The Conservative Party wants to raise £6bn a year by clamping down on tax avoidance and evasion with the proceeds of the tax revenue received to go towards childcare benefits and to help pay for the proposal to introduce national service for 18-year-olds and to keep state pensions outside the threshold for income tax.
Some experts have doubted whether this funding plan – or a parallel Labour proposal to raise £5bn a year from tax avoidance and evasion – is credible.
Where will all these tax revenues come from?
The Institute for Fiscal Studies (IFS) has noted according to reports that while there is room to increase tax revenue by addressing avoidance and evasion, this would require significant investment in HMRC enforcement. Additionally, such a crackdown could be politically sensitive, as much of the additional revenue would likely come from smaller businesses and self-employed individuals rather than large corporations or wealthy individuals.
Why are self-employed a tax grab target?
HMRC has an estimated tax gap – the difference between the tax it should collect and the amount it collects – of £36bn, according to a report by think tank Tax Policy Associates.
Tax Policy Associates illustrates what the cause of the gap is and where it’s coming from. You could be surprised:
- Small business: £20bn
- Mid-sized companies: £4bn
- Large businesses: £4bn
- Criminals: £4bn
- Individuals: £2bn
- Wealthy: £2bn
What is also interesting is why these gaps are happening. Again, here is what the report highlighted:
- Failure to take reasonable care: £11bn
- Error: £5bn
- Evasion: £5bn
- Legal interpretation: £4bn
- Non-payment: £3bn
- Criminal attacks £4bn
- Hidden economy: £2bn
- Avoidance: £1bn
The report stated:
So most of the tax gap isn’t the wealthy, or multinationals… it’s us. Most of it is small businesses receiving payment in cash and not filing properly (accidentally or deliberately). This is not a very politically convenient answer, but it is nevertheless the truth.
Now these figures are estimates, subject to numerous uncertainties, and shouldn’t be taken as absolutes; but they are also unlikely to be very far off the mark.
So, we can say with some confidence that neither Labour or the Conservatives can raise £6bn from clamping down on tax avoidance, because there probably isn’t £6bn of tax avoidance.
Tax avoidance schemes
The think tank sees a growing trend of misleading “tax avoidance” schemes marketed to small businesses and individuals. These schemes the report explains aren’t legitimate tax avoidance, but rather a combination of incompetence and illegal activity. Cracking down on such schemes, even those labelled as “avoidance,” could reduce errors and tax evasion.
These deceptive schemes are often sold by dubious organisations operating within the UK and abroad, rather than reputable firms. These outfits typically disappear when faced with scrutiny from tax authorities, leaving the authorities empty-handed.
To address this issue, the think tank proposes granting tax authorities new powers to hold directors and shareholders of these scheme promoters accountable. This would deter the creation and promotion of these misleading schemes, ultimately protecting taxpayers and ensuring fair tax collection.
How self-employed workers can avoid tax issues
To avoid being caught out by tax avoidance measures, self-employed individuals should:
Maintain accurate records: Keep meticulous records of all income and expenses, including invoices, receipts, and bank statements. This will help ensure that you are paying the correct amount of tax and can provide evidence in case of an audit.
Understand allowable expenses: Familiarise yourself with the expenses you can legitimately claim against your income to reduce your tax liability.
Seek professional advice: If you are unsure about any aspect of your tax obligations, consult with an accountant or tax advisor. They can provide guidance and help you navigate complex tax regulations.
File returns on time: Submit your tax returns by the deadline to avoid penalties and interest charges.
Be transparent: If you are unsure whether a particular deduction or scheme is legitimate, err on the side of caution and disclose it to HMRC. Ask them to look into the umbrella company you are working with to ensure the umbrella is making the correct tax payments on your behalf to HMRC both now and historically. This will demonstrate your willingness to comply with tax laws and can help avoid accusations of avoidance.
By following these tips, self-employed workers can protect themselves from unintended involvement in tax avoidance schemes and ensure they are fulfilling their tax obligations.
You’d mitigate a growing trend of misleading “tax avoidance” schemes marketed to small businesses and individuals by dumping IR35 and the mandatory requirement for umbrella companies (you know, the ones who do that marketing). The companies /individuals need to do all the good practice that you state, of course – so police that instead.