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Tax investigations set to rise under Labour

19 April 2024
The Labour Party's recently announced policy to invest more in tax compliance means that HM Revenue & Customs ("HMRC") will target taxpayers more than ever.

Shadow Chancellor, Rachel Reeves announced plans on 9 April 2024 to invest £555 million in HMRC to fund the recruitment of additional tax inspectors, to focus on more complex tax avoidance and tax evasion cases.

Labour's intention is that this plan will raise £0.7 billion in 2025/26, increasing to £5.1 billion a year by the end of the next Parliamentary term. The money raised is earmarked to be spent on the provision of free school breakfast clubs (£365 million) and more hospital and dental appointments (£1.6 billion).

Why the focus on tax?

Labour has pointed to a recent interview with the head of the National Audit Office that suggests that the Government could save £6 billion a year by tacking tax avoidance and tax evasion.  Labour has cited HMRC figures that show the "tax gap" (the difference between amounts owed and the amounts collected) was £36 billion in 2021/22 (£5 billion more than the previous year). Labour also suggests that the compliance yield (how much HMRC estimates its work has generated in extra tax) has fallen this parliament from 5.8% to 4.2% of total revenues, and is worth £13 billion in additional tax revenue that is not recovered. Furthermore, Labour refers to statistics from the National Audit Office that the tax debt (the amount of tax unpaid which HMRC is aware of but has not been paid) increased to £43.9 billion from £15.5 billion in December 2019.  The tax gap and the compliance yield are based on theoretical estimates, which HMRC uses as a tool for understanding the relative size and nature of non-compliance and to assess its own performance. While these figures can be helpful tools, we must remember they remain, at best, estimates.

Labour has also highlighted that the number of compliance cases opened and closed by HMRC has fallen by 20% and civil investigations by HMRC’s fraud investigation service fell by 28% between 2018/19 and 2022/23.

Labour's Plans

Labour's proposed plans include:

  • increasing the number of compliance officers by 5,000, to increase the number of investigations, tackle fraud and ensure that tax owed is collected;
  • investing in digitisation of the tax system to improve compliance rates and customer service, and free-up resources to focus on more complex cases; and
  • working with businesses, the tax profession and digital service providers to bring a modernised HMRC’s approach, including greater use of AI .

The plan also outlines possible future legal and regulatory changes to tackle tax avoidance including the requirement to report a wider range of tax planning to HMRC under the disclosure of tax avoidance schemes regime.

What these changes could mean for taxpayers

The most obvious change is that there will be more tax officers looking at the tax affairs of individuals and businesses. While this could be positive in terms of customer service and support, it also means that there are likely to be more investigations and, given the premise of reducing the tax gap, more tax disputes.

The additional 5,000 HMRC officers will all need to be trained, but this will take time. We have found that inexperienced HMRC officers dealing with enquiries has resulted in lengthier enquiries and more disputes with HMRC.  This has been seen with HMRC's recent focus on Research and Development ("R&D") claims where it has been widely reported that a number of untrained officers have issued blanket rejections on claims resulting in many taxpayers having to appeal these decisions. We have seen a number of clients complaining of these issues to us. Read more about difficulties with the R&D regime and claims here. 

How we can help

DWF's Tax team is well positioned to provide advice and represent you on all tax investigations and disputes.  We can help at any stage of an investigation and are also experienced in pre-empting investigations. Engaging a law firm to advise on a tax disputes rather than engaging a business's accountant also brings with it the benefit of legal privilege. Legal privilege protects certain confidential documents from being disclosed to a third party, including HMRC, where these are prepared for the purpose of receiving legal advice or in the course of litigation. The same principle does not apply to the same extent in relation to advice from other professionals, such as accountants. 

Please speak to Tajinder Barring, Nina Basra or your usual DWF contact. 

Further Reading