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The simple change that could create a fairer tax system and bring in billions, all without raising taxes

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The simple change that could create a fairer tax system and bring in billions, all without raising taxes

Arun Advani discusses the policy recommendations of his research.

If you think it is hard to make tax sound interesting, try getting people interested in tax administration.

During election season tax issues make the headlines more frequently than usual. But they usually focus on changes to tax rates or tax bases. Like Labour’s plan to raise taxes for earners over £80,000 or the Conservatives’ pledge to raise the national insurance threshold.

But looking over Labour’s Fair Tax programme this weekend, it was a proposed change to tax administration that got me excited. A simple change that has the potential to create a fairer tax system and bring in billions of pounds in uncollected tax revenue, all without raising taxes. The proposal is to increase the number of tax audits carried out by HMRC.

My research into the self-assessment tax-gap (tax going unpaid to the government from self-assessed tax payers) first highlighted the need for this policy some years ago. I found that:

  • Audits are very profitable. Three out of four tax audits find evidence of non-compliance, and back in 2010, a targeted audit raised more than £6,000 directly.
  • Audits also change behaviour. Individuals who are audited pay more tax for 5-8 years afterwards. The effect of this is huge: in 2009, the total revenue from one audit would have been about £15,000. Now, as the self-assessment tax gap has risen by 40-50%, the revenue would be even more, potentially as much as £22,000.
  • Audits are relatively cheap. Given recent salary information and the number of audits done by each auditor, they cost about £2,500 each.

Given all this, you’d think governments would be increasing the number of audits they do already. But you’d be wrong. In the early 2000s HMRC carried out more than 350,000 self-assessment audits a year, but now it is closer to 100,000. Some of the decline makes sense: HMRC are better at targeting their audits. But given that half of the self-assessment tax gap is owed by just over 200,000 people, there is plenty of scope to do more audits and raise revenue.

People often think academics work in ivory towers, but many of us are studying very real world things. I took this research to both the Labour and Conservative party conferences (no shade on the smaller parties, but academic travel budgets only go so far), in the hope that one or both parties would pick up on this. Now it seems at least one of them has.

There’s hope that other parties will follow suit. And whatever your view on the level of taxes, everyone playing by the same rules is something I think all sides can sign up to.

Arun Advani, 25th November 2019

Find out more about the research

Arun Advani, Recovering the missing billions: How auditing can improve tax collection, Advantage Magazine issue 8, pp.17-18, Autumn 2019

Arun Advani, William Elming and Jonathan Shaw, The Dynamic Effects of Tax Audits, CAGE working paper series, no. 414, May 2019

Arun Advani, Who does and doesn't pay taxes?, IFS Briefing Note, October 2017

Further Reading

HM Revenue and Customs, Measuring tax gaps 2019 edition: Tax gap estimates for 2017-18, June 2019

Labour Party, Fair Tax Programme, November 2019