Initial reactions to the announcement of a 70th birthday funding boost for the NHS were broadly positive, with Government statements promising an extra £20 billion for the health service by 2023-24. The money will come from the 'Brexit dividend', from higher borrowing and from increased taxes. The Prime Minister insists that tax increases will be imposed in a ‘fair and balanced way’, with the Chancellor of the Exchequer making it clear that details of the actual settlement cannot be confirmed until the Autumn 2018 Budget at the earliest.
But why the rush to raise new taxes? Why not put more resources into collecting what’s already due? Stamping out tax evasion and clamping down on the shadow economy could pay for around £8 billion of the promised £20 billion.
Last week, HMRC published the latest tax gap figures. The tax gap is HMRC's estimate of the amount of tax which ought to be collectable but which never reaches the Treasury’s coffers for a variety of reasons. Those reasons reflect everything from the inability of honest taxpayers to meet their liability, through to deliberate criminal activity.
The tax gap is £33 billion, which is 5.7 per cent of the total tax collected. For every pound of tax lost in the tax gap, honest taxpayers suffer tax increases. It's in everybody's interests that the tax gap is reduced significantly and rapidly, especially if the country has to find an extra £20 billion every year for the NHS.
The most worrying aspect of the tax gap used to be tax avoidance which still costs the UK £1.7 billion a year. However, the real problems now are tax evasion and the hidden economy. In 2016/17, these cost the UK a whopping £8.5 billion in lost taxes. That's five times the amount lost to tax avoidance. While the consistent message from Parliament is that tax avoidance is the big evil of our times, at least on the tax front, the tax gap figures published by HMRC prove beyond doubt that tax evasion and the shadow economy are far bigger problems.
The Prime Minister, the Health Secretary and the Chancellor of the Exchequer must explain why they are rushing to impose new taxes, in a ‘fair and balanced way’ we are told, on honest taxpayers when £8.5 billion is lost to dishonest taxpayers through tax evasion and the hidden economy. What's fair about that? Surely it would be fairer to give HMRC more resources to bear down on tax evasion and the hidden economy in the same way that it has successfully tackled tax avoidance?
And let's not forget that taxes have been partially devolved to Northern Ireland, Scotland and Wales. Where funding is provided to policy areas falling within devolved competencies, such as the NHS, there would ordinarily be Barnett formula consequentials. However, if additional funding for the NHS is based on new rates or bands of income tax, the Government will face some difficult negotiations to avoid further constitutional unrest. It would not sit comfortably with taxpayers in Scotland, Wales or Northern Ireland if their income tax was seen to be funding NHS England, or indeed if resulting Barnett consequentials implied that English taxpayers were indirectly funding health services in other parts of the UK.
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