Economics

Shaking the magic money tree

Danny Alexander and George Osborne have both promised to boost revenues by cracking down on tax avoidance

December 18, 2013
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Who said what to whom?The Chief Secretary to the Treasury Danny Alexander told the Liberal Democrat conference in September that new government measures to crack down on tax avoidance could provide an additional £10bn per year of tax revenues by 2015. The Chancellor George Osborne has been more modest, scoring an additional £2bn in revenues for 2015 in his Autumn Statement.

What does it mean?New policies are being funded through this crack down on tax avoidance. In the Autumn Statement, this included the extension of free school meals, the transferable tax allowance for married couples and the promise to freeze fuel duty.

But, if Her Majesty’s Revenue and Customs (HMRC) is less successful in shaking the magic money tree of tax avoidance than Ministers are hoping, then these policies will have to be paid for via more government borrowing or cuts in public spending somewhere else.

What could go wrong? The problem for the commitments made by both Danny Alexander and George Osborne is that HMRC seems to be struggling.

The Public Accounts Committee has discovered that HMRC “massively over-estimated” how much it could collect from UK holders of Swiss bank accounts (a change resulting from an earlier tax avoidance crackdown). The 2012 Autumn Statement estimated that in 2013-14 HMRC would recover £3.12bn unpaid tax from the Swiss bank accounts of UK taxpayers and this figure was built into budget estimates. So far it has collected just £440m.

That’s a big shortfall, and if repeated on new tax avoidance measures, then the Treasury could be short a lot of money in 2015.

When will we know? The Public Accounts Committee will keep working away at the detail of this; and indeed they have to, it’s an audit issue. If the government is due this money, and it isn’t being collected by HMRC, then that’s a serious matter; if Ministers have made public spending decisions on the basis of future tax revenues that don’t materialise, that’s even worse.

Commitment rating: 4Ministers have said what they’ve said, and made spending decisions accordingly. No one will want to face up to additional borrowing or more cuts elsewhere because of underperformance on tax collection. The thing to watch for will be when the operating budget of HMRC is boosted in coming months: spend a little more there and it will save a lot of other pain.