Labour announces plans to close the tax gap

Proposals include additional HMRC compliance resource, technology investment and establishment of an expert panel to advise on the plans

Labour plans additional resource and investment for HMRC, as well as an expert panel

Should Labour win the next election it aims to deliver an extra £5 billion of tax per year by the end of the next Parliament by providing HMRC with additional compliance resource and investing more in HMRC’s technology infrastructure and digital services. In addition, it has announced the appointment of a panel of experts which will help inform its plans. Labour has also issued a response to the Government’s non-dom reforms with additional proposals intended to raise £2.6 billion of tax over the course of the next Parliament which we cover in a separate article.

On 8 April 2024, the Labour Party unveiled its plans for closing the tax gap. It cites HMRC figures which show that the difference between the total amount of tax expected to be paid and the total amount of tax actually paid is approximately £36 billion, which represents 4.8 percent of theoretical tax liabilities for 2021/22.

Labour’s plans include providing up to 5,000 additional compliance staff focusing on areas such as:

  • Segments with the greatest complexity and return, including larger businesses and upstream compliance activity among smaller businesses;
  • Offshore tax compliance;Improved quality control of compliance checks;
  • Using external commissioned resource to raise revenue in the short-term;
  • Restoring a deterrent through criminal cases; and
  • Improving customer service.
Labour also proposes additional investment in technology by reversing the Government’s planned reduction to HMRC’s capital budget of approximately £300 million in 2024/25. Labour estimates that this will generate £1 billion in extra tax by 2029/30 with the spend being targeted at digitisation to improve compliance and customer service, and longer-term investments to update technology across HMRC.

The announcement also proposes legislative and regulatory changes that Labour thinks could help reduce non-compliance. These include:

  • Taking forward existing plans to regulate the tax advice market;
  • Widening the scope of the Disclosure of Tax Avoidance Scheme (DOTAS) regime;
  • Strengthening HMRC’s powers to enforce payment of tax in an investigation;
  • Non-public quarterly reporting on criminal powers deployed in tax investigations; and
  • Exploring extending the use of Deferred Prosecution Agreements to individuals.

Labour proposes to use some of the additional tax raised to fund its NHS and school breakfast club plans.

Linked to this, on 9 April, Labour announced the appointment of an expert panel to advise on improving tax compliance and modernising HMRC. The scope of the panel will include increasing tax compliance and enforcement, digitisation of the tax system as well as replacing legacy IT systems, and customer service. The panel will not be involved in setting budgets for HMRC, nor will it advise on tax policy outside of administrative matters.

The panel will be chaired by James Murray MP, Shadow Financial Secretary to the Treasury and will 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;
  • Bill Dodwell, former tax director of the Office for Tax Simplification; and
  • Mike Bracken CBE, founding partner at Public Digital and founder and former executive director of the UK Government Digital Service.

The intention is that the panel will meet several times before the General Election with the output feeding into Labour’s manifesto commitments.