- Increasing tax revenues is deemed possible but difficult by experts
- Labour could reform tax reliefs to raise money
Experts have questioned Labour’s plan to raise billions of pounds a year by clamping down on tax avoidance, as figures suggest HMRC succeeded in collecting the highest ever amount of tax due.
Labour intends to raise £5.2bn a year by 2028-29 by closing non-dom tax loopholes and reducing tax avoidance, according to its election manifesto published earlier this month. The money is to be used to improve the NHS and invest in HMRC.
According to HMRC figures published last week, in 2022-23 the so-called ‘tax gap’, which measures the amount of taxes that should be collected but for various reasons is not, amounted to £39.8bn, or 4.8 per cent of the total amount that the nation should theoretically be paying to the tax office. This was a record high in cash terms but a record low in percentage terms.
The Chartered Institute of Taxation (CIOT) said that the tax gap can “probably” be reduced further, but added that the law of diminishing returns meant "further marginal gains are becoming harder to come by”. “Ambitious targets are to be applauded but our advice to politicians of all parties is not to spend the money before it’s been collected,” they added.
Labour is not the only party whose manifesto included plans to raise billions by reducing tax avoidance – the Conservatives aim for £6bn and the Lib Dems for £7.2bn.
Helen Miller, deputy director of the influential Institute for Fiscal Studies (IFS), said the reduction of tax avoidance is "an uncertain revenue source”. “It will be particularly hard to get the desired revenue if Labour means that it wants to raise all of the additional money from limiting (legal) avoidance opportunities, and not (illegal) evasion, which isn’t mentioned in the manifesto,” she added.
The tax gap is made up of various components, including taxpayers’ mistakes, tax avoidance and illegal activities. The CIOT said that parties appear to be using ‘tackling avoidance’ or ‘avoidance and evasion’ as shorthand for reducing the tax gap as a whole, considering that the largest portion of it (£17.8bn) comes from errors and “failure to take reasonable care” by taxpayers, with tax avoidance accounting for just £1.8bn.
While the tax gap as a whole has decreased in percentage terms, the portion of it due to error and carelessness (2.2 per cent of total theoretical tax liabilities) has remained stable since 2019-20. The CIOT flagged it as a key area of focus and suggested improving HMRC customer service and simplifying the tax system to increase revenue.
Rachael Griffin, tax and financial planning expert at Quilter, questioned how quickly Labour’s plan can be put in place. “Unlocking additional tax revenue from fixing the leaking system is certainly possible but whether it’s realistic in a short time frame is less likely,” she said. “The opportunity for further tax revenues without having to put up taxes is certainly there but it’s not easy to grasp.” She flagged Labour’s proposal to expand the Disclosure of Tax Avoidance Schemes regime and improve HMRC’s use of criminal powers as steps in the right direction.
Reliefs at risk?
Jason Hollands, managing director at Evelyn Partners, suggested a new Labour government might look at tax reliefs for savers and investors, alongside giving HMRC more resources to chase avoiders and evaders.
He added: “Some quite legitimate tax reliefs tend to get portrayed as ‘loopholes’ when a government is in need of money” and it is not unthinkable that the new government might end up getting rid or watering down many of them.
“Labour has already suggested that it regards some of the reliefs available from inheritance tax (IHT) as too generous, particularly business and agricultural reliefs. So although there is nothing in the manifesto we could see some movement in that direction in the next parliament."
It has been reported that Labour is looking at increases to capital gains tax (CGT) and at making it harder to gift money and assets such as farmland free of IHT as ways to raise money to bolster the UK’s struggling public services. Businesses, shares in unlisted companies and certain Aim-traded shares can be passed on free of IHT if they qualify for business relief. These are an important support for many businesses but a high percentage of the relief goes to a small number of wealthy estates.
