In recent years HM Revenue and Customs has become extremely severe in its clampdown on the shadow economy. It takes strict actions in order to reduce the “tax gap”. Special attention is paid to the tax evasions and tax avoidances, changing the traditional view on the taxation policy.
Tax gaps can be defined as “the difference between total amounts of taxes owed to the government versus the amount they actually receive” (Business Dictionary, n.d.). In the UK, tax gaps are the difference between the obtained tax and the amount that should be collected by HMRC calculations. In most cases, a tax gap is caused by means of misreporting of income, underpayment of taxes and non-filing of profit (Longley, n.d). The major causes of tax gaps are tax evasion and tax avoidance.
Tax evasion is “an illegal practice where a person, organization or corporation intentionally avoids paying his/her/its true tax liability.”(Investopedia, n.d.). Being caught, the subjects of the crime are to be under criminal charges and penalties. The amount of tax evasion in the UK makes £14bn a year (Tax evasion, 2013). In the UK, tax evasions are investigated by HM Revenue and Customs, the authority that has the power to demand and collect financial penalties. For example, two businessmen, being in charge of computer technology company, were accused of disclosure of unpaid tax. Having 12 offshore accounts, they had been evaded payment of taxes for six years and they have hid about £500,000. The businessmen were sentenced to 12 and 15 months in jail and are to pay the amount of £500,000 in total. (Manek, 2013). Not only businessmen are found to be guilty. Evading payment of taxes, representatives of different professions, such as doctors, teachers, lawyers, coaches, and others, can invest in dishonest schemes. For example, a plumber was accused of immoral tax evasion and sentenced to 12 months in jail. Without recording his profit in official lists of HMRC, he evaded about £50,000 during the five years
Nevertheless, in some cases the CPS defines the punishment in England and Wales. The Crown Office, Procurator Fiscal Service and the Public Prosecution Service consider cases in Scotland and Northern Ireland. These authorities are involved under the following circumstances: forgery, connection between the evasion and wider criminal acts, authority figure takes part in the evasion, when a secret plan by a group of people is suspected. According to the statistics, these authorities tackled 200 cheats, in 2012-11. The number of tax crimes increased up to 550 convictions in 2011-12 (Tax evasion, 2013). If the amount of tax evasion exceeds £25,000, HMRC publishes the names of people who have been found guilty in the crime. For instance, Cheshire wine merchant The Trade beverage Company has hid nearly £292,000; Nottingham knitware manufacturer Menemis, who has hid about £87,000; Bolton coach operator Brian Clifford Tattersall has been fined about £52,000. HMRC gives the most recent information about tax evasions every three months(King,2013). Though, Richard Murphy, an economist and tax expert, claims that these measures are unfair. The representatives of small businesses are shamed, while rich individuals, global corporations and much of Fleet Street(banks) remain in the shadow(King, 2013). Nevertheless, treasury minister David Gauke claims that the publication of the criminals’ names is the message for the tax-payers about “ consequences for those who refuse to tell HMRC about their full liability”(King,2013).
Tax avoidance is “the use of legal methods to modify an individual’s financial situation in order to lower the amount of income tax owed” (Investopedia, n.d.). Unlike tax evasion, tax avoidance is a legal way to reduce the taxes under payment. Tax avoidance involves artificial transactions to reduce the tax, taking advantage of taxation law loopholes. There are several major schemes of tax avoidance. First, the disposable income can be invested into an individual’s pension scheme or into schemes allowing the businesses to be successful. This scheme is known as Enterprise Investment Scheme. Having the aim to support wealthy individuals in starting new businesses, it is rather risky way of tax avoidance. The second variant is giving some of the income to charity. The third way is contributing in life insurance.The fourth one is giving a job to a husband or a wife. The fifth scheme is creating artificial losses. For example, the US company Starbucks had been paying no tax during three years. The Starbucks UK gave information about its losses not to pay corporation tax (Starbucks,2012). Google and online retailer Amazon, being criticized for sheltering their profit, continue the line. The sixth, the most popular, way is the usage of an offshore scheme. For example, the famous comedian Jimmy Carr has sheltered £3,3million, using K2 scheme. To avoid income taxes, firms make controversial loans to their staff, without paying a salary. It consists in the following steps: first, the individual leaves his/her job and signs a new employment agreement with offshore shell firms. These firms re-employ their new staff back out to the UK, taking their money. Loaning the staff a big sum of money, the offshore companies pay a small salary. These loans are represented as tax liabilities.
Realizing the urgent necessity to tackle tax avoidance, evasion and criminal attack, HMRC has become more aggressive in its investigations and penalties.
It takes key measures that include encouraging people to declare what they owe, prosecuting people who break the law, preventing avoidance by large businesses, investigating offshore tax evasion and avoidance, using data and new technology, cooperation with other countries, dealing with tax avoidance schemes(Reducing, 2013).
To reduce the opportunities for avoidance, DOTAS (The Disclosure of Tax Avoidance Schemes) was introduced in 2004. Demonstrating perfect results, it is expected to be included in the Financial Bill 2013. The disclosure regime targeted employment and certain financial products. Since August 2006, it has been extended on Income Tax, Corporation Tax and Capital Gain Tax. “In each of the last four years, over 100 new avoidance schemes have been disclosed under DOTAS”( Tax avoidance,2013).National Audit Office claims that DOTA contributed in HMRC changes tax law and prevention certain tax avoidance schemes. An avoider can use some opportunities to gain a tax advantage until the authorities prove that the deal do not correspond the tax law. This process can last for years, requiring legislation. HMRC concentrates on the tax crimes, committed by wealthy individuals. “While its high net worth unit set up in 2009 brought in £200 million of revenue that would otherwise have been lost in 2011-12, there are still 41,000 open avoidance cases,… and HMRC has yet to demonstrate how this number will be reduced” (Tax avoidance,2013).
According to the statistics over recent years, total HMRC tax gap comprised 8% in 2008, 8.6% in2009, reducing to 6.7% in 2010-11(Measuring,2010-2012). These data demonstrate the great success of controversial and strict policy of HMRC.
To sum up, HM Revenue and Customs has become extremely severe in its clampdown on the shadow economy in recent years. It has radically changed the common view on two major units of the tax gap, regarding tax avoidance as a legal way and tax evasion as an illegal way of reducing the taxation. Tax gaps are the difference between the obtained tax and the amount that should be collected by HMRC calculations. Tax evasions are illegal ways of non-payment taxes by an individual, organization or corporation. These activities are regarded as crimes. Tax avoidance is the use of legal ways to reduce the amount for tax payment. According to the new HMRC policy, tax avoidance, widely used by high-income individuals and corporations, is not equal to tax planning. On the one hand, tax avoidance is a legal way to pay little tax. On the other hand, involving artificial transactions and taking advantage of taxation law loopholes, tax avoidance is not equal to the tax planning.
Expanding its anti-avoidance and evasion activity, HMRC focuses on aggressive avoidance and offshore schemes. Special attention is paid to the tax crimes, committed by the wealthy individuals and corporations, major schemes of tax avoidance. The key ways of legal reducing of the taxes are the following: investments into an individual’s pension scheme, giving some of the income to charity, life insurance, employment own husband or a wife, creating artificial losses, the usage of an offshore scheme.
Some experts claim that, leading an anti-avoidance policy, HMRC does not run its costs and has not discovered the way of evaluation its progress. This prevents finding wise and proper decisions about the direction of its avoidance activity. They blame HMRC in finding faults with legally unprotected individuals, while transnational corporations take advantage of tax law loopholes. Nevertheless, the events of recent years deny all these objections. The cases of The Trade beverage Company, The Starbucks UK, and many others confirm these facts. According to the annual report of HMRC, “in 2011-12, £474.2 billion of total tax accrued to HM Revenue & Customs (the Department) which was £4.5 billion higher than for 2010-11”(HM Revenue, 2012). These data demonstrate the success of the HMRC tax policies.