The well known fact checking charity Full Fact looked at claims on the UK tax gap yesterday. I opened the page with some trepidation. This was bound to be a Murphy v HMRC comparison. I am by far the most quoted alternative source of opinion to HMRC on the scale of the UK tax gap.
Their conclusion was:
So whose estimate is better?
It is hard to say, and no one can talk about a “true” figure with great confidence.
The International Monetary Fund (IMF) reviewed HMRC's tax gap estimates in 2013.
According to the National Audit Office (NAO), the IMF's review “concluded that HMRC produced one of the most comprehensive studies of the tax gap available internationally. It concluded that in general the methodologies HMRC used to estimate the tax gap were sound”.
However, the IMF “also recommended that HMRC improve its estimates of undetected non-compliance”, according to the NAO.
Ultimately, the NAO notes that “The tax gap is inherently difficult to estimate and HMRC acknowledges that no estimate of the tax gap can be definitive and that its estimates carry a degree of uncertainty”.
“Around two-thirds of the tax gap is estimated using established methodologies, with the remainder estimated using developing and experimental methodologies.”
HMRC does not know the level of uncertainty in 60% of its calculations, the NAO says.
HMRC's methodologies are varied and change year-on-year, and differ from those of others like Mr Murphy. This is a big reason why we get such fluctuating estimates.
I was pleased with that conclusion. What it says is that HMRC does change its approach regularly, which is one reason why the answer always seems to be £35 billion, in my opinion. And it also points out that after years of work on this issue much of what HMRC does is pretty much guesswork when I do at least show all my workings. They also shatter the 'IMF approved what HMRC does' myth.
But that said, they're clear that there is no definitive answer as yet. I agree. That is why I am now working on new methodological approaches.
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The thing is that there should be no let up here when it comes to getting to the truth of the matter – As I am sure that you are aware.
“Don’t know” (to paraphrase) is a rather disappointing conclusion.
Perhaps I am wrong, but I can see little evidence of Full Fact conducting their own independent review of the different methodologies to see which approach might be better (in broad terms, HMRC’s bottom-up, or yours top-down) . Instead, they just seem to be quoting what HMRC, the IMF and the NAO say, and indeed you and Gabriel Zucman.
It would be helpful to see some more independent views on whether around £30bn might be a better or worse estimate than around £120bn. Perhaps the “true” figure lies somewhere between the two, or even off one end, but it would be useful to know which end of that spectrum is closer.
In the absence of that I am developing new methodologies that some seem keen on…
Obviously any sort of ‘black market’ is going to be difficult to estimate the size of.
An interesting study was done (in Liverpool I think) where at the end of a football match all the empty tobacco packaging was collected to estimate the penetration of European taxed products into the local market.
The trick, as I’m sure you are well aware, Richard is finding tangible things to count.
Personally I have very little sympathy with the aims of this particular study in dodgy tobacco.. If we had been ‘given’ the cheap tobacco and alcohol that we were promised in a single market Europe we wouldn’t be wasting all this time and money on Brexit. It’s just another case of open markets being highly selective in what they remain open to.
PS
HMRC clearly have a vested interest in reporting the lowest tax gap figure they can get away with since the bigger the figure the greater their failing.
Are they still operating out of a headquarters that belongs to a company registered in The Channel Islands? The irony of that is beyond parody.