As readers of the Blog will be well aware, I have regularly commented on HMRC’s apparent reluctance to tackle the major players in the field of tax avoidance and their increasing tendency to go for the ‘’low-hanging fruit”, in other words, the ordinary taxpayers and small businesses.
Hounding ordinary taxpayers for trivial amounts of tax, whilst letting renowned tax avoidance scheme operators get away with millions, is not only immoral, but will only make a modest dent in the tax gap, which is currently at least £40 billion.
There have been a string of reports in the financial press recently concerning procedural errors and sheer incompetence by HMRC in high profile court cases. This has resulted in the loss of millions, largely on tax avoidance scheme cases. The list of cases where the tax tribunal has been forced to find in favour of the taxpayer due to lapses in process and administrative oversight by HMRC is growing rapidly.
The new Labour government has promised to plough investment into HMRC to strengthen the department and begin to close the tax gap, but I wonder whether funds will actually be funnelled in the right direction.
You really couldn’t make this up
Earlier this year, notorious tax-avoidance schemer Paul Baxendale-Walker, managed to wriggle out of a £14m penalty for non-payment of tax due to procedural errors by HMRC. So undaunted, HMRC tried again, this time attempting to prevent another of his tax-avoidance schemes, Nova Trust, from being promoted by issuing a stop notice.
The trouble was that instead of issuing the stop notice directly to Baxendale-Walker or to an existing company linked to the scheme, they inexplicably issued it to a company, Buckingham Wealth Limited, that had been struck off six months prior. The disastrous consequence of this HMRC oversight was that the Nova Trust scheme continued to be promoted as recently as the Spring of 2024 with no legal scope for penalties or sanctions to be applied and once again, millions in tax was lost.
Tax campaigner Dan Neidle posted on X: “This was a basic legal failure by HMRC. Any lawyer knows that before you begin a legal process against a company, you check if it still bloody exists.” Ray McCann, president of CIOT and former HM Inspector of Taxes said: “You really could not make this up, especially with HMRC recently lecturing the accountancy profession on competence!”
Cock-up number two
In this case, HMRC applied to the first-tier tax tribunal (FTT) for an order that umbrella arrangements carried out by Elite Management & Consultancy Limited were notifiable as a tax avoidance scheme under the disclosure of tax avoidance schemes (DOTAS) regime.
So far so good, you might think, but unfortunately HMRC’s paralegal missed the deadline for submitting their bundle of evidence by two hours, thus voiding HMRC’s case. The department tried to argue that it would be “completely disproportionate to strike out HMRC’s application simply because it had missed a deadline by two hours”. Nevertheless, the FTT stood firm, concluding: “And so, as night follows day, the automatic strike-out provisions of Rule 8(1) are engaged.”
HMRC errors widen the tax gap
HMRC recently published statistics that suggested that small businesses are responsible for just over half the tax gap. This claim leaves rather a bad taste in the mouths of accountants and taxpayers, considering the amount of money HMRC appears to be wasting via its own incompetence.
It is common knowledge that while allowing one of the country’s most high-profile tax avoidance scheme promoters to so far get away scot-free, not once, but twice, HMRC has elsewhere come down heavily on the little guy, fruitlessly pursuing fines that were lower than the legal costs involved for both parties.
It is therefore crystal clear that we need a better approach to low-value disputes, with Ray McCann suggesting a genuinely one-shot independent review process that HMRC and taxpayers would agree to use in place of the current tribunal. This I agree with 100%, it would clearly save a great deal of time and costs for both sides and have the huge benefit of being seen as fair and reasonable to everyone.
Do Labour have the answer?
Labour’s manifesto stated: “We will modernise HMRC and change the law to tackle tax avoidance. We will increase registration and reporting requirements, strengthen HMRC’s powers, invest in new technology and build capacity within HMRC. This, combined with a renewed focus on tax avoidance by large businesses and the wealthy, will begin to close the tax gap and ensure everyone pays their fair share.”
In its fiscal plan Labour pledged to invest £855m per year in HMRC “to reduce tax avoidance”, which they forecast will raise an additional £5.2bn. This is on top of the £600m additional tax take from removing the non-dom discount loophole in 2025/26. But while procedural errors and administrative cock-ups abound in HMRC, is the problem really going to be fixed by yet more cash injections?
Whilst there is cause for limited optimism, the elephant in the room is the systemic failures within HMRC, which have existed for years and have been steadily getting worse. Whilst there is clear scope to increase tax revenues through modernisation and making the tax system easier to use, unless the mind-set of HMRC can be changed, Rachel Reeves will have a difficult task to significantly reduce the tax gap.
Accountant’s view
I genuinely wish the new Chancellor and her team well, but they must match the increased funding with a fundamental overhaul of HMRC’s processes, especially their legal section, as the tax office’s problems go much deeper and are clearly endemic.
