EVASION BY SMALL BUSINESSES

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EVASION BY SMALL BUSINESSES

HMRC commission a fair amount of research from research companies and in the interests of transparency tend to publish the reports.  Some of these reports make interesting reading but some don’t.  I have been reading one on “Understanding evasion by Small and Mid-Sized Businesses” and am wondering what, if anything, HMRC get for their money.  The report is qualitative research which apparently is designed to reveal a target audience’s range of behaviour and the perceptions which drive it with reference to specific types or issues.  It uses in-depth studies of small groups of people to guide and support the construction of hypothesis (per the Qualitative Research Consultants Association).

The report makes fascinating reading.  Unfortunately I have two problems with it.  The first is that I am sceptical to what extent a tax evader (which I assume to be someone who has been caught out in having lied to HMRC) is likely to give honest answers to a researcher probing the reasons for his past dishonesty.  The second is that the key findings do not reconcile with my own experience.  The report identifies four core types of evader:

a)      unthinking evaders, for whom low level evasion is habitual, and often adopted without thought,

b)      invested evaders, for whom evasion is seen as an unfortunate financial necessity in order to stay in business,

c)      lifestyle evaders, for whom evasion enables a life-style otherwise out of reach, which they feel is justified by the taxes they do pay,

d)      systematic evaders, where evasion is actively considered and integral to the business model.

I have a fair amount of experience of tax evasion – from the perspective of helping evaders to come clean I hasten to explain – and I find it hard to fit my typical evader into any of those categories.  This is because under all of those types of behaviours the cash is either spent or invested in the business, yet my experience is that while some of the cash may well be spent, most of it is diverted away from the business and put into some form of savings.  If that were not the norm, I doubt that many tax evaders would come forward and confess their crimes.  If a person has not created the wherewithal to make a financial settlement, it is hard to see how he can make his peace with HMRC.  It is equally hard to see why anyone should want to tell HMRC that he owes them a large amount of money if he can see no way in which he can settle that debt.

I am also concerned about what the report says regarding agents, bearing in mind that the researchers did not actually talk to any agents and there is an obvious risk that a tax evader may seek to shift the blame by saying, for example, “my accountant must have known that I was not declaring everything”.  Thus the report says … “Agents may be unaware of the full extent of evasion taking place …  However where agents are used primarily to reduce taxes due, a minority may be complicit in evasion to some extent”.   The report later says, “A minority appeared to engage in evasion on the advice of an agent (who might for example point out personal expenses that could be put against the business) …  Businesses typically chose not to inform agents of any activities which were known to be high-risk evasion, since it is understood that agents would not be comfortable with the level of risk involved.  Ultimately how the agents was used (and the extent to which that advice was followed) was determined by the business attitudes and perceptions in relation to tax”.  Under a heading of “perceived risk”, it later says, “Evasion behaviours were believed to be safe on the basis that… agent involvement may also have provided a sense of security (on the basis that the agent would not allow anything to appear on record which could cause problems later)”; and under “Opportunity” it says, “In some cases, agents may have played a role (whether knowingly or not) in raising awareness of opportunities or flagging risky behaviours”.

So the report is saying that some of us actively encourage evasion, others turn a blind eye to it knowing the client is evading tax, others are comfortable with evasion provided that it is not documented, and some of us advise clients to change their ways but are indifferent as to whether or not they accept that advice.  Of course the report does stress that it is a minority and does not speculate on how large that minority may be.  Nevertheless it is frightening if the authors are right in any of these respects.  No wonder HMRC seem to have so low a view of the tax profession if that is what their outside advisors are telling them.

So what can be done to prevent evasion?  The authors say that “Actions intended to tackle evasion and improved compliance… could be more visible and [HMRC should] work harder to cut through the dominant media noise, social norms and market pressures in order to meaningfully impact on evasion behaviour and “promote compliance”.  They suggest that HMRC should “increase the perceived likelihood of getting caught”.  This could be done by promoting awareness of HMRC’s capabilities/tools available to catch those who evade.  Yes of course HMRC should do this but, as much evasion takes the form of not declaring cash income or claiming business-type expenses where the motive is a personal, not a business one, it is not readily apparent what capabilities and tools HMRC have available to detect such things. HMRC’s database program, “Connect” is a very powerful tool for collating information, but it cannot identify either non-information or motive – other than to the extent that it can highlight differences between businesses of the same type which can point to large scale evasion but not to a lot of the fairly petty evasion that the report highlights.  For example, it gives as an example taking home toilet rolls purchased by the business.  I suspect no accountant has ever sought to compare toilet roll purchases with likely business usage to try to detect pilfering.  But I also suspect that Connect cannot do this either!

Their second recommendation is to “improve understanding of potential consequences”.  Apart from the risk of getting caught, which seems minimal in relation to low-level evasion, I doubt that many taxpayers (or rather non-taxpayers) are likely to be unduly concerned about either late payment fines or media coverage, which are the only examples the report identifies.

Finally, they tell HMRC to “tap into what matters, beyond the consequence itself”.  They accept that “there is no silver bullet for tackling evasion” and tell HMRC, “In order to be compelling, interventions must be personally motivating, going beyond the immediate impact of the consequence itself, to get under the skin of what this would actually mean to the business”.  They suggest HMRC might play on an individual’s position in, or perceived responsibility toward the State, the consequences of the publication of evaders name through localised channels, the possible impact on employees who may be innocent bystanders to the evasion taking place but would share in the consequences non-the-less; and most effective of all, leverage personal ramifications and broader consequences for the individual and their family.  Leaving aside the fact that HMRC do not have (and probably never will have) the resources to address every taxpayer individually, it is not clear how HMRC are expected to identify who is evading tax so as to decide on the right personal motivation to use.  If HMRC could identify evaders they would not have a need to commission research reports on understanding evasion.

I hope that HMRC feel that this report represents value for money.  As a taxpayer, I do not!

ROBERT MAAS