Max Mason covers insolvency, courts, regulation, financial crime, cybercrime and corporate wrongdoing. A Walkley Award winner, Max's journalism has also received awards from the National Press Club of Australia, the Kennedy Awards and Citibank. Message Max on Signal https://tinyurl.com/MaxMason Connect with Max on Twitter. Email Max at max.mason@afr.com
A Canadian Tax Lawyer's View On How The CRA Becomes A Victim Of Its Own Incompetence
Analysts say FOI data for 2022-23 suggests agency is better using resources to boost compliance
The number of large UK businesses under investigation by HM Revenue & Customs for potential underpayment of tax is at a five-year low, according to official data obtained under the Freedom of Information Act.
The tax authority has historically probed about half of Britain’s 2,000 biggest companies at any one time, but about 790 companies were investigated in the 2022-23 tax year after a steady decline in recent years, the FOI figures released by
HMRC showed.
In 2021-22, HMRC looked into approximately 820 large businesses — which typically have annual turnover above £200mn or annual turnover below £200mn but complex tax affairs — down from about 900 in 2020-21, roughly 980 in 2019-20 and about 990 in 2018-19.
HMRC said it was focusing resources “on having the maximum impact” and “collecting more tax from large businesses”, with “compliance work last year bringing in £1.6bn more than in 2018-19”.
“The potential value of our large business cases has steadily increased demonstrating our determination to ensure large business pay the tax they owe,” it added.
Analysts said various factors had driven the decline in total investigations, including the suspension of probes by the agency into companies and individuals during the pandemic. Pressure on resources at HMRC, which has been
criticised by MPs for underperformance, had also had an impact.
“Investigations into large businesses require HMRC’s most qualified and highly experienced investigators, and these are in high demand and short supply,” said Ray Grove, head of corporate tax and trade at content and technology company Thomson Reuters, which submitted the FOI request.
Dawn Register, head of tax dispute resolution at accountancy firm BDO, said HMRC had “limited resources” and that “increasing capacity . . . would boost overall returns in the long term”.
Labour pledged in its general election manifesto to spend an extra £855mn a year on “investment in HMRC to reduce tax avoidance”.
But despite challenges, tax experts said they broadly agreed with HMRC’s explanation that it was using current resources to better target compliance activity on large businesses.
Register said that despite the fall in the number of investigations, HMRC’s annual report for 2023-24 showed it was “focusing its efforts on cases where higher amounts are at stake”.
She pointed to an increase of £1.6bn in the compliance yield — the estimate of tax revenue that would have been lost but for HMRC’s compliance activity — from £9.8bn in 2018-19 to £11.4bn in 2023-24.
Investigations were also being completed faster, according to HMRC’s annual report, with the average inquiry concluding within 21 months in 2023-24, down from 36 months in 2022-23.
Andrew Park, partner at accountancy firm Price Bailey, said: “For once, the apparent drop in live investigations may actually be a sign of positive progress.”
He cited the new “notification of uncertain tax treatments” as one factor that had helped HMRC decide which large businesses to probe and acted “as a big deterrent”.
Under the legislation — which came into effect under the last Conservative government in April 2022 but covers transactions that happened before then — large businesses must notify HMRC when their tax position is “uncertain” and it is not clear that the business’s position is correct.
Park said the law aimed to reduce the “legal interpretation” tax gap, which was originally estimated at about £6bn in 2019-20 but has since fallen to roughly £4bn. The tax gap is the difference between the amount HMRC estimates should be collected and what is actually paid, and in total stood at £39.8bn in 2022-23.
Before the law was introduced “some large businesses sailed as close to the wind as they dared in finding sophisticated and optimistic arguments to bring down their tax bills”, said Park.
Tax experts said they expected investigations to increase over the course of the current parliament, with the Labour government vowing to curb tax evasion and avoidance to help fund its manifesto pledges.
Jake Landman, tax partner at law firm Pinsent Masons, said HMRC would “always look to get the best return on investment — and that will probably mean more investigations into large businesses”.
“It’s an area where investigating even a small disagreement between HMRC and a business can yield a large amount of extra tax and penalties,” he added.
HMRC investigations into serious tax fraud and avoidance hit six-year low
UK revenue authority says its teams are focusing their work on the highest-impact cases
The number of HM Revenue & Customs investigations into serious tax fraud and avoidance has fallen to a six-year low, figures uncovered by the Financial Times have revealed.
Known in tax circles as Code of Practice 8 and 9 cases, the number of investigations fell from 1,091 in 2022-23 to just 480 in 2023-24.
Cop9 investigations, which involve the most serious cases of tax fraud such as that of Bernie Ecclestone, fell to just 268 in 2023-24 — down from 669 in 2018-19
Several tax experts blamed staff turnover and a lack of resources within HMRC. The Offshore Corporate and Wealthy unit of the Fraud Investigation Service — which conducts most Cop9 investigations — currently employs 360 staff, down from 400 just before the pandemic, out of a 67,500 total at HMRC.
But HMRC hit back at these claims, saying its fraud investigation teams were focusing their work on the highest-impact and highest-yielding cases.
Andrew Park, tax investigations partner at accounting firm Price Bailey, said the staff working on fraud investigations used to be “the pick of HMRC”, but due to staff turnover many new staff “simply do not know what they are doing”.
The number of investigations opened rose sharply after the pandemic. Park argued that this “surge” had “swamped” staff and prevented further cases from being opened.
“They’ve simply not got the resources to open as many new investigations,” he said. Dan Neidle, founder of the think-tank Tax Policy Associates, added that the figures reflected a lack of experienced staff and poor training for new hires.
He highlighted the case of Paul Baxendale Walker, a former lawyer and tax adviser previously involved in promoting tax avoidance schemes, on whom HMRC had applied to impose a £14mn penalty for not complying with a request to provide information. However, the tax authority made procedural mistakes and its application was struck out.
Neidle added that HMRC staff were being poached by the private sector.
“An experienced HMRC officer is an attractive private sector hire, doing basically exactly the same job but for perhaps twice the salary. Very few civil servants are as marketable,” he said.
In the Budget, chancellor Rachel Reeves announced that the tax authority would hire an additional 5,000 compliance staff in an effort to crack down on fraud — with the first 200 starting training in November.
However, a senior Fraud Investigation Service official recently told a room of tax experts that they had not yet been consulted on how many extra staff their team would be allocated as a result of the announcements.
Despite the fall in the number of investigations opened, a record £1.1bn was recouped by the tax authority in 2023-24. But HMRC acknowledged that the jump was partly due to the “particularly large” Ecclestone payment of £652.6mn, which had distorted the figures.
An HMRC spokesperson said: “In recent years we have deliberately focused our investigations towards the highest-harm and highest-value fraud, which means the number of these inquiries [Cop9 and Cop8] will change from year to year based on changing risks.
“The vast majority pay the tax that’s due and we use a range of civil and criminal powers to tackle those committing serious fraud. Last year this compliance work protected £34bn of tax that would otherwise have been unpaid.”
Endless phoneline waits, unfair clawbacks and misdirected tax-avoidance clampdowns waste business time and energy
Bombshells, black holes, double whammies . . . Tax is rarely far from the centre of attention during an election campaign. But nearly always it’s an argument about who should pay a bit more or a bit less, or whether this party or that has a gap in its figures that will need filling.
Much less discussed, but just as important, is having a tax system that works effectively.
Last year, callers to HMRC telephone helplines spent nearly 7mn hours waiting on hold — more than twice as long as in 2019.
Overloaded helplines are far from the only pothole in the road for diligent taxpayers. Onerous form-filling, baffling complexity, an inability to access clear guidance and prompt repayments — all these hinder the ability to do business and contribute to growth and increased productivity for the UK.
In a survey of tax advisers that our institute conducted last year, 95 per cent said that these poor service levels have a significant or moderate negative impact on the ability to do business.
Digitalising tax administration has to be part of the solution to inefficient processes. But too often at present it seems to be an exercise merely in outsourcing work from
HMRC to taxpayers themselves — or their agents.
Meanwhile, research and development tax credits, recognised by all parties as a key element in supporting innovation, are beset by problems. Large numbers of seemingly valid claims have been
rejected after the government reacted to high levels of abuse not with more careful checks but with a blunt process of challenge and rejection with little chance for businesses to engage. This has undermined confidence in the relief: businesses do not trust HMRC to accept or properly consider legitimate claims, leading to reports of businesses exploring moving overseas or scrapping plans to create jobs or invest.
A smooth-running, easy-to-navigate
tax system that delivers what it promises, without excessive delay or bureaucracy, is an important part of the national economic infrastructure. And it should be cost-effective.
Every major party manifesto so far has vowed to raise additional revenue by reducing the so-called tax gap — the £39.8bn a year that is the difference between tax due (the theoretical tax liability, in the jargon) and tax collected. While most of the political rhetoric is around avoidance and evasion those factors actually make up well under half of the tax gap.
If the next government is serious about this gap, ministers need to tackle not just the £1.8bn of tax avoidance and the £11.2bn of tax evasion and other illegal activity. But they must also look at the £17.8bn made up of taxpayer mistakes — what HMRC categorise as “error and carelessness”.
It needs to be as easy and straightforward as possible for wannabe-compliant taxpayers to pay what is due: investing in HMRC customer service — instead of cuts — is central to making sure queries are answered. Ministers also need a relentless focus on simplification — a simpler tax system, with clear rules and easy-to-navigate guidance would mean fewer mistakes by both taxpayers and authorities. And they must invest in digitalising the system — but review the process to avoid overburdening users.
The happy news is that, done right, measures such as these should not only reduce the tax gap, they should also make administration easier. This would free up business owners and managers to focus on growing, rather than spending their days overcoming bureaucratic hurdles put in their path by the state.
The tax system is not a “dumb pipe” that funnels money to the government. It is an elaborate system taking up large amounts of business time. We shouldn’t make it any more taxing than it has to be. Improving how it operates could make a significant contribution to economic growth. Politicians of all parties should put these measures at the heart of their plans.
