I'm wading my way through the tax avoidance announcements in the Budget today - which are as clear as mud and about as useful.
When doing so though some very obvious issues have arisen on the government's estimates of the tax gap.
Take this from the Chancellor's speech:
HMRC estimate that £14 billion was lost through avoidance and evasion in 2008.
That is as recent as it gets. And it's much nearer my estimate of £25 billion of avoidance than anything they have admitted before.
Then move to the document on tax avoidance, published today:
HMRC’s latest estimate of the tax gap (for 2008-09) is £42 billion. Avoidance by using the tax law to get a tax advantage that Parliament never intended is estimated to account for 17.5 per cent of the overall tax gap.
Hang on. George has already said it's £14 billion. That's 33% of £42 billion in my maths. Who is right?
But from the introduction by my old friend David Gauke I note says:
We inherited a tax system with a ‘tax gap’ of around £40 billion. More than a sixth of that is due to tax evasion — that is, illegally understating tax liabilities. But a further one sixth is estimated to be due to tax avoidance — that is, reducing tax liabilities by using the tax law to get a tax advantage that Parliament never intended.
So a slightly different tax gap - only one third of which in total is explained now by tax avoidance and tax evasion - which really does leave you wondering what the rest is.
And Gauke is saying just £7 billion is avoidance - which puts him in direct conflict with his boss.
All of which makes the following comment in the report quite interesting:
Others have suggested that both the overall tax gap and the amount attributable to avoidance are a lot higher. The Government believes that those higher estimates are based on flawed methodology. Calculating the tax gap is not an exact science, but HMRC’s estimates are based on detailed taxpayer information, are in line with international comparators and make allowance for use of tax reliefs as intended by Parliament. What is clear, even allowing for a degree of caution about the estimates, is that tax avoidance is one of the biggest elements of the tax gap and needs to be tackled.
I think that's pretty personal - and that I'm the "other" in question.
I say the tax gap excluding unpaid debt is about £95 bn.
Well if George is right and avoidance is £14 billion (and I'm not arguing with the Chancellor) and Gauke is right that that's one sixth of the whole that suggests a combined total of £84 billion - close enough to my estimate to make no difference. Immaterial as we accountants would say.
And a lot more consistent than anything the government could say today.
Which amuses me, well, quite a lot.
It's really hard isn't it guys? Especially when you're going out of your way to seriously understate it persistently, even if inconsistently.
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Regardless of what methodology one favors for calculating the gap, it’s worrying when in a time where the gap is coming under unprecedented focus that the treasury and HMRC are putting out inconsistent numbers.
Is it so surprising that nobody can agree on the ‘unknown unknown’ (thank you donald rumsfeld).
It’s avoidance to route profits through a cayman front/shell company to reduce tax. But is it avoidance to make the contracting party for a supplier party be your UK subsidiary instead of your Irish or Dutch subsidiary?
Without a real GAAR (anti avoidance rule), it’s pretty much impossible to slice and dice if offshore transactions have a bona fide business purpose, or if their sole purpose is tax avoidance.
Gauke isn’t in conflict with his boss, you’re confusing some of the figures:
Assume the tax gap is £42bn, as stated. That’s close enough to Gauke’s £40bn if £84bn is “close enough” to your estimate of £95bn.
George Osborne referred to £14bn being the figure for tax avoidance AND evasion together. As you say, that’s about 33% of the tax gap, or one third.
The document on tax avoidance talks about avoidance only, not evasion, and estimates it at 17.5% of the tax gap. Which is about one sixth of the tax gap, and is about £7bn. That’s consistent with Gauke’s figures, so Gauke is agreeing with Osborne’s figures, as he’s talking about £7bn of avoidance (not avoidance and evasion).
If avoidance is around £7bn then evasion must also be about £7bn, being the other half of the £14bn and is therefore consistent with the other one-sixth that Gauke refers to. The two one-sixths make up one-third, and so you get your £14bn out of £42bn.
So there’s no real inconsistency. Certainly not if you think £84bn is close enough to £95bn.
Hi Richard, I am little puzzled by your reasoning. Total tax gap estimated by HMRC at £42m. One third attributable to tax avoidance and tax evasion, about £14m. One sixth attributable to each of tax avoidance and tax evasion, about £7m each. Osborne says £14m for tax evasion and tax avoidance, Gauke says £7m for tax avoidance. How is that inconsistent? How is it lacking in coherence? One possibility is you thought Osborne said £14 for tax avoidance and Gauke £7m for tax avoidance, but I do not think they did, Osborne included tax evasion in his figure.
Kind regards
Gregory
@Anne Fairpo
But the tax gap, by definition, is made up of avoidance and evasion (HMRC estimate excludes unpaid tax – at least with regard to all bar VAT where it is not clear – like so much else they do)
So £7 bn avoidance and £7 bn evasion – what’s the remaining £28 bn?
It’s explicitly not unpaid tax
So?
And if you’re right – why are we way, way out the cleanest country in the world – by a long, long way? As it is their 6% gap is incredible on that basis – but £14bn bears no international comparison
In other words – your claim just does not stack. Sorry
They got their numbers wrong