The Chancellor’s spending review for 2015/16 issued on 26 June 2013, included the announcement that HMRC is to see its budget cut from £3.4bn in 2014/15 to £3.3bn in 2015/16. However at the same time it will have a target to raise £24.5bn by tackling tax avoidance and evasion in 2015/16, compared to a £23.5bn target for 2014/15 – a £1bn increase.
How is HMRC to perform this feat? The spending review paper states HMRC will focus on frontline tax collection services and cut £130m through improved productivity and further digital transformation, reducing inefficient manual processing and dealing with error. Brave rhetoric, but perhaps far moved from reality. It was only in April when the Public Accounts Committee slammed the lack of resources at HMRC, particularly in its fight on tax avoidance, which was contrasted with companies that can devote considerable resource to ensure that they minimise their tax liability. In addition, recent history has demonstrated that relying on IT and automated systems to improve efficiencies in HMRC has been severely misplaced. Perhaps HMRC has fallen victim of its own success: the Treasury says £20.7bn was raised in tax revenues in 2012/13, £2bn ahead of its target and over £6bn more than in 2010.
The announcement of spending cuts appears inconsistent with the many recent statements by the government emphasising that tax evasion is a priority at the highest level of government both nationally and internationally that it has committed resources to this battle. Most recently at the G8 Summit new measures to clamp down on tax evasion and tax avoidance were agreed, including the G8 Action Plan to prevent the misuse of companies and legal arrangements (the "Action Plan"). The agreed Action Plan sets out eight core principles designed to ensure the integrity of beneficial ownership and basic company information and the timely access to that information by law enforcement and tax authorities.
In advance of the G8 agreement the UK secured agreement from the British Overseas Territories and Crown Dependencies (including Jersey, Guernsey, the Isle of Man; and Anguilla, Bermuda, the British Virgin Islands, Montserrat and the Turks and Caicos Islands) to action plans of their own. This follows on from the UK government’s tax disclosure treaties with Lichtenstein and Switzerland which suggests that substantial amounts of money have been hidden from tax authorities through complex "offshore" arrangements.
On a domestic level, in January 2013 it was announced that the Crown Prosecution Service (CPS) intended to substantially increase the number of tax cases it takes on with a view to criminal prosecution rather than civil disposal. Then in March, alongside the Budget 2013, the Government published a progress report on tackling avoidance and evasion. The report stated that almost £1 billion was being invested HMRC in an unprecedented clampdown on avoidance and evasion together with proposed new legal powers to tackle tax evaders and the promoters and users of avoidance schemes. Key targets include tax avoidance schemes, offshore tax evasion and avoidance of employment taxes.
The distinction between tax avoidance schemes, i.e. methods designed to minimise one’s tax liability, and tax evasion is essentially whether there was a dishonest intention not to pay tax. In many cases the initial investigation will be of tax avoidance structures which have been set up purely for the purposes of reducing or extinguishing a tax liability and often the criminality can often be down to the way that a scheme is set up or executed. However, these investigations are complex and expensive, requiring expertise and resources in order to properly investigate and prosecute.
If the Chancellor wants HMRC to achieve his ever-increasing targets for collecting revenues from tax avoidance and tax evasion, he needs to ensure that there are the skills and resources available to do the job. To expect otherwise is to ask the impossible.
Until this latest spending review, all the indications were that this government meant business and that there was likely to be an upswing in the number of tax related investigations and prosecutions. Although the current announcement does not impact on HMRC until 2014/15, it will inevitably demoralise an already under-resourced agency. In addition, those tax payers previously considering self-disclosure in consequence of the previous tough rhetoric may now pause before doing so to see just how effectively HMRC is able to pursue its ambitious targets.