Tax avoidance is on the rise – and the rich are leading the way

It has taken the government spending watchdog to highlight what has long been suspected, that ministerial claims to be cracking down on tax avoidance come nowhere near the mark.

Listening to them, and not only Labour but Tory ministers in recent years, you could be forgiven for supposing that Britain is a state where shielding wealth from the HM Revenue and Customs’ prying eyes is confined to the past. This was Rachel Reeves in her party conference speech last September: “We will crack down on tax avoidance and tax evasion.” And again, in her spring statement, proclaiming the Treasury will tackle “fraud committed by the wealthy, fraud facilitated by those in large corporations, and by individuals and companies who make it possible for others to hide money offshore”.

Here is the Conservatives’ Jeremy Hunt, when chancellor in 2023: “We are against all fraud and all tax evasion, and we will continue to work very hard to reduce the tax gap.” To be fair, you could take your pick of any chancellor or shadow chancellor during the last few decades and you will find a speech lambasting tax avoidance schemes accompanied by a ringing pledge to bring them to an end.

In its report, the National Audit Office (NAO) warns that the tax gap, the difference between the amount the HMRC believes is due and how much is collected, has risen, which “raises the possibility that underlying levels of non-compliance among the wealthy population could be greater than thought”.

This was evidenced by a fall in penalties imposed on the wealthy – defined as those earning more than £200,000 a year or with assets of more than £2m – from 2,153 notices totalling £16.2m in 2018-19 to 456 worth £5.8m in 2023-24. This was over a period when the number of rich individuals in the UK grew, from 700,000 in 2018-19 to 850,000 in 2023-24. This weekend’s Sunday Times Rich List showcases how the rich generally become ever richer and brings the issue into annual sharp relief.

Reeves announced tax rises aimed at the wealthy in her first Budget, including reducing the advantages enjoyed by non-doms, increasing capital gains tax and imposing VAT on private school fees. She also moved against winter fuel allowances, changed the inheritance tax rules for farmers and increased employers’ national insurance. While this latter group are going ahead and their effects will be felt, it is clear from the NAO’s findings that the wealthy have ways to escape what was aimed at them.

This does not include non-doms who are closely defined and the code that applies to them is simply applied. The reaction of many of the non-doms has been to leave the UK for other countries which are only too glad to welcome them and the money they invest and the jobs they create. In this regard, Reeves is extremely short-sighted.

No, it is more about the consistent failure of politicians to clamp down closer to home. They always talk a good game but their performance in office is lamentable. Alas, the same cannot be said for Reeves’ quick hits of winter fuel and the rest – the less well-off are easily clobbered and have no way out.

There will likely be a repeat in Reeves’ next budget, due in the autumn, as the softening-up exercise is well underway, with signals appearing suggesting extra money must be found to pay for public services and heightened defence commitments. Brace yourselves for further tax increases is the message as we head into the summer.

As well as possessing the ways, the wealthy have the means. It does not take rocket science or even the spending of more than a few minutes to gauge the scale of the UK industry devoted to avoiding tax (evading is illegal and is therefore not so brazen). There are advisers galore, all willing to engage in what is euphemistically called “tax efficiency” for a fee.

Those with the largest pots of cash can avail themselves of impenetrable trusts arranged for them in the Channel Islands, Isle of Man and further afield in the likes of Gibraltar, Cayman Islands and British Virgin Islands. Bizarrely, given the “can do, will do” boasts about launching renewed tax drives against the UK wealthy, all the places where UK firms boast of maintaining offices and connections are ours; they are UK-protected.

Nothing meaningful is ever done to curb this offshore trade. Along with tourism, it represents a lucrative source of income. Better it occurs, reasons the Foreign Office that oversees them, than they suffer and come cap in hand for London’s financial and welfare support.

In her Budget, Reeves provided additional funding for HMRC that specifically included tackling offshore non-compliance. But in its report, the NAO urged ministers to redouble their efforts to secure more of the money owed to the Exchequer. Billions of pounds, concludes the watchdog, are going unpaid each year.

Additional steps were required to make sure the wealthy paid their fair share. That did not deter a spokesperson for HMRC from still insisting in relation to the NAO report: “It’s our duty to ensure everyone pays the right tax under the law, regardless of wealth or status. The government is delivering the most ambitious ever package to close the tax gap and bring in an extra £7.5bn for public services per year by 2029-30.”

So, we can look forward to the NAO scrutinising in the future and being satisfied, then? Do not count on it.