Tackling tax evasion
Increasing tax revenue without raising taxes
For the last decade, the HMRC has estimated that at least 6% of tax revenue (around £33 billion) goes uncollected every year. Dr Arun Advani researched tax compliance and the long-term effects of tax audits, to determine whether simple changes to tax administration could reduce the amount of revenue lost to the government. His findings encouraged the UK government to approve resourcing for more HMRC auditors, which has potential to bring in billions in additional tax revenue. The recommendations have attracted interest from tax administrators in Ethiopia, New Zealand, Norway, India and South Africa.
The UK ‘tax gap’ – the difference between tax revenue owed and tax revenue received – runs into billions every year. Yet the number of audits undertaken by the HMRC had declined over the past fifteen years. The team wanted to understand whether more and better targeted audits could help to reduce the tax gap and bring in more revenue. The research showed that if HMRC had additional resources to allow for more targeted audits to be carried out, then the rise in collected tax could be huge.
Dr Advani and the team undertook two main strands of research:
Identifying which groups were the least compliant amongst those making self-assessment tax returns
Monitoring how audits affect the behaviour of non-compliant taxpayers
The research found that just over a third of self-assessment taxpayers under-report their income. Just 4% of self-assessment taxpayers account for more than 40% of the missing revenue. Non-compliance is greatest among men, and in the hospitality and transport industries. Particular income sources, such as self-employment, have higher rates of non-compliance, but this problem is reduced when incomes are also reported by third parties. Crucially, they found that people who were audited continue to pay higher taxes not only immediately following the audit, but for five to eight years afterwards.
Through meetings and panel discussions, Dr Advani encouraged UK policymakers to implement more and better targeted audits to significantly improve tax compliance. His engagement led to the inclusion of resources to employ 1,300 additional auditors in the spring 2020 Budget. Estimates suggest that these additional auditors will bring in an average of £770 million per year in extra revenue (almost £600,000 per auditor).
The Labour Party’s Fair Tax Programme, launched before the general election in 2019, promised to commit the resources for 200,000 more targeted tax audits per year based on Dr Advani’s advice. Tax Justice UK drew on Dr Advani's work in its Manifesto for Tax Equality, published during the election, to encourage a hard line on tax inequality and compliance. Dr Advani has also presented his findings to policymakers looking to improve tax compliance in Ethiopia, New Zealand, Norway, India and South Africa.