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Are we hobbling the UK’s ability to collect tax fairly?

This blog was written for Fair Tax Week 2023. Find more events and content here!

Poll after poll shows the same thing – there’s an overwhelming belief that the UK’s system favours the rich, and this is deeply unfair. According to Fairness Foundation polling released last month, 68% of people (including 64% of 2019 Tory voters) think the government should be taxing the wealthiest more, and 75% are concerned that the wealthiest have too much influence over our political system. 

So there’s a widespread consensus that our tax system needs to be reformed amongst everyone but our political class. 

In fact, we may be about to see the tax system get even more unfair. A few months and several prime ministers ago, then-Prime Minister Boris Johnson issued a demand that the Civil Service cut their headcount by 91,000 jobs. Since then, Ministers have clarified that they’re no longer sticking to this target – but they are still planning “significant cuts”. Cabinet Ministers Oliver Dowden and Alex Burghart both told MPs this year that cuts would be going ahead, with the goal of reducing the amount of people who work in the Civil Service.

This would include HMRC, where permanent secretary Jim Harra told MPs they were on track to reduce headcount to 2016 levels. And it seems the cuts are moving from plans to real, with the Department for Work and Pensions cutting 1,100 jobs this March.

What’s this got to do with tax fairness? Well, any understaffed or underfunded tax system will struggle to collect tax, and the impact of that is usually deeply unequal. 

During Covid, 1,350 HMRC staff were moved from working on tax compliance – tracking down those avoiding tax and forcing them to pay – to Covid support, and the impact was enormous. Without those staff, an estimated £9bn of owed tax escaped payment.

So any reduction of HMRC’s ability to investigate tax will benefit tax dodgers, but it will particularly benefit the wealthiest. The structure of the UK’s tax system and the loopholes within it allow those with the most resources to benefit the most.

This isn’t the only way that HMRC’s ability to tax the wealthy is being hobbled. Recently, the Good Law Project and Ecotricity’s founder launched a legal challenge to HMRC on the “carried interest” loophole. This was lobbied for by the private equity industry in the late 1980s, allowing money made to be taxed as “capital gains” (28%) rather than as “trading income” (40%). But it was never law, according to research; HMRC was simply lobbied into choosing to reduce the tax bill on the richest by around £600m.

It may sound bureaucratic, but the operation of national tax collection agencies like HMRC can be subject to enormous pressure from the wealthiest. In the US, Republicans regularly demand enormous cuts to the IRS, their tax collection agency, despite clear research showing those cuts would cost far more in lost revenue than they’d save. As the UK’s political system becomes increasingly influenced by American debates, we need to resist any similar attempts to hobble HMRC’s ability to hold the wealthy to account. Any fairer tax system (which the UK desperately needs) requires a strong civil service to operate it.

Dario Goodwin, Senior Digital Engagement Officer for The Equality Trust