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KEY POINTS
- Are staff cuts responsible for an increasing number of 'ghosts'?
- Recent examples of 'ghosts' in the tax system.
- HMRC's current approach to identifying tax evaders.
- Possible further action that could be taken.
- Should more 'ghostbusters' be employed by HMRC?
In March 2000, Lord Grabiner QC commented on the scale of the hidden economy in his report The Informal Economy, and said: 'By its nature, the size of the informal economy is hard to measure.
'Most estimates are based on analysing high-level economic aggregates, such as labour market statistics or income and expenditure surveys, and calculate the result as a percentage of GDP.
'However, there is research which suggests that these estimates tend to be exaggerated.'
They may be exaggerated but they are costing us all a lot of money, even if nobody is quite sure how much.
The finalisation of this article had to be delayed, as HMRC got tied up in other matters. Ironically, the issues behind the loss of two computer discs and the successful growth of what has become known as the grey economy almost certainly have similar roots.
As Mike Truman identified in his article An Open Letter to Dave Hartnett (see Related Links above), the poor old department is now so under-resourced that it is really struggling to meet the needs of either its masters or its 'customers'.
This article highlights another reason why Government should heed Mike's appeal that 'staff numbers should not be further cut. Indeed, some of the previous cuts probably need to be reversed'. It is only that 'probably' which might seem out of place by the end of this article.
At times, it seems that tax practitioners, not to mention the media and even the general public, are perennially taking pot shots at HMRC.
A couple of recent examples might consolidate the view that the department is not operating as efficiently as it might do.
In these cases, it does seem that the problems relate far more to staffing levels and policy decisions than the performance of the organisation or its hard-pressed employees.
Shivers down the spine
Unless the writer is the unluckiest person around, there is a major problem surrounding the grey economy. Recently, while closing a PAYE investigation, queries were raised by the Inspector of Taxes with regard to the status of two computer consultants used by my client.
While it was accepted that the first was self-employed and had been paying tax on a timely basis, the circumstances surrounding the second might raise a few eyebrows at least.
This individual had received fees of approximately £50,000 in the previous year and, following discussions with my client, had confessed that the income had not been declared to the tax authorities.
Neither had it been declared in the previous year and, as it transpired, for any year in the last 22.
In addition to activities as a computer consultant for a number of different clients over that period, the person concerned was a freelance photographer with a website from which photographs could be purchased. No return had been made of this income.
The second example may send shivers down the spines of a few readers. This individual is a childminder/nanny who has been working for two or three families at a time, generally young professionals in the affluent London suburbs.
In this case, the worker was definitively, if somewhat unusually, accepted as self employed by the Inspector of Taxes, but for a minimum of nine years, and conceivably considerably longer, had not been declaring tax to HMRC.
Assuming that this straw poll is not unrepresentative, it would appear that millions or even billions of pounds of revenue are escaping the Exchequer each year.
This is money that could easily be utilised to cut class sizes, save lives through the health service or, if one wants to be greedy, cut the basic rate of income tax by a couple of pence.
Plans for phantasms
There is no question but that HMRC wish to bring everyone within the tax net. However, at times one might wonder whether adequate resources are being devoted to the different areas of tax recovery.
The department has publicly stated its intentions in a number of different areas. Recently, there was an amnesty offered to those with offshore bank accounts and it is rumoured that a second amnesty of this type will be made available in the near future.
On a different tack, there have been television and press advertisements asking taxpayers to call confidential help-lines to provide information about others whom they believe are not paying the tax that they should.
This could be regarded as very commendable, although the cynical might argue that this is akin to reducing the size of the police service and asking the public to patrol the streets and call in if they think that something might be a crime.
Surely the only people who are properly qualified to decide whether a criminal offence is being committed or tax evaded are the highly-trained professionals that are employed to do so?
In addition, HMRC are now taking a very different approach to tax compliance compared to that of the past. Where Inspectors might previously have checked on taxpayers at random, they are now using a risk-based approach that has greatly increased the revenues that they make for each £1 of expenditure.
Very few people would disagree with the cost effectiveness of this approach, but is it fair? While many PAYE auditors and inspectors are very good at flushing out self-employed workers, the risk-based approach only scratches the surface as they only visit a relatively small number of taxpayers.
In 2005-06, 29,451 employers were reviewed and only 100,093 personal tax compliance cases taken up.
The statistics for 2006-07 show that although there was a significant increase in the tax take from these areas — for example, £92 million more from employer reviews — only 16,993 employer reviews and 78,757 personal tax compliance cases were started.
That leaves an awful lot of low risk cases untouched — allowing many evaders to escape the net.
Ghosts in the machine
There are a number of different ways to respond to this issue. The first is simply to accept that lots of people are not going to pay their fair share of tax and not let it cause any sleepless nights.
Gordon Brown or Alistair Darling would have to be very brave to stand up in the House of Commons and announce that this is the new tax policy.
A fairer approach might be to underpin risk-based enforcement with broader measures that make it harder for individuals to become tax ghosts.
But what measures would strike an acceptable balance between fairness and cost-effectiveness?
Further adverts for the tax tip-off line might prove money well spent, but can hardly be described as a well-targeted campaign given the randomness of those who would be willing to make calls and the chances that schadenfreude would lead to any great measure of success.
Perhaps the most interesting weapon currently in the HMRC armoury is the little publicised Xenon. This is their web robot software tool which trawls the Internet gathering information on traders.
A spokesperson helpfully explained that 'Xenon identifies websites of interest to us and collects information from the Internet to assist in our enquiries.
It is much more efficient than trying to do the same thing manually as we have in the past'. That might scare a few tax evaders and really needs a great deal more publicity.
Spirited solutions
There is little doubt that more radical solutions are required.
Tracking those who leave an employment and do not reappear anywhere in HMRC's systems might be a good place to start.
With all employment records shortly going onto one database, tracking individuals by their National Insurance number (and contacting them when they fail to reappear after, say, 18 months) could help spot many of the ghosts in our economy.
HMRC could also announce a specific tax amnesty for those who are self-employed, but not currently within the tax net. This might, for example, restrict their liabilities to say a six-year period to include interest, but either without penalty or a fixed penalty at no more than 10%.
In reality, in the first example given at the start of this article where an individual has possibly evaded close to £1 million of tax over a 22-year period, the amount that can realistically be collected even if taxpayers are to be bankrupted may well be less than six years back taxes plus interest.
As a one-off, tax returns could be sent to everyone who does not presently receive one. It is all too easy to ignore your responsibilities if you are not asked to account for them.
More realistically, this could be restricted using one of the Government's favourite games, the post code lottery.
In the same way as policemen (and Community Officers) are now being put back on the beat to prevent street crime, a return to greater local responsibility for tax matters might be of great assistance.
Over the years, one has often come up against Inspectors of Taxes who have a detailed knowledge of their local area.
They have a good understanding of who does what and who should be paying tax and would easily be able to spot the person who lived in the multi-million pound mansion, but claimed to be earning no more than £20,000 per annum, or who has filed no tax return.
As a by-product of this, call centres could be dispensed with which, if nothing else, would lead to universal joy amongst taxpayers and advisers.
Registration of wraiths
Some form of modified (ideally radically simplified) construction industry (CIS) type scheme covering all self-employed people could immediately increase the tax take from the grey economy.
This would require self-employed individuals trading below the VAT registration threshold to register with HMRC and put their registration numbers on all invoices.
Businesses paying anyone without a valid VAT or tax registration number for goods and services could only claim the cost as a business expense if they withheld tax (10%, 18%, 22% — pick a number) and sent it to HMRC on a monthly basis with details of the unregistered traders.
This would place a greater administrative burden upon businesses, but only if they dealt with unregistered individuals — perhaps a small price to pay to eliminate the grey economy from the business to business sector.
Even in the business to consumer market, it would make it much easier for members of the public to establish when a tip-off to HMRC is appropriate.
As an additional measure, would it not be possible to issue questionnaires to employers with the specific aim of obtaining information about the disappeared millions who have now opted out of the tax system?
Who ya gonna call?
Finally, this writer believes that if HMRC were to employ another 1,000 staff whose sole brief was to correlate taxpayers with wider lists of those in the community, the rewards would be manifest.
If each cost (say) £20,000, then using HMRC's own figures on Large Business Office employer compliance of a return of £15 for every £1 spent, the additional net revenue each year would be £280 million.
Indeed, if they were properly directed and did not each bring £100 for every £1 that they cost in the first couple of years simply by sending out additional tax returns, this would be a big surprise.
Just by looking at electoral registers, the internet, newspaper advertisements or possibly land registry records, it would surely be easy to discover untold numbers of the disappeared and to help them to bring their taxation affairs up to date.
While some of these ideas may seem heavy handed, most taxpayers might well have no serious objections to their less honest brethren coming within the self-assessment regime at the earliest opportunity.
While there may be some people who have reservations about HMRC, very few would feel well disposed towards the man next door who has twice their disposable income because of his self-declared tax exemption scheme.
It is hoped that this article might stimulate some serious debate regarding the use of resources in the public sector and more particularly in connection with the recovery of unpaid tax.
Alternatively, perhaps David Hartnett or Alistair Darling would like to confirm that the two examples given at the head of this letter are collectively unique.
Philip Fisher has recently joined PKF to head their Employment Tax and Rewards Team. He is the author of Employee Share Schemes published by Croner CCH. He can be contacted at Philip.fisher@uk.pkf.com or on 020 7065 0300.
