In these tough economic times, the government is trying to find every last penny of savings that it can. Now, as part of the comprehensive spending review, Revenue and Customs (HMRC) has been challenged to find £15 billion worth of avoided and evaded tax.
Many experts have criticised the report as they feel that it is an unrealistic challenge based on complicated tax laws and a lack of personnel at HMRC.
Target of £15 billion in savings
The BBC reports that the government have challenged the tax authorities ‘to make £15bn by 2014-15 by tackling tax evasion and avoidance, and by cleaning up the tax credit system.’
£8 billion of the savings is expected to come from tackling fraud and error in the notoriously complicated tax credits system.
Crackdown on tax credit fraud
The tax credit system is notoriously complicated which makes it a straightforward target for fraudsters. A Government blueprint on tackling fraud admits this, saying: “Customers can also be frustrated by confusing advice from staff who themselves do not always fully understand the specific requirements for different benefits.”
Common ways to defraud the tax credit system include:
- Only declaring the income of one working adult in a household (when there are two)
- Suggesting adults work more hours than they actually do
- Claiming excessive costs of childcare
- Exaggerating disabilities
- Claiming for more children than actually exist in the household
The BBC reports that there has been some success in recent years in tackling fraud. ‘Over the last four years, intervention by HMRC has delivered £1.5bn and the target has now been set for £8bn over the next four years.’
Tax avoidance and evasion
HMRC has also been challenged to close loopholes and gaps which allow many people to avoid paying tax. The Spending Review included the promise of £900m of investment to tackle the problem of tax avoidance and evasion.
However, one of the problems is that tax avoidance, unlike tax evasion, is perfectly legal.
Former tax inspector Ronnie Ludwig, of accountants Saffery Champness, says that many people legitimately ‘avoid’ tax by making simple changes to their tax affairs – such as a self-employed person setting up a business and paying corporation tax, rather than income tax. Mr Ludwig told the BBC: “I do not know where the line is drawn on avoidance.”
HMRC figures show that the amount of tax that went uncollected in the last financial year was £42bn.
Whether the ever shrinking HMRC workforce will be able to meet this tough challenge remains to be seen. However, with continuing problems regarding millions of incorrect tax bills, HMRC looks like it may be stretched to breaking point over the next few years.