The UK government has for the first time ever issued a set of consolidated accounts covering its activities today. They are, admittedly in draft, but they are also blatantly wrong, and so seriously misstated that any auditor must be duty-bound to qualify them as being a completely unfair view of the state of the government's finances.
The reason for saying this is simple: it is an absolute rule of accounting that revenue must be recognised as it falls due and any sum not collected must be treated as a bad debt. However, the revenue included in these accounts is the net sum of cash collected relating to the year 2010/11. As such the accounts are stated net of losses to tax evasion, which the Revenue themselves admit might be £35 billion a year, and may be as high as £70 billion a year in my estimate, and they are also stated net of tax avoidance. The Revenue have admitted they have £25 billion worth of tax avoidance subject to dispute at present, and I believe that this is the sum lost annually for this reason.
As a result I contend that the top line of these accounts is understated by at least £95 billion, meaning they are grossly and materially misstated in accounting terms or, in layperson's terms, they are just a straightforward lie about the true financial state of the government.
Unless and until the UK government can accept the fact that it fails to collect a very large part of the tax owing to it then we have no hope of economic competence being restored at heart of government. Basic recognition of this truth is the first step towards achieving that goal, and these accounts suggest that the government remains in denial on this fundamental issue that could transform the well-being of the UK government, help slash the deficit to a point where it would be of no great consequence, restore social justice in this country by giving preference to honest people over cheats, and at the same time uphold the rule of law and the democratic will of Parliament.
Right now, the government chooses to do none of those things. It prefers to leave money in the pockets of cheats instead of using it to pay for pensions, provide education and ensure the health service is secure for the future. Worse still, by stating its accounts in this way it denies that there is even a problem to address.
The government should be ashamed of these accounts and ashamed of their cowardice with regard to tax collection and I sincerely hope that the auditor of these accounts has the courage to say that they do not represent a true fair view of the government's activities, because that is very obviously true. If they do they will be doing us all a great service: this government may demand greater transparency and accountability but unless it adopts that maxim for itself then there is no hope of it being achieved elsewhere. So far they are a long way from coming up to scratch.
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I think you’re confusing political cowardice with self-interest here. It’s the tax avoiders that have funded the ConDems into government, and they’d very soon find themselves unfunded if they bit the hands that fed.
BB
I’m not sure I completely agree with your “absolute rule of accounting” with regard to revenue recognition. The two key criteria are that the revenues are realised/realisable (ie reasonable expectation that it can be collected), secondly that they are earned (ie the entity has substantially completed what it must do to receive the revenues). That is before we get onto the difficulties of measurability.
I think on both counts, the area of tax avoidance would fail the tests given that this is largely conducted by exploiting loop holes in poorly drafted tax laws. There may be more scope for tax evasion to be included, but again the calculation would need to be more robust for an auditor to approve – plus as you correctly state, it would be offset by a bad debt provision, so no impact on the bottom-line.
More pedantically, your statement that the total tax under-statement is “at least” $95b is based on an estimate that the amount for tax evasion “may be” as high as $70b. This suggests that you are converting a high-case scenario into a low-case estimate. A clever sleight of hand that most auditors frown upon when auditing the accompanying statements to accounts.
Let’s hang on a minute here. Leave numbers out for the minute: they are secondary although the fact that they are agreed to be big is enough to make it clear that this issue is material
Unambiguously missing out evasion has to be wrong under any accounting principle: that money is owed, and is not collected. That is bad debt. It is not revenue foregone. Missing that out would be a material misstatement of the accounts
I happen to think the same true avoidance as well – after all the government says it is due, so why is it omitted?
OK, so you increase profit by £95m but then put a bad debt provision through as an expense of the same amount. Net effect on profit is nil.
As I understand it you accept the profit/loss is correct but are just worried about turnover.
Turnover and expenses are massively out
that’s accounts that do not give a true and fair view
Materially misstated
You seem to agree
Wrong in other words
The accounting principles are pretty firm on the issue that the revenue must be accurately estimated and reasonably certain of collection.
If the government has sent out tax demands for this figure, then I would agree that it should be included in the top-line revenues. However, if the amount is not supported by invoice (tax demand) then it is a revenue accrual and the rules are very strict in this area to stop entities over-stating their revenues when there is limited prospect of collection.
Nonsense
All tax is self assessed
There are no demands
Please get facts right
Tax is what is due – not an honesty box – which is what you’re saying
So HMRC never send out summons if you short-pay tax, or never notify of an inspection?
Back to my point – if there tax figures aren’t supported by a self-assessment, a tax demand based on mis-calculation or an investigation based on suspected fraud – I don’t think you have sufficient information on which to base a calculation that would satisfy the needs for accuracy and collectability and allow the tax evaded to be booked as revenue.
I am definitely not saying tax is an honesty box. However, I have a sufficient lack of faith in my fellow man to know that governments have an obligation to chase amounts oweing in order to collect.
I really do think you need to read the notes to the accounts before you make the comments that you do. The revenue noted is a statistical calculation, and is not based upon the accumulation of data from particular cases. It represents the statistically likely tax recovered from the UK economy, and nothing more or less. If you know a corporation accounts on that basis, please let me know, because I don’t. But if that is the basis on which the accounts are prepared then it is wrong: the figure that should be included is the expected revenue (as for example that the revenue use in their calculation VAT tax gap) and they should then offset that figure they do not collect. Anything else is wholly inaccurate in your logic is completely and bizarrely wrong.
In the past I have been going on about the three part economy. There is the Taxable Economy, The Alternative Economy (where tax is largely avoided in a variety of legal and some traditional ways, e.g. barter) and The Illegal Economy. As a rider this will vary in different parts of the UK.
Taxation revenue is £488m. Are you really suggesting that the government does not collect over a quarter of the taxes legally due to it?
Your maths is wrong even on the basis you’re using
The total should be £488 + £95 = 583
Evasion = 12% which makes us second cleanest country in the world bar Switzerland
Avoidance = 4.3% and even H M Revenue & Customs reckon that in the corporate sector this is plausible
So sure I’m saying exactly that: if anything I under estimate
It seems to me there’s a firm argument here that tax rates are too high and if they were cut, the fall in revenues would be proportionately less as there’s less incentive to underpay/avoid/evade/cheat/whatever.
Our economy is being run too cold starved of the appropriate money/fuel mix for the economic engine to work effectively as evidenced by decades of mass unemployment of people and capital, it’s a shamefully dysfunctional and wasteful way to ‘run’/’manage’ things.
Under National Income Accounting, when the private sector is too weak to sustain demand because of it’s own cancerous debt and the world is undergoing austerity so current account balances can’t increase, the only way to manage economics responsibly and effectively is for government to allow public net spending to increase and fill the private consumption/saving/de-leveraging gap and buy the unsold goods and services the private sector is too weak to buy.
Rodger Mitchell describes this well, better than Richard Koo;
“federal deficit spending is good for the economy, always good, endlessly good (up to the point of inflation). Private and local government spending/borrowing also is good, but not endlessly. Unlike the federal government, the private and local-government sectors eventually reach a point where debt is unaffordable and unsustainable.
To prevent recessions, the government continuously must provide stimulus spending, then provide added stimulus spending to offset the periodic reduction of money creation by the private sector.”
http://rodgermmitchell.wordpress.com/2011/07/09/why-bank-lending-leads-to-recessions-a-counter-intuitive-finding/
Oh dear, the Laffer curve makes its obligatory outing
The trouble is that no one has ever found any evidence whatsoever to support it within the ranges of taxation that are seen within the UK
Belief in the Laffer curve is like believing there are fairies at the bottom of your garden. Of course you’re free to believe that there are such things, but it destroys your credibility if you do so
Nobody’s ever explained why someone who should pay £20,000 in tax, but doesn’t, would suddenly decide they would pay £10,000. There is no sudden benefit for the rich in paying tax. It isn’t like a TV – I can’t afford it at £400, but I can pay £200 – you don’t get any thing extra for paying the moral amount of tax. Additionally the sort of sums we are talking about means that employing accountants to move the money around is still less than the money saved.
I’m not an accountant but if surely if you don’t know how much is owed, or by whom, which is surely what tax evasion amounts to, then you cannot include the income as a debtor as you have nothing to substantiate it to the auditors.
Or put it another way, if you do know who owes how much then the figures would surely be included.
Its a bit like saying in the Greek economy that we know that everyone underdeclares their income and so we will include a figure as a debtor but with no hope of convincing the auditors that it either exists or is collectable because we don’t know who owes what.
I can just imagine the attitude of the auditor of my company’s accounts if I tried to include a material and unquantified and unverified figure to pass it off as collectable income.
Wrong – the job is to show income due and how crap you are at collecting it
Then you do something about it
If you don'[t recognise it you never get it
Yes – the job is to show “income due” and evidence it to the auditors accordingly. How is the latter part achieved if nobody knows who owes what? It doesn’t even get to the stage of showing “how crap you are at collecting it” as that’s not even measurable!
With the greatest of respect, that’s nonsense: the methods to do this exist. they’re not being used. You are clearly out of your depth
Not out of my depth at all.
How can “the methods exist”? If they do then HMRC would know who owes what and they could collect it! You are grasping a “tax gap” out of the air. No matter how justified you are in reaching that figure, you don’t have a list of who owes it, therefore de facto it simply cannot be included as owing to the government as a debtor by any established accounting principles.
Er…we think this money is owed and its a lot of money but we don’t know who owes it – can we include it please as a debt owed to us?
But HMRC do estimate the tax gap! So they can and do do this!
Heavens……
Hardly scientific or formal enough for any auditors though is it?
I’d give up if I was you if that’s how little you know about auditing….
Richard, once again I see you are using back of a fag packet numbers and misrepresenting what tax avoidance is. For example, ” . .. The Revenue have admitted they have £25 billion worth of tax avoidance subject to dispute at present …” No they haven’t. It’s clearly not all tax avoidance as it’s simply the gross amount in dispute with them and they don’t expect it all to be paid. According to the tax journal, “the department emphasised that the estimate did not represent tax owed or unpaid.”
Of course the revenue always tilt at windmills….
They expect to get at least half of it….
And that’s just large business
So your argument is complete nonsense
Try using facts – it often helps
I try to use the facts. So you are now saying it’s around £12.5bn from LBS (although the point remains that this is clearly not all tax avoidance and you haven’t dealt with that point). Plus where is your evidence for them admitting to another £12.5bn for non-LBS cases to get anywhere near your £25bn figure? So can you point me to where the HMRC has admitted to dealing with £25bn of tax avoidance as you clearly state in your blog. It clearly doesn’t say that in the Tax Journal article you refer to so you obviously have another source. Thanks
£12.5 bn from LBS which collects 25% of CT which is 10% of total tax revenue leaves ample scope for the rest
I then rely on my own research – show me it’s wrong
Glad we agree that HMRC haven’t admitted to £25bn of tax avoidance is subject to dispute.
Now let’s move onto the validity of your figures. Let’s start with the often-quoted TUC paper that calculated annual £25bn of tax being avoided annually. As I understand it the method you used to get to this number is to take the headline tax rate (28% for companies at the time) and adjust it for deferred taxes, any goodwill and for overseas earnings. You then compared it with the actual corporate tax paid by companies as a percentage of their profits. The difference is then said to be all avoidance (although you use tax gap elsewhere in the report which appears disingenuous). Is that a fair summary of the method before I move on to the actual numbers?
As you are well aware that is not the whole story
And mysteriously my number is the same as HMRC’s net number for large companies
No coincidence I think
If that’s the extent of your analysis please don’t bother to post again – you’re wasting my time – and I delete time wasters
For someone interested in transparency you seem very quick to close down any debate.
Coincidence clearly yes. Your figure is an annual estimate figure for tax avoidance whereas the HMRC figure is the gross amount they say is in dispute for multiple open years in the LBG. If you can’t distinguish between a yearly figure and ones for a number of years or tax avoidance or amounts in dispute it says it all about the robustness of your analysis.
Yes, and there figure is a microcosm of the issue – it’s hardly the whole corporate tax gap – as I’ve very clearly shown when 500,000 companies disappear a year and on top 600,000 don’t even send the CT returns in
It’s you clinging at straws
IAS 18 paragraph 18
Revenue is recognised only when ….
Bad debts are treated separately *only if* the money has already been recognised in revenue.
So the Treasury only recognises the money it has actually collected.
It is correct under IFRS because it doesn’t actually know until it checks a tax return how much is due.
If the accruals basis was an absolute rule of accounting (which it isn’t – cash accounting is valid and actually encouraged by HMRC for small businesses preparing VAT returns) then the Treasury would have to estimate the tax liability accruing during the year on income during that year before anyone filled in a tax return, adding the amount paid after the year-end to the PAYE for the year, subtracting the amount paid in 2010/11 in respect of 2009/10 and the deduct the amount of tax on losses incurred during the year that not only could but would be offset against taxable profits of future years.
I find it quite boring when people comment here on the basis of their complete ignorance, and your comment is one such case
If you look at the accounts to which you are referring you will discover that the tax income in question is stated on an accruals basis, and not on a cash basis to which you refer (which incidentally is not ever endorsed by HMRC for accounting purposes)
There is a specific note of the difficulty of dealing with the issues to which you refer, but they do it nonetheless
A little research on your part would become your commentary in future
Please *read* my comment. I did *not* say those accounts were on a cash basis. I *said* that a cash is a valid accounting option.
The last paragraph was to point out that any attempt to produce accounts on an accruals basis in less than three years from the end of the tax year involves an inordinate amount of guesswork. It is quite feasible for income tax in respect of earnings from work done by a self-employed individual to be collected three years after the VAT in respect of that work is collected. The figures published are a best guess, no more.
Please also read IAS 18. It is *not* correct to include in revenue money that you do not expect to receive
Wit the greatest of respect, if you did not mean a cash basis, you should not have referred to it and there is no valid accounting option for income with regard to a cash basis in UK taxation law now. Confusing income tax and VAT is an extremely rudimentary error.
The reality is that there is an accruals basis for accounting in the accounts to which you refer, so arguing otherwise is pointless.
And yes I am familiar with IAS 18 and this is not income which the government does not expect to receive, this is bad debt. The money is due and owing By law. That is different from not having income at all. The tax gap is bad debt. Your logic is entirely wrong. Or is it that you are happy that people evade tax?
Firstly, when talking about accounting principles, why should I not refer to alternative bases?
Secondly, I am not confusing anything – a complete theoretical accruals basis would include both VAT and Income Tax accrued in respect of every transaction in the period, but HMRC does not actually have the data from which to estimate the income tax until more than a year after it receives the VAT, and sometimes more than a year after it publishes the consolidated accounts .
Thirdly, I was making a point about accounting standards – some accounting standards accept a cash basis of accounting.
Fourthly, HMRC *require* me to produce accounts for income tax purposes with my expenditure on a cash basis but my income on an accruals basis#. Also it requires me, and many others, to submit VAT accounts on a cash basis – the latter is to make life simpler both for the taxpayer and HMRC as otherwise the taxpayer would have to first pay VAT on bad debts and subsequently reclaim it, so the receipts by HMRC would be the same but the admin costs would be much higher. Are you telling me that HMRC is breaking the law? Please do not call me ignorant when I am simply stating facts..
“Expect”, in this context, does not mean “I think that I am entitled to it” – it means that “I believe that I have more than a 50% likelihood of receiving it”. No decent auditor would sign off accounts that included income that the business did not expect to receive. IFRS can be a pain in the neck over accruing income that is not received but it does require a greater than 50% chance of receiving it at the time when the accounts are prepared and audited.
I am NOT happy that some people evade tax and have never in my life sought to do so or encourage anyone else to do so. I do not regard tax evasion as bad debt – most bad debt is that which the debtor is *unable* to pay because his/her/its debts exceed his/her/its assets. Tax evasion is crime. However, tax avoidance, most of which, apart from pensions, was encouraged by Mr Brown, is not a crime.
#I did not come up with this intellectually unsound basis, they did.
“Fourthly, HMRC *require* me to produce accounts for income tax purposes with my expenditure on a cash basis but my income on an accruals basis#.”
No they don’t. That’s utter rubbish. a) VAT accounting is not income tax accounting and b) they offer you cash accounting for VAT by concession – but they correct for it in national accounts
So is all the rest utter rubbish.
Sorry – but it seems glaringly obvious you have no idea what you are talking about.
You seem to think I am confusing VAT with income tax I am not.
My VAT is on a cash basis, my income tax was on a cash basis until HMRC changed the rules and required me to put income on an accruals basis, leaving expenses on a cash basis.
I assure you that I do not choose to do this: apportioning income between different tax years on an accruals basis is tedious and can waste a few hours of my time and the HMRC system tends to overstate my taxable income relative to that on either a pure cash basis or a pure accruals basis.
That is not a valid accounting basis
Accruals is the only one there is
Be very careful….
“That is not a valid accounting basis”: tell that to Gordon Brown!
Thanks for the advice but I am very careful about paying my bills (of which income tax is one) anyhow – life could be a lot easier if I was not so careful.