Rachel Reeves has a big problem on tax, one of many I hear you cry. She is being assailed with demands from both her own party and the opposition, to spend more, but this means she will have to raise more tax to avoid breaking her own self-imposed fiscal rule of not borrowing to fund day to day expenditure.
So, what are her options? Well, one of the few areas of agreement from both sides of Parliament and the various interest groups is to tax those individuals with the broadest shoulders, namely the wealthy.
National Audit Office report
We are currently in the season of governmental reports on HMRC performance, none of which have praised our tax authority. The latest, issued on 16th May, comes from the National Audit Office (NAO) and focuses on HMRC’s woeful record on maximising the tax-take from the wealthy.
The NAO’s definition of at which point individuals are considered to be wealthy is somewhat arbitrary. They have set the bar at earnings in excess of £200,000 per annum or assets of over £2m. Many householders in the Southeast, especially in the London area, with an annual income well under £200k may well consider themselves financially comfortable but a long way from being wealthy.
Using the NAO’s definition of at which point an individual is considered to be wealthy, in 2023/24 HMRC identified 850,000 taxpayers who qualified to be in the ‘wealthy’ category, even though around a third of this group are only basic rate taxpayers. A classic example of ‘asset rich, but cash poor’.
A bit more meat on the bone
The NAO report includes a series of key pieces of information and statistics. These include the fact that last tax year, these wealthy folk generously contributed nearly £120bn in personal taxes or around £140,000 per person on average.
This group, which constitute less than 2% of the UK’s thirty-six million taxpayers, in fact only contribute a relatively modest amount of tax, given the uneven distribution of wealth across the country. This is borne out by the report, which shows that top 50 richest families in the UK are worth more than the poorest half of the population, with their wealth is continuing to rise.
The NAO report is particularly concerned about hidden offshore income and they have estimated that the amount of money held in offshore accounts, much of which is deliberately hidden beneath layers of trusts and/or companies, amounts to several billion pounds.
Of the £120bn in taxes, over 85% comes from income tax and national insurance contributions (NIC). This would suggest that capital gains tax (CGT) and inheritance tax (IHT) are potentially being largely ignored by HMRC, perhaps because they’re considered more bother than they’re worth to collect.
Wealthy tax gap
Given the statistics in the report, especially the relatively low levels of CGT and IHT paid by the wealthy, it was shocking to read in the report that “HMRC no longer has a unit specifically dedicated to ensuring compliance among high-net-worth and the wealthiest individuals.”
So, what on earth are HMRC playing at? The disbandment of this unit could well explain why the “wealthy tax gap” is so high. The tax office has itself estimated this to be £2bn in 2022/23, which the NAO believes to be a gross underestimate.
HMRC is apparently, now also of the view that the net loss in tax revenues from wealthy individuals is likely to grow based on the threat from 19 key risk factors that they believe has dramatically increased in recent years. The report notes that HMRC estimates that the bulk of the net losses for wealthy individuals sits under three risks:
- Inaccuracies in reporting personal income
- Incorrect capital gains tax declarations
- Deliberate offshore non-compliance
Tax gap significantly underestimated
The NAO report makes it absolutely clear that they are appalled by HMRC’s ineffective efforts to counter the 3 issues. They clearly consider that decisions on which cases to pursue are way out of sync and largely misdirected, as it’s clear that the tax office’s caseworkers have largely ignored offshore non-compliance. The NAO considers this area to be as a major, currently unquantifiable, threat to the tax take.
However, after giving the grey men and women in suits a good kicking, on a more positive note, at the end of the report there was some modest praise. The NAO noted that in the 5 years to 5th April 2024, HMRC had more than doubled its collection of additional tax from wealthy individuals from £2.2bn to £5.2bn. Unfortunately, the sting in the tail as the report notes, is that the HMRC calculated tax gap has been drastically underestimated by billions!
HMRC must do better!
Given the statistics on the tax take, wealthy individuals who evade tax must be very happy that penalties and criminal prosecutions have been scaled back dramatically. In 2023/24 HMRC issued a paltry 456 penalties to the wealthy, totalling £5.6m. This compares with 2,153 penalties totalling £16.2m in 2018/19, a year in which their special unit that targeted high net worth individuals was in place.
The report winds up with the conclusion: “Wealthy people contribute significant amounts of tax revenue to the Exchequer, but the complexity of their affairs makes it more difficult to get their taxes right and presents more opportunities to deliberately not pay enough,” and “HMRC has recognised it needs to give the risk posed by wealthy individuals much greater prominence.”
The NAO then listed a number of recommendations for the tax office to consider, most of which were common-sense and which HMRC should already be doing with arguably the most important being: “assess the skills and capabilities it needs for compliance in this area and consider external recruitment of people with sufficient knowledge of wealthy tax affairs and expertise in international arrangements.”
Accountant’s view
I fear that the excellent NAO report, especially the last point, may well fall on deaf ears. This is because whilst changes in how HMRC operates will come at a significant cost, it should prove a very worthwhile investment. But. In these days of austerity, will any of it ever happen? I have my doubts!
