What would a UK Labour government mean for tax disputes?

With the general election now underway, shadow chancellor Rachel Reeves has already ruled out rises in corporation tax, VAT, income tax and national insurance, and indicated that no further tax rises are planned beyond those already set out. 

In order to fund the party's various spending pledges, Labour is therefore looking to others areas, including a focus on closing the UK's tax gap (the difference between the amount of tax that HMRC considers should be collected and the amount of tax actually collected), which is approximately £36 billion according to the latest published figures.

In its Plan to Close the Tax Gap, Labour has set an ambitious target of raising an additional £5.1 billion a year by the end of the next Parliament from action on tax compliance. We look at some key aspects of this plan to help predict how the tax disputes landscape in the UK might change under a Labour government.

More investigations and greater use of AI

Labour's plan includes an extra £555m per year to help HMRC "relentlessly pursue the money that is owed".  The specific allocation of this funding will be confirmed should Labour be elected but amounts are already earmarked for certain areas, in particular the recruitment of an additional 5,000 HMRC compliance officers. 

Funding will also be invested in the digitisation and modernisation of HMRC, including a "greater use of AI". HMRC currently uses its Connect software to help target high-risk cases from an increasingly wide range of information sources. This includes not only predictable sources, such as data shared with other government departments, but also information shared via social media, e-commerce and other online platforms. Further investment in AI may see an even greater level of scrutiny for taxpayers.

Focus on larger businesses

Although Rachel Reeves has described Labour as "the natural partner of business", the party's plans on compliance state that any additional resource for HMRC will be strategically focused to maximise returns, in particular on larger businesses where the scope and scale of any tax errors are invariably larger.  For smaller businesses, there would be more emphasis on "upstream compliance" (that is, activity intended to prevent non-compliance before it happens).

It is also noteworthy that Labour's panel of expert advisers on tax compliance includes Dame Margaret Hodge MP, who was an extremely vocal critic of the tax affairs of multinationals in her former role as chair of the House of Commons Public Accounts Committee.

Debt recovery and enforcement powers

Labour has stated that it wants to explore how more external resource might be deployed while new HMRC officers are being trained.  This could include further use of third-party debt collection agencies, which are already being used by HMRC to help collect unpaid tax bills.

Labour's plans point to published figures stating that the total value of tax debt has tripled since 2019.  Labour is therefore considering changing the law to strengthen HMRC's powers to enforce payment of tax. The details have not yet been set out but previous legislative changes in this area have, for example, included the introduction of the accelerated payment regime in 2014, which allows HMRC to demand an amount of disputed tax under certain conditions even while an enquiry or appeal is still underway.

Restoring a criminal deterrent and the Criminal Finances Act 2017

HMRC's current policy is to handle cases of suspected tax fraud using civil procedures wherever appropriate. Labour's report, however, bemoans a reduction in the volume of prosecutions and convictions in respect of tax, citing reports that only 11 wealthy individuals were prosecuted in connection with HMRC investigations in 2022.

A portion of "blockbuster" funding would therefore be ring-fenced for strategically important criminal cases in order to restore a "strong deterrent where it is needed".  Labour also wants to explore whether deferred prosecution agreements (agreements allowing a prosecution to be suspended for a certain period and currently only available for corporate entities) might be applied for individuals suspected of tax offences.

Labour's plans make specific reference to Keir Starmer's record on white collar tax evasion in his former role as Director of Public Prosecutions, as well as the Criminal Finances Act 2017 (CFA) corporate criminal offences relating to the failure to prevent the facilitation of tax evasion.

Despite being introduced from 30 September 2017, no prosecutions have yet been brought under these offences. Figures published as at January 2024 revealed that HMRC at that time had 11 live CFA investigations and a further 24 live opportunities under review, with an additional 94 opportunities rejected to date. With plans to introduce quarterly (non-public) reporting to relevant ministers on the volumes and nature of criminal powers deployed by HMRC, the prospects of a first CFA conviction could be much higher under a Labour government – and given Labour's aim to establish a deterrent, the first prosecution might be reserved for a high-profile corporate.

A reason behind the lack of a CFA prosecution to date is that these offences were introduced to help drive behavioural change and to encourage businesses to put in place reasonable prevention procedures (the only defence in law against these strict liability offences). Many businesses still do not have adequate procedures in place (which includes those that may have purchased "off-the-shelf" procedures that have not been properly adapted or updated to reflect current working practices). Businesses concerned about their position should review their procedures as soon as possible.

Regulating the tax advice market and avoidance schemes

Labour plans to take forward the current consultation, launched in March 2024, on proposals to regulate the UK tax advice market. According to that consultation, around a third of tax advisers are not a member of any professional body and therefore not subject to any form of regulation. HMRC believes this lack of regulation has led to unscrupulous practices, including a high volume of ineligible tax repayment claims, as well as promoters and enablers of tax avoidance.   

Labour is also considering new legislation to require a wider range of tax avoidance schemes to be reported to HMRC under the disclosure of tax avoidance schemes (DOTAS) regime, noting that some schemes are being constructed by advisers to avoid the requirement to register under current rules.

Other proposals

Labour's plans state that HMRC will have an increased focus on offshore tax compliance. The party has already committed to closing perceived "loopholes" in the current plans to abolish non-dom tax status in order to raise an additional £2.6 billion (see our Insights on inheritance tax changes and the end of the remittance basis).

The plans also include a commitment to improving customer service for taxpayers, which is described as "dire".  Tax professionals and taxpayers will be well aware of the current problems in communicating with HMRC, with phone lines regularly not working and correspondence taking months to arrive.

Osborne Clarke comment

Labour's plans indicate that HMRC will become more proactive and that compliance activity will rise.

More broadly, the tone of Labour's statements suggest that HMRC may take a more aggressive stance against perceived tax avoidance and that the party aims to increasingly frame tax as a moral issue. For example, party press releases heralded Labour's proposals on boosting tax compliance as a plan to "take on the tax dodgers to fund our NHS". In the face of such rhetoric, all taxpayers – but particularly larger businesses – may face an unprecedented risk for tax disputes to cause significant reputational harm.