I gave evidence to the Treasury Select Committee in February, during the course of which I was asked to clarify what I meant by tax avoidance, tax evasion and by implication, the tax gap. I was explicitly asked to make clear why I do not agree with HMRC on these issues.
I have now submitted my 16 page commentary on these issues to that committee and since it will be published anyway share it here. If you want to know why I think HMRC have got so much on the tax gap wrong, this is the place to start.
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The bulk of the difference between the two estimates of the tax gap – about £30 billion out of £50 billion – relates to different estimates for the size of the shadow economy – cash-in-hand traders, businesses with two sets of books, informal undeclared labour, and the like. You say £40 billion and HMRC says £10 billion (actually, the 2015 report says £6 billion for the hidden economy).
I could not see an expplanation for the big difference in your letter. Where do HMRC’s numbers come from?
As I understand it from your 2014 report, your £40 billion number is based on three simple assumptions:
(1) up to 10% of all sales go unreported,
(2) total sales in the UK of about £1,000 billion, and
(3) a tax rate of about 40%.
So 10% of £1,000 billion, taxed at 40%, is about £40 billion. Is that right?
Perhaps the next step would be to explain why each of those three assumptions gives a good estimate. The first seems consistent with estimates of undeclared VAT turnover. Who calculates the second? And where does the third come from?
The 2014 report does document all my sources
Indeed, your 2014 report does explain at some length where the 10% estimate comes from. So lets take that as read.
But I can’t see where that report explains where the other two numbers come from.
I am not trying to be difficult. I am just trying to understand how you calculate your £40 billion estimate for tax loss due to the shadow economy.
Please could you point me towards the source for total sales in the UK of £1,000 billion, and an effective rate of tax on those sales of 40%?
Sales is based on GDP analysis – and I know I detailed it
And I discuss the 40% tax rate at length in the report
Sorry, above I should have said “the two estimates of the tax gap relating to evasion”. There is also some disagreement with HMRC estimates of avoidance too.
One other small thing, you include “error” – defined by HMRC as a taxpayer making a mistake despite taking reasonable care – in your figure for tax evasion. Can you explain why?
Error is always evasion
Ignorance of the law is no excuse
“Error is always evasion”? Always? Crumbs, so if a person makes a clerical or typographical error, or an honest mistake, they are a fraudster?
Is it really your position that all errors should be treated as criminal offences, even when a person takes reasonable care to avoid them?
HMRC would certainly treat it that way
That’s the reality
I found this commentary much clearer than HMRC’s own note on the tax gap.
It makes me wonder if HMRC deliberately over-complicates this issue – to make it difficult for outsiders to suggest different ways that HMRC might go about its tax-collection activities
You cynic!
You may be right
I will be honest: HMRC’s effort is little better than guesswork in some cases
Of course nothing changes the fact that the HMRC methodology was endorsed by the IMF and your position remains isolated. No amount of bluster can change that outside of this echo chamber.
The IMF said HMRC should try my methodology
Not as bluntly as that
But very clearly
Why not acknowledge that rather than make up an inaccurate claim?
Do we really need to dig up those IMF quotes yet again? You know those ones that say HMRC methodology is “sound and consistent”? I’ll leave you to spin like a top that this is somehow an endorsement of you.
Read the ones that says HMRC should use top down methodologies
But you won’t deliberately
Which says all I need to know
As an experienced tax practitioner I have to say your methodology of estimating the Tax gap is far, far superior to HMRC’s. But I would defend some of SMES’s tax/NIC avoidance, it is there (should be, for this reason that is) to encourage economic activity, perhaps it’s a short cut- instead of them paying the full whack, and then being given subsidies to compensate. But, yes, it is still avoidance.
Or evasion, surely?
And thanks