9 April 2024

Will Rachel Reeves’ plan to take on the tax dodgers work?

To reduce tax avoidance by £5.1bn by the end of the next parliament, Labour will need to invest as soon as possible.

Rachel Reeves has this morning announced a new plan to “take on the tax dodgers” and raise an extra £5.1bn a year by the end of the next parliament.

The new policy is partly a riposte to Jeremy Hunt, who pinched Labour’s plan to tax non-doms in his Budget and spent the proceeds on a cut to National Insurance. Labour says the Conservatives gave those non-doms a rather generous window in which to expatriate their cash into offshore trusts, and a half-price rate on the tax they do decide to pay in the first year. Hundreds of millions can be saved by tightening up these loopholes.

However, the real money will come from hiring up to 5,000 people to investigate tax avoidance and prosecute fraud. This will give Labour the “funding stream” to pay for policy commitments on the NHS and education, but it will be a longer and more difficult process.

Labour’s policy paper says the plan will involve “focusing additional resource on segments with the greatest complexity and return”, a sentence that is easily wandered past. It’s important, however, because it tells us from whom the billions will be extracted.

“Return” here means the tax you get back from £1 invested in spotting and stopping tax dodges. In tax talk this is known as “compliance yield”, and it varies by an order of magnitude depending on whom you investigate.

Research by the independent think tank Taxwatch shows that £1 spent on compliance in 2021-22 (the latest figures published by HMRC) returned £6.60 when it was targeted at individuals, but it returned £11.40 when targeted at wealthy individuals and £39.20 when it addressed large businesses. It’s important that HMRC prosecutes some individuals and small businesses to deter them from tax shenanigans, but investigating and challenging the tax paid (or rather, not paid) by big multinationals is about six times as lucrative.

While the “tax gap” as a proportion of expected revenues has fallen over time, the yield on HMRC’s compliance work has also fallen and the number of compliance cases and criminal investigations have dropped sharply. HMRC has powers introduced in the 2017 Criminal Finance Act that have still never been used, and during that time fewer than 100 wealthy individuals (defined as having income over £200,000 a year or more than £2m in assets) have been prosecuted.

This is the quid pro quo of a Labour Party that has also committed to plenty of business-friendly policies. The message is that a Labour government wouldn’t opportunistically muck about with the tax system (businesses prefer stable rates they can plan around), but that it would do more to ensure large companies cough up.

“When working people in Britain are being asked to pay more in tax because of the Conservatives’ economic failures,” said Reeves, “it is wrong that a minority continue to avoid paying what they owe.”

However, this high-yielding work is also more difficult to do, and the HMRC workforce is older, on average, than the rest of the civil service. It will take years to recruit and train thousands of new tax inspectors capable of taking on well-resourced businesses. HMRC has also had to cope with many of these people being asked to pick up other policy priorities, such as all the Covid money that went missing after the then-chancellor, Rishi Sunak, handed it out: the Taxpayer Protection Taskforce set up to recoup some of the missing cash was wound up in 2023, after HMRC realised the inspectors who were seconded to it would have brought in more money if they’d just carried on doing their regular jobs.

To get to the £5.1bn number by the end of the next parliament, Labour would need to invest as soon as possible, maintain the funding and ensure that its army of new inspectors remains focused on the right targets. The benefits of recruiting and training people to look into the offshore accounts of wealthy individuals and big businesses are huge. Labour’s £5.1bn estimate seems cautious against the £6bn quoted by the National Audit Office, or the £13bn lost to declining compliance yield. However, these benefits will take time to accrue, and it won’t start really paying off until the end of the decade.

This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here.

[See also: Labour’s depressing caution]