Labour's Tax Plans Signal Tougher HMRC Approach

Labour's plans for closing the tax gap suggest that taxpayers may face an increasingly aggressive HMRC. With the UK general election now underway, Labour’s shadow chancellor Rachel Reeves has ruled out rises in corporation tax, VAT, income tax, and national insurance, indicating no further tax increases beyond those already planned.

To fund the party's various spending pledges, Labour is focusing on closing the UK's tax gap—the difference between the amount HM Revenue and Customs (HMRC) considers should be collected and the amount actually collected—which stands at approximately £36 billion ($45.9 billion) according to the latest figures.

In its Plan to Close the Tax Gap, Labour has set an ambitious target of raising an additional £5.1 billion a year by the end of the next Parliament through action on tax compliance. Here, we examine some key aspects of this plan to predict how the UK tax disputes landscape might change under a Labour government.

Labour's plan includes an extra £555 million per year to help HMRC "relentlessly pursue the money that is owed." Specific allocation of this funding will be confirmed if Labour is elected, but amounts are already earmarked for certain areas, particularly the recruitment of an additional 5,000 HMRC compliance officers.

Funding will also be invested in the digitisation and modernisation of HMRC, including a "greater use of AI." Currently, HMRC uses its Connect software to target high-risk cases from a wide range of information sources, including data shared with other government departments and information from social media, e-commerce, and other online platforms. Further investment in AI may result in even greater scrutiny for taxpayers.

Although Rachel Reeves has described Labour as "the natural partner of business," the party's plans on compliance state that any additional resource for HMRC will be strategically focused to maximise returns, particularly targeting larger businesses where the scope and scale of any tax errors are invariably larger.

For smaller businesses, there would be more emphasis on "upstream compliance," which aims to prevent non-compliance before it happens.

It is also noteworthy that Labour's panel of expert advisers on tax compliance includes Dame Margaret Hodge, who was a vocal critic of the tax affairs of multinationals in her former role as chair of the House of Commons Public Accounts Committee.

Labour wants to explore deploying more external resources while new HMRC officers are being trained, which could include further use of third-party debt collection agencies, already employed by HMRC to collect unpaid tax bills.

Labour's plans highlight that the total value of tax debt has tripled since 2019. As a result, Labour is considering changing the law to strengthen HMRC's powers to enforce tax payment. Although details are yet to be set out, previous legislative changes in this area included the introduction of the accelerated payment regime in 2014, which allows HMRC to demand disputed tax amounts under certain conditions even while an enquiry or appeal is still underway.

HMRC's current policy is to handle cases of suspected tax fraud using civil procedures where appropriate. However, Labour's report criticizes the reduction in prosecutions and convictions related to tax, citing that only 11 wealthy individuals were prosecuted in connection with HMRC investigations in 2022.

A portion of "blockbuster" funding would be reserved for strategically important criminal cases to restore a "strong deterrent where it is needed."

Labour also wants to explore whether deferred prosecution agreements, which currently apply only to corporate entities, might be applied to individuals suspected of tax offences.

Labour's plans make specific reference to party leader Keir Starmer's record on white-collar tax evasion in his former role as Director of Public Prosecutions, as well as the Criminal Finances Act 2017 (CFA) corporate criminal offences related to the failure to prevent the facilitation of tax evasion.

Despite being introduced on September 30, 2017, no prosecutions have been brought under these offences. Figures published in January 2024 revealed that HMRC had 11 live CFA investigations and 24 live opportunities under review, with 94 opportunities rejected to date. With plans for quarterly (non-public) reporting to relevant ministers on the volumes and nature of criminal powers deployed by HMRC, the prospects of a first CFA conviction could be much higher under a Labour government. Given Labour's aim to establish a deterrent, the first prosecution might target a high-profile corporate.

A reason for the lack of a CFA prosecution to date is that these offences were introduced to drive behavioral change and encourage businesses to implement reasonable prevention procedures, the only defense against these strict liability offences. Many businesses still do not have adequate procedures, including those that have purchased ‘off-the-shelf’ procedures not properly adapted or updated to reflect current practices. Businesses concerned about their position should review their procedures promptly.

Labour plans to advance the current consultation, launched in March 2024, on proposals to regulate the UK tax advice market. According to that consultation, about a third of tax advisers are not members of any professional body and therefore not subject to regulation. HMRC believes this lack of regulation has led to unscrupulous practices, including many ineligible tax repayment claims and promoters and enablers of tax avoidance.

Labour is also considering new legislation to require a broader range of tax avoidance schemes to be reported to HMRC under the ‘disclosure of tax avoidance schemes regime.’ The party has noted that some schemes are constructed by advisers to avoid the requirement to register under current rules.

Labour's plans include an increased focus on offshore tax compliance. The party has already committed to closing perceived "loopholes" in current plans to abolish non-dom tax status to raise an additional £2.6 billion.

The plans also include a commitment to improving customer service for taxpayers, described by Labour as "dire." Tax professionals and taxpayers are aware of current communication problems with HMRC, with phone lines often not working and correspondence taking months to arrive.

Labour's plans indicate that HMRC will become more proactive, with an increase in compliance activity. More broadly, Labour's statements suggest HMRC may take a more aggressive stance against perceived tax avoidance, with the party aiming to increasingly frame tax as a moral issue.

For instance, party press releases have heralded Labour's proposals on boosting tax compliance as a plan to "take on the tax dodgers to fund our NHS." In light of such rhetoric, all taxpayers, particularly larger businesses, may face an unprecedented risk of tax disputes causing significant reputational harm.

By fLEXI tEAM