Tax evasion and unfairness

By Lord John McFall

How do people judge what is fair, and what is unfair? Professor Amartya Sen, who appeared before the Treasury Committee in the last Parliament, has said that people judge fairness by the link between effort and reward.

That link is severely out of sync. As a result of the economic crisis, we are now seeing severe cuts in public spending as well as tax rises. But whilst the crisis was caused by the financial sector, it is ordinary working people who will now bear most of the pain. They are right to be angry.

Those tax rises are particularly unfair when some people are not paying their way. As I said in the House of Lords yesterday, the current ‘tax gap’ – the difference between what the Government is legally owed in tax, and what it actually receives – stands at £52 billion, according to the ARC. That is equivalent to nearly 9% of the UK’s total net tax take for the next year. And the gap appears to be widening fast; the latest figures for 2008-09 showed an increase of £4 billion on the previous year.

To close that tax gap, HM Revenue and Customs will need resources. I welcome the £900 million that the Government has pledged to tackle this problem, which aims to bring in an extra £7 billion of tax revenue. That is a recognition by the Government that spending more on dedicated staff at HMRC will save the taxpayer money, not cost them. The Public and Commercial Services Union cites evidence that an average member of staff dedicated to tax compliance yields £650,000 in tax revenue, net of staff costs.

But that £900 million needs to be seen in the context of the Government’s wider Spending Review, which will cut £3 billion from HMRC over the same period, or about 10,000 jobs. It also needs to be seen in the context of the cuts to HMRC since it was created over six years ago, from the merger of the Inland Revenue and HM Customs and Excise. Over these years, staffing levels have fallen by nearly 30,000 and 200 offices have closed.

During my tenure as Chairman of the cross-party Treasury Committee, we were concerned about high staff turnover, low morale and poor employee engagement at HMRC. Further cuts to the department would not appear to be the answer to these problems.

There is a consensus amongst all the main political parties that the budget deficit must be addressed. But quick ‘efficiency’ savings are a chimera. The changes at HMRC have taken place over a period of over six years, but even then they have resulted in reductions in the front-line service provided. They have also created long-term problems which will be costly to resolve.

These kinds of cuts will end up costing the taxpayer dearly in the long run. They could also lead to more cuts and tax rises, which penalise the wrong people. My advice to the Government is not to rush into quick cuts, but to ca’ canny – to go carefully.

Lord McFall is a Labour and Co-operative Peer and former Chairman of the House of Commons Treasury Committee.