HMRC publishes new research into tax evasion

Tax and the Agricultural Sector

Agriculture is an important part of the British economy, accounting for nearly half a million jobs and worth more than £8 billion. The taxation of this sector is key – not only to the sustainability of the agricultural industry itself but also to the fiscal revenues generated.

Farming taxation is frequently seen as challenging and complicated due to the number of specific reliefs, valuations and unique situations that do not exist in other industries.

SME tax evasion

HMRC recently released a comprehensive study into the nature and motivation behind small business tax evasion. According to HMRC figures, the total tax gap from evasion is £5.2 billion. The suggestion is that just over half of this is attributable to the SME sector.

The survey was based on a series of telephone and face-to-face interviews with a fairly narrow sample of 45 small businesses.

It identified four key types of evaders:

  • Unthinking evaders: where evasion is fairly low level and is often ‘adopted without thought’
  • Invested evaders: who believe that they need to evade tax to stay in business
  • Lifestyle evaders: who deliberately reduce their tax liabilities to maintain their lifestyle, feeling that the taxes which they DO pay justify the evasion
  • Systematic evaders: where the activity is intentional and integral to the business model

The survey also analyses the factors which influence the adoption of evasive behaviour. On the positive side, it sees a ‘personal code’ or ‘contract with society’ (perhaps personal conscience). These tend to reduce evasion as does the presence of a tax agent.

Factors which increase evasive behaviours include:

  • The blurring of boundaries between personal and business matters
  • Perceived need for financial reward, whether to stay in business, expand the business or enable a more expensive lifestyle
  • Perception that the risk of evasion being detected or punished is low
  • Opportunities such as cash paying customers, family employees who might collude or a business where expenses can be overclaimed
  • External influences such as the perception that evasion is commonplace or that the amounts are small compared to the tax liabilities mitigated by national and multinational businesses

Finally, the survey looks at what HMRC might do to reduce this element of the “tax gap”. It appears that existing measures such as the provision of help and information from HMRC are largely ineffective.

Instead, steps should be taken to:

  • Increase the perceived likelihood of being caught
  • Improve the understanding of the potential financial consequences
  • Most importantly, raise awareness of the implications of evasion for others beyond the main taxpayer, such as family, employees or even the continued existence of the business itself

John Billings, Head of Agriculture & Rural Business, commented on the survey: “This is a report based on interviews with a small sample of self-confessed tax evaders, none of whom were involved in farming. We do not believe it is representative of the sector as a whole, and we would be concerned if HMRC used this very narrowly based report as a basis for actions which could needlessly cause concerns for the vast majority of law-abiding businesses”.

If you would like further advice regarding your agriculture property or business, please contact our Rural Business tax team on 01903 234094.