Wednesday, 17 November 2010

The Collapse of the British Tax System

Recently I watched an episode of the long-running BBC television programme 'Panorama'.  The particular programme was entitled 'Are You Paying Too Much Tax'.  It featured a number of case studies of people sent erroneous and often conflicting information by Her Majesty's Revenue & Customs (HMRC) the part of the civil service responsible for assessing and collecting tax.  One couple had been sent 13 different tax codes in the space of a few weeks.  The tax code determines how much PAYE (Pay As You Earn) tax you pay.  PAYE is the way that most people have tax taken from them, only the self-employed tend to avoid it.  Around 40 million people pay tax through PAYE.  The PAYE system is simple, most people do not study their tax code in detail and assume their employer is deducting the correct amount of tax. This year due to problems with new software being introduced 1.4 million people had underpaid by a total of £2 billion (€2.28 billion; US$3.44 billion), but 1.8 million had overpaid by a total of £4.3 billion.  In total 6 million may have been affected by some errors in the past two years and a total of 18 million people if cases from before 2008 are included. 

The key problem was the introduction of the NPS software which was supposed to make tax assessment and collection more accurate and efficient.  However, as anyone who has worked with databases at any scale knows, significant errors creep in when moving over to a new database. A classic case of this was when the 1901 census was put online.  First the database was populated by prisoners who put 'bastard' or some other derogatory phrase beside anyone listed as a police officer or prison warden.  Then it was shipped out to India where in ignorance of British surnames, it was assumed from the lists that 'Ditto' was by far the most common surname in the UK in 1901.  These were extreme examples, but always errors creep in because humans especially low-paid data entry clerks, are fallible.

There is also a long history of government departments suffering greatly from failing software.  Just this year the £12.7 billion NHS (National Health Service) computerised record system was deemed 'close to imploding'.  The project, called the National Programme, has already lasted seven years with failures in software and over-runs in implementation, unsurprisingly numerous companies have pulled out or slashed their bills for the work.  You can find articles going back into the early 2000s around failed IT projects in the NHS for a whole variety of activities, often over-running.  Partners like Fujitsu seem to come back to work for the NHS only to fail and withdraw again.

Air traffic control in the UK has also suffered a great deal from IT and software errors.  Twice in 2000 software 'glitches' shut down British air traffic control for hours.  The move of British air traffic control from West Drayton near London to Swanwick near the south coast was supposed to overcome such problems.  The move did not occur until 2002, six years later than originally planned and even then software problems continued and even in 2008 they were still suffering disruptions due to the software.  It was a similar story at Prestwick which handles Scottish airspace.  In 2009 there was another computer failure at Prestwick, preventing cross-Atlantic flights.   These are just two examples of how important parts of organisations linked to the government (air traffic control was part privatised with the formation of NATS - National Air Traffic Services in 2001), suffered and continue to suffer from computer and software problems.  You could have predicted something similar for the HMRC.

Tax is becoming more complex for individuals because many of us have more than one job at a time or pick up short periods of work which we do not pay PAYE tax on.  Since the early 2000s far more people have had to do their own tax returns in the way that everyone seems to in the USA, but at least if you do that then you have an idea of what figures are going in and you can tell quickly if what you are being asked to pay seems wrong.

Now, in January 2010, even before the October cutbacks were even dreamt of ('nightmared of' may be more accurate), the HMRC had announced the closure of 130-200 offices and redundancy for 25,000 staff .  The amount of unpaid tax that was going to be written off, i.e. tax the HMRC was no longer going to pursue had already risen from 23% in 2006 to 40% in 2009.  It is estimated there is £17 billion owed in unpaid tax and for a sizeable minority of those people, generally rich, self-employed people, they will now not ever be pursued.  The amount of current unpaid tax is equivalent to 2% of all government expenditure in 2009 (£631 billion) and more than double what is spent on international development; welfare (excluding pensions) took £97 billion in 2009; defence £42 billion, so though while it would not dent those figures greatly, it is a significant amount.  In October it was announced that the budget for HMRC would be cut by £990,000 but it was assumed that £7-8 billion would be recouped in going after unpaid tax, though presumably not the £1.5 billion of the bills that arose from the computers which it now seems to be being written off too, due to popular pressure.  If the HMRC recoups less revenue then its funding will effectively fall further.  It has seen a 24% reduction in staff since 2004 even under Labour and a further 14% (around 10-12,000 staff) in the next five years; staffing will be 58-60,000 compared to 105,000 back in the early 2000s.

It seems ironic that when we know that there are billions of pounds of unpaid tax and the computer system is worsening the situation, that the part of the civil service which brings in revenue is being cut even further.  It clearly has been unable to do the job for the last five years (even 23% tax avoidance seems high) and this will worsen in the future.  What is this going to mean to the average tax payer?  Well, as anyone who has tried telephoning a UK tax office knows, you are very unlikely to have your phonecall answered.  The woman in my house tried for 1 hour per day for 3 days without getting a reply.  It is clear that many more of us will get the wrong amount of tax taken off us.  Those people who work in a number of jobs or freelance and quite often get over-taxed as each employer charges you at the full rate, will probably never see their overpayments refunded. 

Of course, in contrast to ordinary people, the government and their allies will be laughing.  The Conservatives have always pushed to reduce tax levels, but it is clear now, that when that is not politically acceptable, they simply let their rich supporters not pay any tax at all or only the amount they wish to pay.  Lord Ashcroft  former treasurer of the Conservative Party, and David Rowland who was offered the post next but withdrew both went into tax exile or failed to pay taxes in the UK.  Ashcroft saved £127 million in taxes by not being resident in the UK. 

'The 'Guardian' quoting Robert Peston gives a wonderful illustration of how much Sir Philip Green, an advisor to the Coalition Government avoided paying on a single dividend  in 2005: ' ...a tax saving to Sir Philip that has been estimated at £300m. That one dividend payment ... was equivalent to what 54,000 people on average earnings would earn in a year, would build around 10 secondary schools capable of educating some 13,000 young people, or, if paid in an unlikely column of pound coins, would tower 2,350 miles about the Earth's surface.'

Lord Laidlaw a big funder of the Conservative Party and because he was made a lord, a member of the House of Lords, part of the British parliament, stopped funding the party due to questions over the amount of tax he was paying.  He is a resident of Monaco, not the UK.  Of course, these four are only a miniscule fraction of the 6 million British tax exiles.

These men are just the tip of the iceberg.  I think as a sop to people like me, the government says it is going after 'offshore' accounts held by people who owe tax in the UK.  Apparently British people have £125 billion in Swiss banks and in an agreement with Swiss authorities £3 billion of unpaid tax on such money will be repatriated; close to £1 billion is supposed to come back from Liechtenstein and another £1 billion from other tax havens around the world, though not the Cayman Islands which apparently has the largest amount of British money held overseas to avoid tax.  Even with a larger, better funded HMRC these people have been getting away with massive tax avoidance.  How much easier is it going to be for such people now that the HMRC is being shrunk further and its funding reduced?  Of course, these people tend to be Conservative voters and particularly supportive of the hard-line New Right policies Cameron has adopted.
Thus, as with so much of the current government policies, the approach to the HMRC means that ordinary people will suffer more.  We will get confused statements without explanation, may be under or over charged without our knowledge and then be asked for the money back or have to wait for years for our refund, if it ever comes.  I believe I have paid £16,000 too much tax because of confusion over me selling my flat to buy a house (they assumed I owned more than one property at a time, which I never did, I have only owned one property and part of another in my life and never at the same time) but I have no hope that my query will ever be answered.  In the meantime, those who have already saved millions in tax will find it even easier to avoid paying any tax and presumably will be freer to reward their friends in the Conservative Party and to spend their money on boosting the income of Monaco or Belize or some other tax haven rather than contributing to the ailing UK economy.  Every week it seems there is just yet another area in which the ordinary people of the UK are rapidly and vigorously being shafted so that the privileged can benefit even more than before.  Clearly I should set up an IT or software company specifically selling defective systems to government departments, that would keep me in work for 6-7 years and pay me millions even if I produce nothing that works.

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