I had this article on the Guardian’s Comment is Free site yesterday and in the paper today:
George Osborne is making political capital out of seeking to save £4bn on the benefits bill, happy for those making the claims he's targeting to be called lifestyle choice fraudsters and layabouts — all, supposedly, because of the need to tackle the hole in the government's deficit. But he wouldn't need to make these cuts if he tackled the biggest category of fraud in the UK economy — that of tax evasion.
The tax gap is real. It's the difference between the tax that should be collected from the UK economy if HM Revenue & Customs knew everything that was going on and the tax it actually collects. HMRC claims the gap is £40bn a year with well over £30bn of that being tax evasion and a much smaller part — less than £5bn — being tax avoidance. The difference between the two is important. Evasion is illegal — it's fraud, in other words. Avoidance is the smart trickery my colleagues in the accountancy profession play.
The trouble is HMRC has these estimates wrong. I estimate that tax evasion — the issue I'm concerned about here — costs about £70bn a year. My estimate is based on the rate of VAT evasion that HMRC admits to — which I calculate to be an average of about 13.7% over the past seven years.
That means more than £1 in every £8 of VAT due in the UK is evaded. Shockingly, the World Bank has recently confirmed in a study of the size of the cash economy in 162 economies that they agree almost exactly with this ratio for the UK, suggesting on average that the UK shadow economy is about 13.5% of GDP, and on an upward trend.
Despite this evidence HMRC refuses to recognise that if VAT is evaded at the rate its admits then it follows that this proportion of income tax, corporation tax and national insurance is also evaded — which is an untenable position on its part. No business person puts cash in their pocket to evade VAT and then declares income tax on the wages and profits paid out of that cash. Those other taxes are evaded as well, and by as much — if not more — than VAT, simply because VAT doesn't apply to all businesses but income tax and national insurance always do. And as a result £70bn is lost to tax evasion a year. That's enough to pay our way out of our current financial crisis.
But this does not happen by chance. This cash has to get into the hands of fraudulent traders — and not much of it comes from them trading with each other. Most of it comes from the public who, when offered a deal for cash take it. Builders are the classic case everyone points too. But so too are after-school tutors these days. And nannies and domestic cleaners paid cash in hand. And those who trade through car boot sales. And even people who trade on eBay and "forget" to tell HMRC. The list of ways cash creeps out of the tax system and into the shadow economy are numerous.
And the fact is that cash on this scale does not just come from those committing benefit fraud. Cash on this scale comes from the middle and upper classes — Guardian readers among them, no doubt. Every time you pay cash, in these ways and more, you contribute to the tax gap. You deny the government the cash it needs to preserve public services. You facilitate fraud, even if you're not guilty of it. You undermine the NHS. And your children's education, and all those other services you value. And you help deny benefits to those who need them. The joy of tax is that it pays for all these things. Tax evasion denies them to us.
If there is a "big society" — not in the way Cameron describes it but in the way we believe in the society we live in and enjoy the services our state provides — then the cash economy directly undermines it. That's the real consequence of the cash deal to save a bit on the cost of cramming for an A* GCSE.
And that's a challenge for all who do believe in society, the rule of law, the value of government services and the democracy we enjoy. Are you willing to pay by cheque or card, to demand a receipt, to operate PAYE on your domestic staff, to clamp down on tax evasion, and say so? It's a choice you can make. You can choose to pay tax. Will you do that to keep the services you want?
Ask yourself that the next time you could evade tax. And live with your conscience if you contribute to the tax gap — a gap we, and those who rely on the state, can no longer afford.
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richard–well said–keep up the excellent work.I am a Labour Councillor in Exeter(we have just won 3 more seats (at the expense of the LD’s and Libs)and we await with trepidation the cuts to be imposed by HMG in October and beyond.The whole con-trick of making the people pay for the frauds of the bankers needs exposing.I have read that the Gen Sec of Unison has stated the Tory Manifesto 2005 wanted 25% cuts then,so the current propaganda offensive seems ideological.Most national politicians talk about new or improved taxes but not much about the unpaid taxes–this seems rather odd?regards tony wardle
“Despite this evidence HMRC refuses to recognise that if VAT is evaded at the rate its admits then it follows that this proportion of income tax, corporation tax and national insurance is also evaded”
That sentence is a complete non-sequitur. Can you seriously expect to be taken seriously if you have sudden leaps of logic like this?
The whole premise of your article is founded on two “givens”, neither of which is explained properly and both of which, if we’re being blunt, are likely to be rubbish:
1. HMRC’s figures are wrong.
2. Mine are right (even if I start from HMRC’s figures, which I’ve previously asserted are wrong).
It is good that people are starting to pick up on this nonsense in the comments section.
🙄
As Grandad, who worked on the fitting out of the RMS “Olympic” used to say, “More leaks than the “Titanic”. The ship of state cannot float without the bouyancy of a sound tax system and this one is sinking fast.
The way the VAT gap is calculated means that it correlates with the size of the “informal” economy, generally estimated to be around 12% of UK GDP. But this is well below the OECD average of around 18%. How much scope is there for reducing the size of the UK’s informal economy? What would be the knock-on effects of doing so? Would be interesting to see some analysis of these points.
I think Richard’s criticism of HMRC’s methodology for estimating the tax gap is not “a non-sequitur”, as Chris claims, but is a very reasonable alternative approach. Given that most of the right wing seem to believe that high marginal tax rates encourage avoidance and/or evasion, it would seem strange if VAT (effectively a flat rate tax at 17.5%) had a higher avoidance/evasion rate than income tax (which tops out at 50%). HMRC admit that their methodology for estimating tax gaps is a long way from being perfect, partly because the data are poor. Certainly it would be very interesting to see HMRC’s response to Richard’s critique of their methodology. I’m sure they’d have something more intelligent to say than “can you seriously expect to be taken seriously?”
There does seem to be a sudden rash of hard-right critics of Richard appearing on the blog all of a sudden. Perhaps a co-ordinated attempt by followers of the Tea Party/TPA to discredit him? Obviously someone out there has decided he’s dangerous to the Tea Party project and needs to be taken out. Dangerous times we’re living in at the moment.
HMRC uses two quite different methods for measuring the tax gap.
In the case of indirect tax, they take a “top-up” approach, extrapolating from the size of the economy – as VAT is a tax based on turnover that in principle can produce an accurate result. In the case of direct tax, you can’t simply extrapolate from turnover, as direct tax is imposed on a net not a gross basis. HMRC therefore take a “bottom-up” approach , extrapolating from the evasion HMRC staff have seen.
Both result in quite different figures but, given the differences between direct and indirect tax, and the stated and unstated sources of error, they are not necessarily inconsistent with each other.
Any discussion of the tax gap also needs to look at the experience in other countries. The relatively small size of the informal economy in the UK compared to elsewhere suggests that there may be little scope in practice for reducing “low level” evasion. Larger scale evasion – undeclared bank accounts, carousel fraud, money laundering etc – is another matter.
Problem I see here is how do you convince the public to shun the black economy? Throwing more cash at HMRC isn’t going to do this. Do we increase the penalties of those that get caught, hoping that this will act as a deterrent? Do we equate cheating at tax with GBH or robbery and give out 5 year + jail sentences. But would that even work?
[…] as a result there are those who would like to suggest that I’ve got my calculations wrong. This is an inevitable consequence of promoting ideas that suggest that there […]
[…] as a result there are those who would like to suggest that I’ve got my calculations wrong. This is an inevitable consequence of promoting ideas that suggest that there […]
The Black economy surely results in cash liquidity?
The cash is spent quickly, on some ‘luxuries’ probably unafordable from taxed income and consequently contributes to VAT income, etc. etc. so HMCR gets it’s whack in the end, maybe even faster than via income tax. Or am I being too naive?
I have no idea. Some of what you say probably is true, but as the very nature of the black economy makes it pretty unrecordable I guess we’ll never really know.
We’d be much better off legalising most currently illegal drugs, and creaming stacks of tax at the same time as hugely reducing crime.
“Despite this evidence HMRC refuses to recognise that if VAT is evaded at the rate its admits then it follows that this proportion of income tax, corporation tax and national insurance is also evaded — which is an untenable position on its part. ”
Nonsense. Even if the “shado” economy is an extra 13% of the economy – unlikely when government spending is 50% of the economy – the fact that 13% of the due VAT is not collected does not imply the same ratio of loss for other taxes. If payments are made cash in hand it will usually be paid to less well paid workers. Highly paid lawyers, traders and others in the 40/50% tax bands are much less likely to be paid in cash (i.e. probably not at all).
By contrast, apart from dodgy farmers driving on red diesel and some Ulstermen making moonlight flits across the border, fuel duty is collected 100% efficiently and isn’t impacted by the shadow economy because it is collected at the refinery.