I am reliably informed that the UK's new tax gap data is out this week. More than a decade ago I was one of the first people in the UK to write about and research the tax gap. Much of my work at City, University of London, is now focussed on this issue. Discussing the tax gap is much of the reason for my recent, frenetic, travel.
I will be curious to review what the latest UK offering will be. I suspect, whatever it is, I will think it an underestimate. Don't get me entirely wrong when saying so. I appreciate that the UK does address this issue as comprehensively as it does each year. It is unique in doing so. That this is the case is not, I suspect, unrelated to the well developed state of the tax justice movement in the UK. But there are real problems with what HMRC does, which can be split into two parts.
The first concerns relate to governance. I have considerable concerns with HMRC making the tax gap one of its highest objectives when at the same time it is responsible for establishing the methodology, undertaking the field work and reporting the result without any independent oversight. I know the IMF once reviewed its approach, in part quite critically, but there is little or no evidence that it has the suggestions made by the them have been taken into account when revising its tax gap methodologies to date.
This, to me, suggests serious governance weakness that seriously undermines the credibility of the figures. The pressure to reduce the tax gap is very great. Two things suggest that HMRC may have been selective in approaches used to date as a result. One is to be found in the VAT gap, which I think by far the most methodologically sound of the gaps HMRC reports. Even so, there have been almost constant revisions to methodology in the calculation of this gap that explain the greater part of its reduction over the last few years. Real progress in tackling abuse in the shadow economy is very difficult to really appraise as a result as prior years have not been consistently restated.
The next area of concern is to be found in great many categories where it is likely that tax evasion is significant. If is unfortunate that in areas such as the scale of the shadow economy, ghost employment and moonlighting HMRC has, to date, made very little methodological progress and most figures remain what seem to be implausibly small 'illustrative estimates', which as the FT once said, are in effect 'made up'.
There is one other significant concern: with the exception of VAT all tax gap estimates from HMRC are 'bottom up'. In other words the population on which they are based is the tax returns actually submitted plus HMRC's estimate of errors in those not submitted. As I have repeatedly documented, HMRC do not receive tax returns from about a million companies in existence in the UK each year. Of course some of these will have no tax liabilities but HMRC provide no indication of being aware of the scale of this issue, which has been raised with them a number of times, including in the Public Accounts Committee. The IMF also suggested, as I do, that estimates starting from national income estimates should also be prepared.
I would be delighted if HMRC do this in this week's report but cannot imagine the political will to do so exists as yet. In which case I fear these estimates will be seriously underestimated, again. But I can live in hope.
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With so much property now owned as “investment” etc. perhaps they should get out more often and knock on a few doors?
They are closing most of the local offices like the one I used to work in, so there will be no officers left to go round knocking on doors, I recall we used to do “VAT drives” going into businesses on spec (mainly retailers and workshops) and asking to see their VAT registration certificates and if they did not have one making further inquiries into their records as to whether they were liable to be VAT registered.
Is there evidence that the million or so UK companies that do not file corporation tax returns do in fact have material tax liabilities?
No doubt many of them are dormant and have no taxable income or gains, and some of the rest have only exempt income, such as dividends from shares, or are loss making.
Given that corporation tax is less than 10 percent of the UK tax take, and the hundred or so largest companies account for the bulk of it, is this really the place for HMRC to focus its efforts?
(On the other side of the equation, the disproportionate effort put into clawing back small amounts of tax credit overpayments is surely not worth it either. Perhaps everything will be sweetness and light in the sunny post-Brexit uplands, once Universal Credit solves all benefits problems. Or perhaps not.)
Andrew
It is patently silly to have an agency of the size and national importance of HMRC which is operating in the dark with incomplete data. And by implication understaffed and therefore incapable of doing its job.
“Given that corporation tax is less than 10 percent of the UK tax take, and the hundred or so largest companies account for the bulk of it, is this really the place for HMRC to focus its efforts?”
In terms of fairness in the tax system, focus on any one particular area is inimical. There would ideally be no ‘either or’ in this equation of where resources should be concentrated. What merit and sense could there be in having an agency which only does half a job irrespective of which half it is doing?
As to tax credits and specifically ‘working tax credits’ – don’t get me off on that one !
The entire benefits system is a rat’s nest and in so many areas the question ‘who benefits’ is moot. So often it is not the title beneficiary.
Andy, it is patently silly to expect an agency of the size and national importance of HMRC to devote equal effort to every single task that they do. They must direct resources to the areas of greatest risk, where the investment of their time (a resource that is not unlimited) might have the greatest impact.
I agree, HMRC is woefully under-resourced: the return on investment is demonstrably high, and it beggars belief that the government is willing to keep slashing public sector jobs for reasons of political ideology. It smacks of cutting off their noses to spite their faces. (As Old Codger points out above, local knowledge is already much reduced, to the detriment of HMRC’s ability to catch everyday non-compliance. More than that, experience is walking out of the door as the generation recruited in the 1970s retire – themselves recruited to replace the 1940s generation. Going digital is not going to be sufficient.)
OK , Andrew,
By definition, I have to agree, that you can’t make everything a priority or the word becomes meaningless.
It would perhaps represent considerable progress if some of the rules were not so labyrinthine that even the majority of HMRC staff don’t know how they should be interpreted.
(As an aside I have to admit that from my point of view having a personal tax return online has been a great improvement; particularly because the initial tailoring simply removes the pages I don’t need to look at. It makes the process much less daunting.)
Andrew.
There is not the slightest bit of evidence that there is mass tax evasion using companies. But this is impossible to prove so makes a useful recurrent scare story.
Why would anyone seeking to evade tax go to the bother of drawing attention to themselves by registering at companies house? They have to supply names and home addresses. Companies House automatically notifies HMRC of these details. It’d be like a burgler opening a high street store and letting the police know the address.
Still. You can’t prove that God does or doesn’t exist either so if some want to promote the belief they can try and build a religion and will no doubt get followers
Oh dear, the usual nonsense
You do not have to supply your home address
You can still use nominee directors
It’s harder now, but so what
And the law is simply not enforced, at all
So if you want to commit a fraud why not pay a few ounds to add a degree of opacity to doing so?
400,000 failures to file accounts and CT returns pus 600,000 supposedly dormant companies that might be anything but that say I am right