6bn in currently lost tax – an amount comparable to the total spending cuts announced by George Osborne in May 2010’s Emergency Budget.
“The Coalition Government is shooting itself in the foot”, Black argued. “HMRC generates income for the Government, and must be treated differently to other government spending departments. Cutting tax-gathering budgets during a period of economic recovery is grossly counter-productive. It will not save money, it will cost money. Tax avoidance will increase, revenues will diminish”.
HMRC has suffered significant staffing reductions in recent years, with staff levels falling from 99,179 in 2004/5 to 68,037 by June 2010. The Spending Review’s announcement of a further 25% cut in expenditure will, Black said, “further erode staff capacity, staff morale and HMRC’s overall ability to close the tax gap”.
“Even with the £917m ‘reinvestment’, HMRC will be expected to deliver savings of over £1bn by 2014-15 – a loss of an additional 13,000 staff over the Spending Review period. It is simply not possible to cut tax gathering resources while simultaneously pledging to close the tax gap.”
The latest estimate of the gross tax gap for 2008/9 shows that it has increased by £4 billion as compared with the previous year and stands at approximately £52 billion.
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Graham Black, President of ARC, is available for interview.
Government policy is to reduce the current account deficit by a mixture of spending cuts, additional economic growth and increased revenues. There has been a large amount of attention on two of these (cutting public spending, and supporting the economy to grow) but very little focus on making sure we are collecting all the tax owed to us.
Every developed economy has a tax gap. It is the difference between the amount of duty and tax due under the law and the amount taxpayers pay voluntarily. HMRC recently estimated the size of the UK tax gap as over £50bn, equivalent to an extra £1000 of tax for every adult in the country. HMRC action managed to reduce the gap by about £12bn last year.
ARC members are senior HMRC professionals engaged in work that brings in the majority of the £12bn tax gap closure delivered by HMRC last year. This work is incredibly cost effective. An ARC member earning £50k can expect to generate additional yield of at least £1.5m each year, a return of 30 times their cost. Furthermore, for every £1 yield the Exchequer benefits by an additional £1 through the deterrent effect.
The Association of Revenue and Customs (ARC) is an independent trade union and represents HMRC workers in the FDA, the trade union for senior managers and professionals in the public sector. ARC represents around 2600 members in HMRC, including senior tax inspectors, accountants, lawyers, policy makers and managers, all at grade 7 and above.