Tax gap » Tax Research UK

The economic crisis has one cause – the tax gap

Economics, Tax gap, Uncategorized 19 Responses »

Nov 102011

I’ve talked about economiuc crisis for a long time.

I’ve got a book coming out about what I think we need to do about it next week (I’m assured the printing is underway, now).

And let’s now have no doubt about it: the crisis is for real.

Italy can no longer pretend it is not bust: it is.

I stress, it’s not bust because of overspending. It’s not been profligate. It could pay for the services it has consumed, and did. It just chose not to do so through taxes. By that I mean it’s bust because of the size of its shadow economy. That’s 27% of its GDP. Its effective tax rate is 43.1%. It loses, annually, as a result about €175 billion in tax.

Its debt is about €1.9 trillion.

That’s a bit over a decade of tax evasion.

That’s why Italy is in crisis.

That is why the EU is in crisis.

That is why the world is in crisis.

The tax gap is the problem.

Collecting tax will be the solution.

Of course there are massive other issues to be addressed.

But that’s the cause of this crisis. And that’s in the long run its solution.

And that’s a recognition that is absent right now.

FTSE companies do not pay 26% tax

Tax gap, TUC, Uncategorized 8 Responses »

Nov 032011

I note a story from a couple of days ago that has spun in all sorts of weird ways.

UK accountants Hacker Young have suggested that the tax rate of FTSE 100 companies has fallen by almost 30% over two years, publishing a graph that looks like this:

This is utterly misleading.

In 2009 we had economic meltdown and many companies made losses. However, many of those losses were provisions that were not tax allowable so profits were deflated by tax bills weren’t, so rates rose.

Now that situation is reversing.

And in addition, of the unadjusted profit of FTSE companies before goodwill provisioning is taken as the base when goodwill provisions are almnost never tax allowable that is also misleading whilst failing to exclude rogue companies like Shell which includes oil taxes in its tax charges can also seriosuly distort reuyskts.

The reality is that, as I have shown, that the effective tax rates of companies in a controlled sample of FTSE 100 entities is much lower than Hacker Young suggest, as follows:

This makes sense, and broadly agrees with a wide body of data, none of which shows UK effective tax rates are higher than the headline rates of tax as Hacker Young are suggesting.

Candidly, this report on their part is poor work, misleading, and is simple headline grabbing to demand tax cuts when none are due. They do themselves no favours as a result by publishing it.

The FT acknowledges tax avoidance is real, deliberate and extensive

Banking, Barclays, Tax avoidance, Tax gap 14 Responses »

Sep 262011

The FT has reported this morning that:

US tax authorities are targeting cross-border finance deals worth billions of dollars between leading US and UK banks as they step up efforts to clamp down on abusive tax avoidance, a joint investigation by the Financial Times and ProPublica, the not-for-profit news organisation, has found.

Four US banks – BB&T, Bank of New York Mellon, Sovereign (now part of Santander of Spain), and Wells Fargo – are in turn suing the US government over more than $1bn in tax credits that the Internal Revenue Service has disallowed over the past decade. Washington Mutual has settled a similar dispute and Wachovia is pursuing an administrative complaint over a deal.

The UK’s Barclays emerges as a pivotal promoter of the complex cross-border deals, which the IRS claims were designed to generate artificial foreign tax credits.

The cases have become a crucial early battleground between the US and multinational banks and companies in the wider debate over so-called tax arbitrage, and whether companies exploit gaps between international tax systems to benefit their bottom lines.

The best link to their analysis is here.

The deals were complex, deliberately structured, are claimed to be legal (which I don’t doubt) but arte being challenged because legal they may be, but tax credit loss generating they are not according to the IRS. Clearly I can’t decide that, but I have strong inkling they’re right.

I’m interested to note that not only were Barclays purveyors, at considerable cost to HMRC (so please don’t tell me there’s no tax gap now, or that it’s not much bigger then the paltry sums HMRC say it is when these deals alone are meant to have cost $800 million to HMRC – and that’s just one set of deals in one bank) but that KPMG are named as designers alongside them.

The analysis is all in the linked article. I won’t repeat it.

But what this does prove is three things:

a) The FT things tax avoidance is real

b) It thinks it is abusive

c) It thinks it is extraordinarily costly

d) It thinks it is deliberate

e) It thinks it can be stopped

I think all are important.

I rest my case.

Why the tax gap matters – or why I appeared in court for UK Uncut

Tax avoidance, Tax compliance, Tax evasion, Tax gap, UK Uncut, Uncategorized 13 Responses »

Sep 252011

I wrote the following at the request of the Brighton Evening Argus for publication after the close of the UK Uncut trial in that city, in which I appeared as an expert witness to explain the links between tax avoidance and the cuts agenda of this government.

I regret that the judge, sitting as a magistrate, did not accept that the link was close enough to justify the actions taken during peaceful protest by UK Uncut supporters: equally I am pleased he appeared to accept the link existed but was simply not sufficiently immediate in his view on this occasion (which does of course beg the question when it might be, but let’s leave that aside) and as such five of the nine charged were found guilty of criminal damage. That he gave them conditional discharges for six months does also suggest how trifling he thought the absurd case brought against them to be.

But, back to the Argus article:

Nine people from UK Uncut have been on trial in the last fortnight in Brighton for allegedly causing criminal damage during a protest in Brighton’s Top Shop last December. The damage they’re alleged to have caused was trivial and they admit they stuck themselves to the window of the store. The much more interesting issue is why they did it.

As a chartered accountant I appeared in court when asked to do so by their defence lawyer to explain just what the issues they were protesting about were. These are both complex in detail and relatively simple at the same time to explain.

Everyone knows that the UK is facing cuts at present and we are told they are inevitable. So benefits and pensions are being cut, school funding is down, hospitals are having budgets frozen, the arts and leisure are seeing cuts all over the place and the armed forces are having their numbers slashed. What I argue and what UK Uncut argue is that this is not as inevitable as it seems. There is, in fact, an alternative and it is one that the government is refusing to pursue.

That alternative is called ‘closing the tax gap’. The tax gap is the difference between the amount of tax which the law suggests should be paid in the UK and the amount actually paid. There are three parts to the tax gap. The first is the tax that tax payers have admitted they owe but which they then do not settle on time or at all. This amounts, according to H M Revenue & Customs to about £25 billion at present. If we got this money in the country would not have to borrow so much so it’s a big deal.

The second part of the tax gap is tax that’s evaded. Tax evasion is a criminal activity. It’s what happens when people don’t declare their income to H M Revenue & Customs or when they claim expenses to offset against their income to which they are not entitled. Of the two the first is the most important. Estimates of the total sum evaded each year vary. H M Revenue & Customs estimate the sum to be approximately £35 billion a year but there’s good reason to think that’s a serious underestimate. I think it’s £70 billion a year.

The third component of the tax gap is tax avoidance. This is the element that most people find hardest to understand. Tax avoidance is not the act of claiming the allowances that you are entitled to in law. So, for example, claiming your personal allowances is not tax avoidance. Nor is paying money into a pension fund, or saving in an ISA. Tax avoidance is instead seeking to get around the law so that less tax is paid than Parliament intended on the economic activity that a person undertakes.

This “getting round” the law can be done in a number of ways but the most common is to find loopholes in UK law or between UK law and the law of other countries. These can be complicated; a lot of it involves offshore tax havens, and because it’s expensive to set up it’s largely done by the wealthy and multinational corporations. I estimate it costs the UK £25bn a year, split between individuals and companies.

So the tax gap is, I estimate, up to £120 billion. In fairness I should note H M Revenue & Customs do not agree, but because of my work they have published their own estimates, which come to £60 billion at present – exactly half of what I suggest. It’s curious to note in this context that ‘benefit fraud’ is just over £1 billion a year – but is the issue to which all attention is given.

Either way, and whoever’s figure for the tax gap is closer, it’s an enormous amount of money. My figure would pay for most of the NHS. The point is collecting even some of this money – again whoever’s estimate is closer – would eliminate the need for a lot of cuts – hence the name of UK Uncut. They are saying, and I have said for a long time that if only we collected the money due from tax cheats and crooks then we would either need many fewer cuts or we would not need tax increases. And what I have shown, sometimes working with politicians like Caroline Lucas, is that the measures needed to collect some of this tax are relatively simple, are quick to enact and would work.

Nothing though would work better than having more people on the job of collecting the tax owed to H M Revenue & Customs and yet extraordinarily at a time when the government needs every penny it can get in tax it is sacking tax staff as fast as it can. There were almost 100,000 HMRC staff in 2005: there will be 50,000 in 2015. Rarely has a policy designed to offer ‘savings’ been so misguided. It’s like a company facing a cash flow problem deciding to sack all its debt collectors. But the important point is this: that the government has not only decided to continue with this plan conceived when the economy as booking and it might have made sense, it is accelerating it.

As a result it is clear that the Coalition is choosing to leave money with the tax crooks and cheats instead of collecting it to pay pensions, educate children, fund the NHS, keep our armed forces armed and so much more. It’s that choice that UK Uncut were highlighting – picking on Top Shop because Sir Philip Green’s family are widely reported to have actively avoided £285 million of tax in one year in the mid noughties. He’s just an example, nothing more. But the example is important: there’s cash out there; this government needs it and UK Uncut and others expect them to collect it, now, for the sake of us all. And by demonstrating UK Uncut have made clear that this option is available, which is why I supported them by giving evidence during their trial.

HMRC and the tax gap: their data just does not stack at all (wonkish, but worth reading)

HMRC, Tax gap, Uncategorized 28 Responses »

Sep 232011

I thought it would be useful to highlight the incredibly small sample base of HMRC’s tax gap data for direct taxes, published this weak.

As I have explained at length here, HMRC have got a reasonable methodology for estimating the tax gap for VAT and other direct taxes and one that is hopelessly inadequate for calculating the tax gap on direct taxes like income tax, national insurance, corporation tax and capital gains tax.

As they note in their report these direct tax gaps are based on:

The main methods used to estimate tax gaps for direct taxes are random enquiries, risk registers and data matching. These are discussed in more detail below. In addition, where robust methodologies have not yet been developed, an illustrative estimate of the tax gap is given based on expert opinion or derived by selecting the nearest equivalent measured gap.

Random enquiry programmes involve samples of taxpayers being selected at random and their returns being subjected to full enquiries by HMRC officers. HMRC has random enquiry programmes for individuals subject to Self Assessment, small and medium-sized businesses subject to Corporation Tax Self Assessment and small and medium-sized employers. The sizes of the samples for the three programmes are shown in Table 7.1 below.

So, the results of findings and errors noted in these random enquiries are extrapolated to calculate the tax gap. This is the table in question indicating the number of random enquiries used as the basis for this work:

Some of the data in this table does itself give rise to enormous questions of credibility.

For example, can anyone, for a moment, believe that HMRC really did exactly 1,649 PAYE audits without ever varying by just one more or one less in each and every year from 2000 to 2008? I candidly simply do not believe them. That is not plausible and to publish date of the tax cut on the basis of such utterly implausible data undermines the credibility of any resulting estimate, completely and entirely.

Second, note that the extrapolation is based on self assessment tax returns received. I have researched this issue with regard to limited companies for a report I published here. Let me show some data from that report, all based on parliamentary answers. First of all this:

In 2009 over 30% of companies in existence weren’t asked for a tax return by HMRC, a rapidly increasing trend. Only 18.5% of companies certified themselves dormant. But note: we don’t know the dormants and the companies not asked are the same, and nor do HMRC. Nor do we know they’re actually dormant and HMRC definitely does not. They have no way of knowing – the data is not available to them (I’ve checked, I’ve asked). All we do know is HMRC turned a blind eye. None of those companies submit a tax return. So they can’t be included in the tax gap data because that’s based solely on those who do submit returns. But what the heck? Why worry about organised crime that abuses this it evade tax, or estimating how much it’s worth?

Second look at this:

Of the companies asked for returns vast numbers don’t submit then – in 2010 over a third ignored the request to submit the return altogether. But they’re not in the tax gap data either because HMRC investigate returns they get to form their view – not the ones they don’t get. But less than half of all companies submit returns.

So now look at this logic which I have extrapolated from the data available here and in the report:

In 2009-10 there were likely to have been a net 1.9 million trading companies in the UK. I stress: I have allowed for near enough half a million dormant companies and companies that are formed and might never trade in coming to this number, or nearly 700,000 dormants in all. 734,000 of these did not submit a tax return. More than half a million probably owed tax.

How many companies did HMRC investigate in the year – who submitted tax returns? Based on the above data, maybe 400.

And you wonder why we have a tax gap?

And you wonder why I say their data is wrong?

And that’s not the only absurd ratio to be picked out from this data. There are near enough 30 million tax payers in the UK and they randomly enquire of 3,200 a year – a number halved when staff cuts began, please note. The result is a person in the UK is likely to get a random tax enquiry once every 9,375 years, or thereabouts. That’s a massive deterrent, isn’t it? And also a far from adequate base for extrapolation of data of this sort.

Let’s put this another way: these estimates show:

a) How inadequate is the work of HMRC due to the shortage of resources;

b) How inadequate the management of HMRC is for agreeing to those resources;

c) How inadequate is the HMRC estimate of the tax gap;

d) How appalling is regulation of small companies in this country;

e) How likely it is that the tax gap is vastly bigger than HMRC say (as I suggest, often).

But still ministers will argue otherwise. What are they trying to hide? Could it be they really don’t want to collect tax from the crooks and the cheats? Is that their reason for denying the truth? Anything else is very hard to imagine.

According to HMRC’s tax gap report offshore tax evasion costs them £3 million (yes, million) a year

Tax gap 12 Responses »

Sep 222011

I am well aware that ministers and HMRC’s senior management like to say my criticism of their tax gap figure is misplaced. After all they say, admitting to £35bn of missing tax is a big deal, so how could they possibly have got it wrong?

Well, the detail shows why. I searched their report for a key word. It was offshore. It comes up once, on page 45 where they say by way of introduction:

By matching data supplied by third parties to HMRC records, it has been possible to produce an estimate of the tax gap relating to income and capital gains of individuals taxed through PAYE but who do not receive SA returns. The income covered would not have been earned from employment and therefore the associated tax liability was not recovered under the PAYE system. As these individuals did not receive SA returns, the income and gains were also not reported through this means and thus additional liability was due.

This is the way in which they estimate the total impact of the hidden economy – of which offshore is, by definition, a part.

So you then turn to table 8.8 to see how much they think they lose to offshore and there’s the number in all its glory:

Offshore bank interest – estimated tax gap – £3 million

Now the UK has just claimed it has signed a deal with Switzerland – just one, albeit significant tax haven – which they claim will recover £5 billion of tax. And then there was the £3bn they claimed they’d get in Liechtenstein. And that’s before we build in the Crown Dependencies and Cayman, the BVI and so on and on and on.

But in the tax gap report they say the total loss from offshore is £3 million a year. OK, they extrapolate that – but put it ion context, they say the loss from undeclared rental income is 47 times higher and from UK interest is 22 times higher.

Who are they kidding?

This data is so obviously wrong it takes seconds to realise the deficiencies and gross under estimates in it. But they put it out as if it’s authoritative and then dismiss criticism of it as if it is absurd they could be wrong. And yet they glaringly obviously are.

No wonder I stick by my estimate of the tax gap. And so should everyone else.

The tax gap will increase by not less than £3.8bn this year – and what are HMRC doing about it?

HMRC, Tax gap 6 Responses »

Sep 222011

HMRC have been issuing massively misleading reports that the tax gap fell by £7bn last year.

It didn’t, and I have explained why here. Using their own, dodgy, methodology it fell by £1.3bn in real terms at most.

But that ignores another issue. The gap in cash terms fell last year by at least £2bn because of the cut in the VAT rate, and not because of HMRC effort.

But this year the VAT rate is 20%. So right now the VAT gap will have automatically risen on the basis of the same rate of crime by not less than £3.8bn. That follows like night does day as the VAt rate has risen from 15% in most of 2009/10 to 20% now.

And what is HMRC doing about this? It’s cutting staff. It’s closing tax offices. It’s pulling staff off the front line that might address this problem.

£3.8bn is almost what it costs to run the whole of HMRC a year – and that whole sum is going to be lost because of the VAT rise, and apparently that gives no rise to a change in policy to recover this loss.

That is ludicrous. Who else would sit back and note they’re bound to lose this much unless they take action and shrug their shoulders and say c’est la vie? Only Dave Hartnett, David Gauke and George Osborne, I guess.

I’ve suggested that increasing staff at HMRC by 20,000 would cost £1bn – and suitable staff are out there in the economy right now wanting this work – many of them sacked by HMRC in recent years. They could even pay a premium to lure trained people back. And the payback would be enormous. But no, the government won’t take action.

Why not? Well you have to conclude that Hartnett & Co want the tax to be in the pockets of the cheats and crooks because they sure as heck aren’t going about collecting it.

What a ludicrous and dangerous state of affairs that is where the state sits and looks at organised crime and does nothing.

All the direct tax gaps have risen – making the case for massive new investment in HMRC

HMRC, Tax gap Comments Off

Sep 222011

I’m going to repeat the HMRC tax gap table just published:

Let’s look at the direct tax gaps – I’ve already explained that much the VAT gap is down to a change in tax rates.

Now let’s look at the direct tax gaps. As is very clear, with the exception of stamp duties these have all risen. And this is despite falling incomes and profits.

This is inevitable. Even given the wholly inadequate basis of calculation the Revenue use for these gaps which ludicrously understates them (to make their performance look better) tax gaps will always rise in recessions: that’s because people can’t make ends meet and so seek to abuse more. This trend will get much worse.

But despite that the Revenue are cutting staff across the board who can deal with this - meaning money is simply being given away by HMRC. How ludicrous is that?

And how wrong is their message that the tax gap is being dealt with in that case?

HMRC’s claim that the tax gap has fallen by £7bn – it’s £1.3bn at best using their own data so why aren’t they telling the truth?

Tax gap, Uncategorized Comments Off

Sep 222011

I now have details of the 2011 tax gap estimates, based on the tax year 2009-10.

The table looks like this:

This is in itself curious because the previous year’s table looked like this:

Extraordinarily HMRC have claimed that the tax gap has improved by £7bn in a year. But that’s not true. The tax gap has only improved by £4bn at best (£39bn to £35bn) – their own table say so. Candidly to claim that because they put their own prior calculation errors right means the tax gap closed by £7bn – as their own press release seems to imply by subtle use of language – is as a result blatantly untrue.

But that’s not the limit of the gall of HMRC senior management. Read the detail and you realise that the reason why the VAT gap went down is in no small part due to the fall in the VAT rate matched by a fall in GDP.

VAT is paid a quarter late. Allowing for that the GDP fall in 2009/10 was 2.9%. And the VAT rate was 15% for must of that period for VAT payment to HMRC purposes. So given that the VAT gap is the difference between expected VAT paid and actual VAT paid we’d expect this gap to fall in cash terms by up to 14% for the falling VAT rate (but I’ll allow for timing differences and only use 11%, generously) and by another near 3% for GDP fall. In combination taking the revised 2008/09 VAT gap estimate of £14.6bn as the base we’d expect a fall to near enough £12.6bn (you can argue a decimal point either way – the above is my generous estimate, i.e. favouring caution). So £2bn or more of the fall is due directly to Alistair Darling’s VAT cut or declining GDP.

In that case the real fall is £2bn (£4bn real fall less this £2bn adjustment) at most.

Except, of course, the fall in GDP did not only apply to VAT – it applied to all other income as well. There was £24.4bn of gap relating to that in 2008/09. So a fall of at least £0.7bn of the resulting fall would result from the decline in GDP alone. Now we’re down to an improvement in the gap using HMRC methodology of £1.3bn at best – and candidly that’s in the range of statistical error.

Or to put it another way HMRC are simply not telling the truth on this issue.

They expect taxpayers to be honest, as do I.

But I demand an honest tax authority in exchange.

And their press releases on this issue are not honest.

It’s a lousy precedent to set.