By Chris Dorrell
With debt at its highest level since the 1960s and growth sluggish, the next government will face some very difficult choices.
The Institute for Fiscal Studies (IFS) suggests that the next government will inherit the worst set of fiscal challenges since the 1950s.
Predictably both parties are reluctant to suggest they will raise taxes, but in recent weeks both have found a conveniently painless source of revenue: clamping down on tax avoidance.
The Conservatives claim they can raise £6bn through tackling tax avoidance while Labour think they can find an extra £5bn. Sunak has already promised that some of the funds will go towards helping his national service proposals while for Labour the money will go to the NHS and school breakfast clubs.
But is this realistic? As usual, there isn’t a simple answer.
Let’s start with how much money is not paid in tax that should be, what experts call the tax gap. Last year HMRC estimated that the tax gap was £36bn.
No government will be able to retrieve all or even most of that, but there’s no reason why more could not be collected. Indeed the £6bn figure quoted by both parties comes from the National Audit Office (NAO), suggesting its not complete finger in the air stuff.
Tim Sarson, head of tax at KPMG, said: “There is certainly more that can be done to collect underpaid tax. HMRC have had some success in the last few years meaning the tax gap now is much smaller as a percentage of GDP than it used to be.”
Drilling down into the details reveals some of the challenges, however. The biggest contributor to the tax gap is a ‘failure to take reasonable care,’ which amounts to £11bn. ‘Error’ makes up a further £5bn. Tax avoidance only makes up £1bn.
Turning to the culprits and there’s a similar challenge. £20bn of the £36bn tax gap comes from small businesses compared to just £4bn each for large businesses and ‘criminals’.
“The trouble is most of the tax gap is down to accidental or deliberate underpayment by small businesses and individuals, not grand avoidance schemes by huge multinationals,” Sarson noted.
“Squeezing this extra money out is Labour-intensive. It’s going to require lots more HMRC focus and resources, which probably means more boots on the ground as well as greater investment in technology. This is a clear-cut case of when you need to spend to save,” he argued.
Labour has committed to boosting HMRC’s funding by £555m a year to increase the number of compliance staff in areas with the greatest complexity, invest in technology transformation and introduce a genuine legal deterrent.
The party said this will raise a net £700m in 2025/26, rising to £5.1bn a year by the end of the parliament.
Alex Ruffel, international and high net worth partner at Irwin Mitchell, said that the Conservatives have “not (yet) produced anything as detailed… it is not clear what the Conservative focus will be”.
Its also worth pointing out that the Conservatives have been in government for the past 14 years and presumably could have taken steps to reduce tax avoidance earlier.
“I don’t think people can have any confidence in these desperate gimmicks that they’re putting out now,” Rachel Reeves said earlier this week.
Ruffel also suggested that simplifying tax rules could generate returns too. “Given the Byzantine complexity of the UK tax laws now, devoting more time, effort and resource to its simplification and rationalisation so that taxpayers get it right the first time might produce a very healthy yield on its own,” he said.
In short, tackling tax avoidance is a realistic way of finding some extra cash. But it won’t be easy.
