5 ways HMRC could plug the tax gap

Taxing smokers, drinkers and drivers just doesn’t bring in the money it used to. We look at five big moves the Government could make to plug the tax gap.

Taxing the British public used to be easy.

For decades, governments could squeeze cash from smokers, drinkers and gamblers by slapping them with ‘sin taxes’. Environmental levies cajoling industry to switch to greener energy solutions also boosted national coffers. The likes of stamp duty, congestion charges and fuel taxes also irritated people, but they generated finances that could be pumped into healthcare and infrastructure.  

However, the UK’s tax revenues have been drying up.

The £35 billion tax gap

Healthier lifestyles have seen HMRC collect less money from ‘sin taxes’. For example, we’re incentivised to drive cleaner cars, rather than taxed, and we’ve been obeying. This rising eco-consciousness means factories and power stations use less fossil fuels, which makes for a happier environment, but less ‘sin taxes’ for HMRC.

The British housing market is also at its weakest point in a decade – not good for stamp duty fans.

This and more has resulted in the UK’s rising tax gap – the difference between what should be paid to the government in taxes and what’s actually being received.

HMRC indicates the shortfall is £35bn – the nation’s highest tax burden in 50 years, according to the Taxpayers’ Alliance.  

So, the UK needs more money. But where will it come from? Here are some of the tax solutions currently being proposed…  

1. Taxing multinationals & tech firms

For: HMRC estimates large UK and international firms owe them £27.8bn in unpaid tax, with US multinationals accounting for 17% (£4.6bn).

Although a new digital services tax (introduced in April 2020) will tax 2% on the revenues of search engines, social media platforms and online marketplaces, many feel it’s too modest. The government claims this tax will raise an annual £400m but this is just a small fraction of the pot of gold available.

Against: It could irk the tech titans, who may move their HQs to the continent – an increasing possibility, post-Brexit. It could also cause problems for British workers employed by these firms.

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2. Revising UK property taxes

For: Landlords and overseas owners of UK property are taxed lightly compared to other countries around the world. This was highlighted recently when American hedge-fund billionaire Ken Griffin bought two London homes for £195m. The amount of council tax he’ll pay on both properties? Just £2,842 a year. Then, there’s the thorny issue of stamp duty.

AAT has previously recommended that stamp duty liability switches from the buyer to the seller, which would not only help first-time buyers, but also save taxpayers £670m a year.

Against: Opponents argue reforming property taxes could suffocate the top end of the market and discourage landlords from investing.

3. Raise the pension age and cut benefits

For: Increasing the state pension age is a surefire way to boost revenues. The government plans to increase retirement age for men and women to 67 by 2028, estimated to bring in an extra £11bn from income tax and National Insurance contributions.

With the typical retiree enjoying a household income twice that of working-age adults, many feel pensioner perks should be scrapped too. Politicians have discussed removing winter fuel allowance, along with free TV licenses for over-75s. Less controversially, AAT has suggested raising the eligibility age for free eye tests and prescriptions from 60 to 67, which could yield savings of £1bn.

Against: Political parties are reluctant to cut pensioner benefits, because of their high voter turnout (84% of over-70s voted in 2017’s general election compared with 57% of 18-19-year-olds).

4. More environmental taxes

For: With environmental taxes raising £48.9bn a year (40% paid by households), other eco-taxes aimed at the public have so far been mooted, such as customers paying taxes on any flights taken, plus a 25p ‘latte levy’ on disposable coffee cups.

Against: Eco-taxes aimed at the public tend to be unpopular, as shown by the gilets jaunes (yellow vest) movement in France (who started protesting against rising fuel taxes). Flight taxes would penalise less-frequent travellers, such as those taking one holiday a year. A latte levy could also deter people from visiting the high street, at a time when retailers are struggling.

5. Find more ‘sin taxes’ 

For: Last year the government introduced its sugar tax on soft drinks. Aimed at tackling the nation’s obesity problem, the levy could extend to other products. Earlier this month (September), researchers writing in the British Medical Journal  suggested public nutrition could be improved with a 20% ‘snack tax’ on cakes and sweets.

Meanwhile, with the World Health Organisation declaring red meat a carcinogen, some (such as the Green party) have called for a further tax on meat products such as beef, lamb and pork.

Against: Any levy on snacks or meat would be contentious. As with the sugar tax, the greatest impact of rising prices would be on lowest income groups.

Boris Johnson isn’t keen on them either; earlier this summer he said he vowed to freeze ‘sin taxes’ if he became prime minister.

In summary

Taking money from people’s pockets is never popular. Nor is it easy. There are downsides to all the solutions available to Government. But with a £35 billion hole in its finances, controversy may be a small price to pay to plug it.

Read more on tax as part of our #AATPowerUp Tax 2020 campaign for September and October;

Christian Koch is a contributor for AAT's members magazine, AT.

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