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Whether the affluent may be evading higher tax amounts than initially estimated?

Wealthy individuals may be evading taxes to a greater extent than thought, according to a recently published analysis. Could a complicated tax system be a contributing factor?

Wealthy individuals may have greater tax evasion than assumed, with complexity in the system...
Wealthy individuals may have greater tax evasion than assumed, with complexity in the system potentially contributing to this issue.

Whether the affluent may be evading higher tax amounts than initially estimated?

Every fiscal year, the UK's tax authority, HMRC, publishes an estimated "wealth tax gap" - the discrepancy between the tax owed and the tax paid by high-income individuals. Minimizing this gap is a primary focus for HMRC. The term "wealthy" according to HMRC pertains to individuals earning over £200,000 or possessing assets worth £2 million.

The collections of additional tax by HMRC have seen a significant surge over the past five years, climbing from £2.2 billion in 2019/20 to £5.2 billion in 2023/24, due to their compliance work. This increase in revenue collection raises concerns that the problem of non-compliance among the wealthiest population could be greater than initially thought.

Initially, the tax gap was estimated to be around £1.9 billion per year. Yet, the increased revenue gained through HMRC's compliance initiatives amounts to £3 billion, which casts doubt on the earlier estimates.

The National Audit Office has suggested that the underlying levels of non-compliance among wealthy individuals might be far more extensive than previously perceived. While HMRC deserves acclaim for boosting revenue, they need to prioritize transparency to enhance the public's confidence that everyone pays their fair share, according to the head of the National Audit Office, Gareth Davies.

HMRC will examine the National Audit Office's recommendations and offer formal feedback by the autumn. They have affirmed their commitment to ensuring everyone pays the correct taxes lawfully, irrespective of their financial standing. The government is also pursuing an ambitious initiative aimed at closing the tax gap and generating an extra £7.5 billion annually for public services by 2029-30.

The spotlight on taxes has intensified in recent times following the government's announcement of a £40 billion tax increase in the Autumn Budget. Some high-net-worth individuals have reported moving abroad to enjoy more favorable tax regimes.

In her Spring Statement in March, the chancellor pledged to invest in an additional 500 HMRC compliance staff, adding to the 5,000 already slated for hiring in the 2024 Autumn Budget. The consequences of non-compliance could also become harsher, with the chancellor looking to boost the number of tax fraud convictions by 20%.

While the government is also working on digitalizing parts of the tax system to minimize errors and improve efficiency, tackling non-compliance among the wealthy is no small challenge. Taxpayers who are unaware of tax rules can inadvertently engage in non-compliance, especially given the complexity of wealthier individuals' diverse income sources and assets.

Despite the increased tax burden on the wealthy, who account for 2% of the taxpaying population, they paid £119 billion in personal taxes in 2023/24, or 25% of the entire amount collected. High-net-worth individuals are taking legal steps to reduce their tax liabilities by holding assets in trust, investing in tax-efficient schemes, or carefully timing the sale of assets to leverage tax-free allowances.

However, the complexity of the tax system can make it harder for many taxpayers, and the rules increasingly appear to be becoming more difficult to navigate. A cross-party group of MPs mentioned this in a report published earlier this year. Complexity can lead to mistakes, create opportunities for avoidance and evasion, and ultimately complicate the picture for the wealthy.

Subscribing to a personal finance newsletter could provide valuable insights for those seeking to understand the intricacies of investing and managing their finances, given the increasing complexity in the tax system. In light of the government's focus on boosting revenue collection and tackling non-compliance among the wealthier population, it's essential for individuals to stay informed about changes in personal-finance policies and regulations.

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