Labour set out plans to reduce tax gap and close non-dom ‘loopholes’

The proposals were revealed by Shadow Chancellor Rachel Reeves in a series of announcements on 9 April.

Framing the announcements as ‘taking on the tax dodgers’, Reeves said that: “At a time when working people in Britain are being asked to pay more in tax because of the Conservatives’ economic failures, it is wrong that a minority continue to avoid paying what they owe.”

She said Labour’s plan would “give HMRC the resource it needs to go after those who are avoiding or evading tax, and to modernise the tax office so we have a system that is fit for purpose.”

Labour estimate the tax gap plan will raise more than £5 billion a year by 2029-30. The party has said it will use this to fund more appointments in NHS hospitals, new scanners, extra dentist appointments and free breakfast clubs for all primary school pupils.

Taking on the tax gap

Labour’s plans for improving tax compliance are set out in a 15 page paper: ‘Labour’s Plan to close the Tax Gap’.

The party describes the UK tax gap – the gap between the tax HMRC believe is due and tax actually paid – as remaining “stubbornly high”. They accuse the Conservative government of having “no plan… to bring it down” and claim that the government’s tax digitisation plans are “floundering”.

They point to comments by the head of the National Audit Office, in an interview with the Financial Times in January, that there is £6 billion annually that could be recovered through a concerted effort on tax compliance.

Under Labour’s ‘invest-to-save’ plan, up to £555 million of additional funding will go to HMRC each year to boost tax income by:

• Bolstering the number of compliance officers working out of the tax office by up to 5,000 to increase the number of investigations, tackle fraud and ensure tax owed is collected.
• Investing in digitisation of the tax office to improve compliance rates and customer services, and free up resources to focus on more complex cases.
• Working with businesses, the tax profession and digital service providers to bring a new focus to HMRC’s modernisation, including greater use of AI – learning from industry and best practice overseas to make sure its scope is ambitious, whilst having new, achievable timescales for delivery.

Where would Labour’s compliance focus be? The party says they would focus additional resource on segments with the greatest complexity and return (mentioning larger businesses in particular). “Among other groups including smaller businesses, upstream compliance activity is a better use of resources to improve compliance yields”, they suggest.

The party also promises a focus on offshore tax compliance, informed by the findings of the first offshore tax gap estimate, due to be published in Summer 2024. Additionally, some of the extra money would be designated ‘blockbuster’ funding to be used on strategically important criminal cases, as determined by HMRC working with other departments and agencies.

Alongside resourcing, the party says there are additional legislative and regulatory changes that could help to tackle tax non-compliance. Measures they would consider (they describe them as “options” are:

• Taking forward the outcome of the current review on regulating the tax advice market.
• Requiring a wider range of tax schemes to be reported to HMRC, under the disclosure of tax avoidance schemes (DOTAS) rules.
• Strengthening HMRC’s powers to enforce payment of tax in an investigation case.
• Quarterly reporting to relevant ministers on volumes and nature of criminal powers deployed by HMRC’s investigations teams.
• Explore whether the tax gap could be further reduced if Deferred Prosecution Agreements, currently only used for corporate bodies, could be applied to individuals for tax evasion.

Customer service

While customer service is not the central focus of Labour’s paper the party does acknowledge the importance of effective customer service in increasing tax compliance: “This is because it makes it easier to pay the right amount of tax the first time, reducing errors that need to be corrected later.” Current poor service “means that more and more taxpayers risk making errors in their tax returns”, they add.

In particular the paper notes CIOT comments that poor HMRC service levels are having a negative impact on the wider economy, because of their impact on the ability and costs of doing business, in addition to harming tax compliance and trust in the tax system.

The paper states that Labour would “seek to improve the core customer service offer.”

The party is not explicit about how this would be done and in particular whether any of the additional funding would go into customer service personnel.

The party does say that it sees investment in digitisation as a route to improving both compliance and customer service noting, among other things, the lack of email correspondence routes for taxpayers to speak to HMRC.

The party says the modernisation of HMRC can reduce the tax gap from error (as well as other elements), as well as “improving the experience for individual taxpayers” and “driving productivity gains for businesses”.

Expert panel

Alongside the tax gap paper Labour announced that it has appointed an expert panel to advise on the party’s work on improving tax compliance and modernising HMRC.

The panel will be chaired by the Shadow Financial Secretary James Murray and include:

• Sir Edward Troup, former HMRC Permanent Secretary and former Treasury special adviser on tax
• Dame Margaret Hodge MP, former chair of the Public Accounts Committee and current chair of the All-Party Parliamentary Group on Anti-Corruption and Responsible Tax
• Bill Dodwell, former tax director of the Office for Tax Simplification and former CIOT President
• Mike Bracken CBE, founding partner at Public Digital, and founder and former executive director of the UK Government Digital Service

The panel’s remit includes:

• Tax compliance, including strategic and operational issues relating to increasing compliance and enforcement of the rules, as well as any legislative changes to HMRC’s powers and penalties. This will also cover how HMRC works with others to enforce the law.
• Digitisation, including the future of ‘making tax digital’ and the ‘single customer account’, as well as other issues such as replacing legacy systems, and taking full advantage of new digital opportunities and technological advances.
• Customer service, including how to balance the needs of more complex cases and vulnerable taxpayers and the need to offer forms of support to all taxpayers.

The remit excludes:

• Setting a budget for HMRC as an organisation, although discussion of where to focus any additional investment and where savings can be made may be included.
• Tax policy outside of administration including rates, thresholds and reliefs.

The party has said the panel will meet likely three times before the general election. The exact number and timings of meetings will depend on the timing of the election. The output will feed into Labour’s manifesto and plans for government. 

Closing non-dom ‘loopholes’

On the same day as the HMRC proposals were published Labour announced plans for changes to the Conservative government’s plans for taxation of non-doms.

Labour said they support most aspects of the proposed replacement for the non-dom rules, but are concerned that “major loopholes” remain.

Consequently the party would:

• Include all foreign assets held in a trust within UK inheritance tax, whenever they were settled, so that nobody living in the UK permanently can avoid paying UK inheritance tax on their worldwide estates. By not doing this, Labour suggest the current government is foregoing approximately £430 million in IHT a year.
• Not give a 50% discount in the first year of the new rules. Labour say this would raise a one off £600 million.
• Consider whether there should be an investment incentive during the four-year window, so that UK investment income is free of UK tax and not disincentivised versus investment elsewhere in the world.
• Explore ways to encourage people to remit stockpiled foreign income and gains (FIG) to the UK, to “end the legacy of the current non-dom rules”.