Spending Review: Can the taxman fix the system?
Many an inquisition has been based on fear and ruthless efficiency - and now it seems the taxman is expected to do the same.
Deep in the Spending Review documents is a challenge to HM Revenue and Customs (HMRC) to make £15bn by 2014-15 by tackling tax evasion and avoidance, and by cleaning up the tax credit system.
Accountants have cast doubt on whether this can be done - especially with a "demoralised" HMRC staff who already face a backlog of cases.
But if successful, such savings would be six times more fruitful to the government's coffers than the change in child benefit.Tax credits
Some £8bn in savings will come from tackling fraud and error in the notoriously complicated tax credits system.
In fact, it is so confusing that even some staff at the HMRC do not get it. Similarly Department of Work and Pensions (DWP) staff struggle with other benefits systems.
"Customers can also be frustrated by confusing advice from staff who themselves do not always fully understand the specific requirements for different benefits," says a government blueprint on tackling fraud and error.
"This lack of understanding among staff is a key driver of official error.
"In 2009 DWP still issued its decision-makers with 8,690 pages worth of instruction manuals to help them apply benefit rules correctly, and the guidance for tax credits staff ran to 1,447 pages."
Spending Review documents
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So it is complicated, and this complexity makes the tax credits system easy to defraud.
"It is something we have warned about from the very beginning. There is an open door for bogus claims and inconsistencies," says Chas Roy-Chowdhury of the Association of Chartered Certified Accountants (ACCA).
This, he says, is compounded by the fact that the goalposts of eligibility are constantly being shifted.
The HMRC and DWP's blueprint on tackling fraud explains that there are common lies told by claimants in order to get better pay-outs.
These include only declaring one of two earning adults in a household, claiming excessive childcare costs, and suggesting more hours are worked than is actually the case.
Others include claiming for more children than actually exist in the family, telling lies about income, and exaggerating disabilities.Crackdown
With the authorities aware of the problem, they have started to make strides in clawing some of this money back.
Over the last four years, intervention by HMRC has delivered £1.5bn and the target has now been set for £8bn over the next four years.
Tactics to ensure this happens include:
- Gathering more information about claimants' lives
- Creating a new, integrated fraud investigation system
- Fines of £50 for people who are knowingly paid too much because their circumstances have changed
- Using private sector debt collectors to chase debts.
In addition, to tackle other forms of benefit fraud, DWP will employ 200 more fraud investigators, create a team that targets specific areas in the country, cut benefits instead of issuing cautions, and increase the amount it can recoup through deductions to salary to £16.50 a week.
It may also seize the assets of people who have persistently refused to pay back benefits obtained through fraud, or force them to sell their home to pay.
Even after doing all this, HMRC and the DWP accept that there will still be £3.8bn of residual fraud and error in the system.Tax gap
The action goes beyond anything that has been tried before in terms of cracking down on fraud.
End Quote Ronnie Ludwig Saffery Champness
I do not know where the line is drawn on avoidance”
The same can be said for measures targeting higher earners and businesses.
The Spending Review included the promise of £900m of investment to address the tax gap, and tackle avoidance and evasion.
It is the inclusion of "tax avoidance" in this list that has raised debate among business people and accountants since Treasury Chief Secretary Danny Alexander first announced the plan at the Liberal Democrat conference.
Tax avoidance, unlike evasion, is perfectly legal.
Former tax inspector Ronnie Ludwig, of accountants Saffery Champness, says that many people legitimately "avoid" tax by making simple changes to their tax affairs - such as a self-employed person setting up a business and paying corporation tax, rather than income tax.
He says there has been no clarification on the detail of the proposal, which could seriously affect the business of accountancy firms.
"I do not know where the line is drawn on avoidance," he says.
The amount of tax that went uncollected in the last financial year was £42bn, HMRC figures show.
The least effective tax was on hand-rolled tobacco, with nearly half uncollected owing primarily to smuggling.
HMRC will target this area - one of many firefighting policies to take full control of the tax system.