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Zahawi’s resignation won’t be enough. The entire UK tax system needs fixing

OPINION: Paying tax is a social act, a contribution to a better society. The government is jeopardising that

Alex Cobham
27 January 2023, 1.50pm

See you later: disgraced former chancellor and Tory Party chair Nadhim Zahawi, pictured in February 2022

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WIktor Szymanowicz/NurPhoto

Nadhim Zahawi’s tax position is not inherently very important. His presumably imminent resignation as a cabinet minister and chair of the Conservative Party even less so. But what this scandal tells us about the state of UK governance should worry us all.

The reported £3.7m that Zahawi failed to pay in tax is immaterial – a drop in the ocean when compared with the hundreds of millions in public funds that the government has distributed to insiders during the Covid pandemic and through the pork barrel politics of ‘levelling up’.

But tax matters for much more than just revenues. Tax is the glue in the social contract, the price we pay for civilisation. It’s a social act – a reflection of our belief in a better society, and a contribution to it. Tax is paying it forward.

If we weighed up only the penalties and the chances of being caught not paying tax, it might be ‘rational’ to be much complaint. But a good deal of tax-paying depends on two things. First, our perception that tax revenues support redistribution to those with greater need – which means we need to be able to trust the state is working as it should – and second, our perception that other people are also compliant (because nobody wants to be the only mug).

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These are compromised when governments start to undermine their own tax authorities, and the rot sets in quickly. The UK government may have already crossed a crucial tipping point.

Consider that Zahawi’s apparent tax abuse was entirely visible from documents in the public domain. Kudos to tax lawyer Dan Neidle for putting the pieces together. But this raises questions over where HMRC was – why, given the department had all the relevant tax returns, didn’t it spot the mispayment?

Then there’s the genuinely shocking fact that Nadhim Zahawi reportedly negotiated a deal with his own civil servants while he was chancellor. In this case, we know exactly where HMRC was. Imagine the internalised fear and failure in that once-proud organisation, for them to have gone ahead and settled with the law team of their boss.

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A particular odour emanates from the settlement’s characterisation of Zahawi’s non-payment of tax as merely “careless”, which limited the penalty owed to 30%. Tell that to the thousands of families who have faced the punitive withdrawal of hundreds of pounds a month in desperately needed benefits, simply because juggling life didn’t allow a working parent to attend a particular appointment. The UK employs more than three times as many people to combat ‘benefit fraud’ as it does tax fraud, resulting in 23 times as many criminal prosecutions. Yet tax fraud costs us nine times as much.

Can trust be restored?

The UK is teetering on the cliff. It may be too late even for a concerted and immediate effort to re-establish confidence in the tax system and wider functioning of government. But surely it’s worth trying.

Ultimately, the UK needs a serious debate about its role at the head of the largest ‘tax haven’ network in the world. Through international corporate tax abuse and hidden offshore wealth, this network imposes estimated revenue losses of $189bn on the world – almost 40% of the global total lost revenue – according to the State of Tax Justice.

The costs at home are dramatic too. The resulting need for financial opacity leads inevitably to widespread corruption. This is visible over recent decades everywhere from the Turks and Caicos to Jersey, and from the British Virgin Islands to the UK itself.

The dependent territories that the UK has encouraged down the road of tax havenry are due reparative funding to support them towards alternative economic models. Whether the UK can right itself and meet those responsibilities is another question.

Three immediate steps are clear. First, the UK should require public registration of the assets of elected officials. This basic measure is already in place in many countries, including Russia, where lawmakers recently voted to scrap it. If Vladimir Putin approves this, Russia will effectively fall back to Westminster’s level of transparency.

Alongside this should be a requirement for senior politicians (Cabinet ministers at a minimum) to publish their tax returns. Like Donald Trump in the US, Rishi Sunak has an unmet campaign promise to publish his own returns. Only mandatory disclosure will be effective in delivering transparency and building public confidence. Much greater scrutiny of funding to politicians and parties is a necessary complement.

The UK is the head of the world’s largest ‘tax haven’ network, which is responsible for estimated revenue losses of $189bn

Secondly, the Treasury should enact the basic transparency measure for multinational companies that has been on the books since 2016. Multinationals are responsible for the largest cross-border tax losses globally, and just over half of the $52bn losses suffered in the UK annually.

A requirement for public country-by-country reporting of profits made and tax paid would simply put multinationals on a level playing field with domestic UK businesses, which are being suffocated by the resulting unfair competition. And this is transparency with power – publishing this data has been shown to discipline tax behaviour and increase multinationals’ effective tax rates. That alone would likely bring in £2.5bn a year in new revenues for the UK, and bolster public perceptions of fairness in the system.

Lastly, HRMC needs a significant commitment of resources for enforcement, coupled with genuine operational independence. Successive governments have undermined the department’s resources and operational independence. Staff cuts and the ‘private sector DNA’ in its senior management have had the entirely predictable result of damaging UK taxation.

At the willing end of the compliance spectrum, we have the morale-sapping inability of the service to support taxpayers to get their bills right. At the unwilling end of the spectrum, we have a tax authority that appears no longer capable of auditing, investigating or detecting tax abuse.

Investing in HMRC will pay for itself many times over. In addition to targeting corporate tax dodging, an explicit focus on the top 1%, 0.1% and 0.01% of households that are responsible for the majority of tax abuse by individuals will maximise the revenue gain and the potential improvement in public perceptions of fairness and compliance.

There’s a great deal more to do before the UK can be turned around. But these measures would provide an immediate platform to stop the rot – before it’s definitively too late.

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