Tax Research UK

Mutualisation: The John Lewis state | Editorial | Comment is free | The Guardian .

The Guardian, in an editorial, notes:

One can see the politicians’ train of thought: John Lewis is popular; [it's a mutual entity] therefore this policy will be popular. But even if we overlook the vague announcements (teachers having more say over their workplaces, which is what is sometimes talked about, is a great idea, but it is not mutualism), there are big problems with the very idea of a John Lewis state. Even nice bourgeois retail chains are in the business of making a profit; the NHS is not. Public sector organisations should be accountable to the taxpayer; an architects’ firm need not be.

Turning public services into co-operatives opens them up to the risk of being run by profit-seeking companies. Having more mutuals in the private sector would be a fine thing, but before politicians import the John Lewis principle into the public sector they should probably shop around a bit more.

The Guardian is right: I am a big fan of mutuals and cooperatives. But corporate models of management and organisation simply don’t belong in the state sector. The ethos is different.

The result of corporatism has been only too apparent: bullying, inefficiency and disaster in the NHS - entirely as a result of using the foundation and trust model; the disaster of PFI for the tube and the crazy economics of sacking staff at HMRC when we badly need more tax revenue.

Mutuals are good.

But let’s be clear - the public sector is different. The sooner we realise that, applaud that, embrace it and encourage it the better.

Richard Murphy Management

On 17 February the editor of Taxation magazine, Mike Truman, wrote an article under the title ‘Lack of Evidence’, the summary of which said:

The claim that poor countries lose $160 billion in tax from ‘transfer mispricing’ has been repeated endlessly. MIKE TRUMAN finds it hard to justify

KEY POINTS

• Two Christian Aid reports claim $160 billion tax lost.
• Raymond Baker’s 7% claim does not relate to TNCs.
• Problems of methodology in Simon Pak’s study.
• Real shortfall is homegrown tax evasion.

Raymond Baker of Global Financial Integrity, Alex Cobham of Christian Aid and I wrote a response, published this week. It is entitled ‘Lack of Will’.

That response is behind a paywall and so is not on public record, even though the critical article is.

There is also apparently an on-line debate going on about the issue – which none of us can read or contribute to as it is also behind a paywall. So much for debate. In the circumstances I think it entirely appropriate to republish our response, below. I leave it to others to work out the ethics of publishing criticism on open pages and denying response and debate a similar airing.

—————————————————-

Lack of will

Transfer pricing abuse is a massive global problem, argue

Richard Murphy , Alex Cobham and Raymond Baker.

Mike Truman, in his comment article ‘Lack of evidence’, Taxation, 17 February 2010, page 6, questioned work we have, in various and different ways, undertaken to estimate the loss arising to developing countries from transfer pricing abuse – or transfer mispricing as we prefer to call it.

We think Mike is saying three things. The first is that Raymond Baker’s work on this issue, published in his 2005 book Capitalism’s Achilles Heel, used an inappropriate interview-based methodology to establish a potential rate of transfer mispricing, which he anyway contends is now out of date.

Second, he challenges Christian Aid’s May 2008 report on transfer mispricing ‘Death and taxes: the true toll of tax dodging’, which suggested that the loss to developing countries from transfer mispricing might be as much as $160 billion a year because that reports relies in part on Baker’s work.

Finally, Mike questions the findings of Christian Aid’s second report on the subject (published in March 2009), ‘False profits: robbing the poor to keep the rich tax free’, which relies on the statistical analysis of world trade data using a methodology developed by Professor Simon Pak of Penn State University.

Based on his analysis, Mike concludes:

· transfer mispricing is not the issue we claim it is;

· country-by-country reporting as proposed as one solution to this problem is not therefore as important as we claim it might be; and KEY POINTS

· Illegal flows out of developing countries could be up to $1 trillion annually.

Despite our high regard for Mike, we have to disagree with him on all counts, although in the space available cannot address all the issues he raises.

Methodology

First let us deal with methodology. Raymond Baker in his book only examined mispricing in arm’s length transactions, i.e. between unrelated entities. Having done so, and based on personal experience, he concluded that while it was highly likely that the rate of mispricing was higher in related party transactions, he would only use the figure his interviews had established to be likely between unrelated entities. Three things should be noted as a result: first this is likely to be a conservative estimate. Second, research based on semi-structured interviews is considered entirely suitable as a basis for research in all social science disciplines, including taxation. Third, while now relatively old research, subsequent work has corroborated the findings .

That subsequent research includes new work published by Global Financial Integrity (GFI), a project Baker now directs. Its study of illicit financial flows, published in 2008, defined illegal flight capital as funds intended to disappear from record in their country of origin, with the earnings on the stock of illegal flight capital outside of a country not normally returning to that country of origin.

The report recognised a number of mechanisms that that can be used for this purpose, of which transfer mispricing was just one. As it noted, since this activity is illicit, available data with which to assess its scale is oft en incomplete or inaccurate: the work accepted that risk, as do all other studies in this area. That said, GFI used several methodologies and databases to estimate both the legal and illegal components of flight capital, including the Hot Money, Dooley, and World Bank residual methods, IMF Direction of Trade Statistics, and the International Price Profiling System. All are widely used, recognised and considered by those bodies that have given their name to some of them as the best available methodologies.

Based on this work, GFI estimated that illicit financial flows out of developing countries are some $850 billion to $1 trillion a year. We believe this estimate is conservative. It does not, for example, include transfer mispricing within the same invoice, which cannot be picked up in mispricing models based on IMF Direction of Trade Statistics.

Such mispricing is entirely possible within multinational corporations which do not need to rely on reinvoicing. Nor does it provide any estimate of the loss due to transfer mispricing on services or intangibles, which are perhaps more open to abuse given the difficulty in identifying comparables to establish an accurate arm’s length price.

The IMF Direction of Trade Statistics on which the estimate of transfer mispricing is primarily based measures the difference in exports out of one country and imports into another country for all pairs of reporting countries. After subtracting the cost of freight and insurance, the only way to get a difference in export and import prices (other than mis-entering the data which might itself be indicative of mispricing) is to reinvoice, for example through tax haven locations. It is this reinvoicing that the GFI data records meaning that mispricing within the same invoices would have to be added to these figures to get a more accurate analysis of total mispricing.

Transfer pricing abuse

The GFI report in 2008 estimated that at least half of all illicit financial flows out of developing countries involved transfer mispricing. In February 2010 a further GFI report, ‘The implied tax revenue loss from trade mispricing’ sought to quantify the tax loss arising from these illicit flows and concluded that the average tax revenue loss in developing countries was between US$98 billion and US$106 billion annually over the years 2002 to 2006. This figure represents an average loss of about 4.4% of the entire developing worlds’ total tax revenue.

The methodology used is one some commentators will challenge: it assumes that the identified flows of transfer mispriced funds would have been taxed at the marginal corporate tax rate of the location they fl owed from. This ‘tax gap’ methodology, developed by Richard Murphy, has been challenged by some as misleading since its opponents argue that it ignores the availability of reliefs and allowances that might have reduced the effective tax rate below the nominal tax rate.

We do not agree for two reasons. First, if those reliefs had been available in respect of these profits, it would have been rational to have used them. We assume we are dealing with rational entities. They were not used, so presumably they were not available, meaning that tax would have been paid.

Second, to assume that the allowances and reliefs that multinational corporations enjoy in developing (or other) countries are independent of their considerable economic power in such places when negotiating inward investment, or are even independent of other illicit financial flows such as those resulting from bribery, is untenable. Numerous reports, including some by the authors of this article, for Christian Aid, Global Witness and others attest to this fact. As such we suggest that the methodology records a potentially recoverable loss, and that is its purpose.

Bilateral trade

Simon Pak’s approach to this issue is different from Raymond Baker’s. Christian Aid notes the OECD estimate that at least 60% of world trade now takes place within multinational corporations rather than between arm’s length bodies. For the years 2005-2007, Simon Pak analyses data on all bilateral trade on commodities with the US and European Union to determine the extent of losses arising on this intra-group trade. The US and EU provided the data for this purpose.

The data is the most granulated available: so detailed that HMRC would not provide it directly for the UK because identification of individual trades was possible in too many cases. 83.7 million EU trades were analysed by Pak in 2007, for example. Only data where price estimates per unit supplied could be calculated was used. By definition services are excluded, and given that the majority of transfer mispricing is now likely to be in this area this will result in any estimate we offer significantly underestimating total losses from this activity.

An important assumption in the price filter analysis method Pak uses on the resulting data is that the estimated inter-quartile price range per unit of product traded is an arm’s length price range. This assumption is suggested by some to be arbitrary. However, the assumption is considered reasonable as the US Internal Revenue Service transfer pricing regulation, Internal Revenue Code 482, specifies that an inter-quartile range is an acceptable arm’s length transaction range. We believe that provides credibility to the approach used but we accept that the point is debatable, but then everything in statistical analysis is. This does not invalidate statistical analysis as the basis of much, if not most, academic tax analysis and in turn a great deal of tax policy worldwide.

Lost tax revenue on capital flows as a result of trade mispricing is then calculated on a country-by-country basis by multiplying the capital flow by corporate marginal tax rate for each country in question: this approach accords with that used by Baker/GFI, noted above and acceptable for the same reasons.

Losses underestimated

This approach is reflected in the second Christian Aid report noted above, but not the first. As that second report notes, the approach seeks to use Pak’s methodology to estimate how many imports to the EU and US from non-EU countries are underpriced, and how many exports from the EU and US are overpriced to facilitate illicit capital transfer from non-EU countries. In doing so it is likely to underestimate the losses, partly because services are not considered and partly since the techniques used will underestimate mispricing because over and under pricing is aggregated by the methodology. There is also the risk that averagely priced transactions may be mispriced. This possibility is not detected.

In contrast, it is accepted (and noted in the relevant report) that there is an opposite risk with regard to products with highly volatile prices, e.g. oil. There, averaging over an annual period,

as the method does, might produce errors. Across the whole spectrum of trade this is assumed to be a counter-balancing error, but it does also explicitly recognise that the issue raised by Mike Truman in his article is a matter of concern, but not one considered likely to be material.

The result of the work is an estimate of lost tax revenue from all non-EU countries to the EU and the US between 2005 and 2007 of £190.8 billion or about £63.6 billion a year ($127 billion a year at 2007 exchange rates). Given that this implied lost revenue is based on EU and US trade, and assuming that trade between developing countries and the rest of the world is characterised by a similar level of mispricing, Christian Aid extrapolated this figure to find it consistent with their earlier estimate of $160 billion globally.

All of the estimates reviewed fall in the range $100 billion to $160 billion a year. As yet unpublished research by Richard Murphy for the World Bank undertaken in 2009 shows it is plausible for transfer mispricing of this scale to take place within multinational corporations.

Consistent estimates

Our point now is to suggest that we are presenting broadly consistent estimates within a range. We are not claiming spurious accuracy. As other studies have shown, e.g. that of Clemens & Fuest for the Department for International Development in June 2009, no one outside the small circle of NGO researchers noted here has even sought to do this work. Many have sought to criticise it. We accept it is open to improvement. We also accept, as should any researcher, that the flaws in available data make the results offered estimates. We would however stress, that if the data is fl awed it is likely to be because of trade mispricing, not its absence.

We would also add that the direction of this flow should be noted: overall additional funds arrive in the EU and USA. They may be taxed there, usually at lower rates than would have been paid in developing countries. Many will come through locations such as Switzerland and Hong Kong and in case study after case study we have seen this to be true. This lets us immediately dismiss the main thrust of Bill Dodwell’s assessment of our work as implausible: we do not know of tax authorities which take transfer pricing cases to argue down their revenues. This is what would be required if Dodwell’s assessment assertion was to be correct.

That said, Christian Aid does also show a transfer of capital from the US and Japan to Europe. Given the use made by corporations from both locations of European holding companies to act as worldwide sales agents, nothing surprises us about this. Indeed, work by Martin Sullivan for Tax Notes in the US has long documented this trend, noting in 2004 that American companies were able to shift $149 billion of profits to 18 tax haven countries in 2002, up 68% from $88 billion in 1999. This strongly suggests that this direction of flow is correct, the strength of the transfer pricing regimes of those countries notwithstanding.

All this being noted, the important thing is to ask what does potential transfer mispricing of this scale from developing countries imply? First, the losses are, even if the lower end of the estimate range is considered, more than twice the sum required to pay for the United Nation’s Millennium Development Goals.

In other words, we believe that reducing (but not eliminating) transfer pricing abuse could eradicate extreme poverty and hunger, achieve universal primary education, promote gender equality and empower women, reduce child mortality, improve maternal health, combat HIV/AIDS, malaria and other diseases, ensure environmental sustainability and help develop a global partnership for development. If that is the case, the argument for inaction has to be very strong indeed.

Any action does, however, have to recognise the reality of taxation in developing countries. It is essential to bring the poor into the tax base, as it is likely to result in stronger engagement in political processes, and strengthen accountability between state and citizen.

However, in the short term, income taxation will have limited revenue impact given the weak economic base. Taxing a small elite of individuals, civil servants, major corporations, international trade and natural resources when present is likely to have a much greater revenue impact. To be effective the largest available flows must be taxed.

Stricter tax reporting

We suggest three things to ensure that these flows are taxed as effectively as possible. The first is that, and here we agree with Mike, significant technical support to tax authorities in developing countries is needed – as well as cash to ensure their best staff are not continually poached by the biggest firms of accountants.

Second, we argue for country-by-country reporting by multinational corporations. Mike is entirely wrong to say this cannot help. HMRC now publicly concede that country-by-country reporting by multinational corporations would increase tax yield in the UK. We do not however argue it is the solution to transfer mispricing: it is not. What it does is provide the data that can show whether pursuing a case is likely to be worthwhile. When resources are scarce, as they are in developing countries, this is vital. The tiny experience of transfer pricing litigation in Africa to date suggests that the simple absence of data on differing profit rates by location within multinational groups – data we think was deliberately withheld by those multinational corporations to assist their cases – is a major inhibitor to any chance of success on this issue. Country-by-country reporting would help provide this data.

Country-by-country reporting does much more: it is now seen as a key component in effectively tackling corruption in the extractive industries, for example. It is, therefore, a key component in tackling the very issue Mike says is an impediment to progress. It also provides enormous value to shareholders concerning the timing and location of tax liabilities that their company faces. To dismiss country-by-country reporting because it cannot solve transfer mispricing by itself is absurd.

Lastly we promote massive increases in the range and scope of information exchange agreements available to developing countries so they can secure the data they need to address issues on transfer mispricing, which also impacts revenues from royalties, sales taxes, export levies and more besides. Developing countries are almost entirely excluded from the tax treaty network. They start with a massive asymmetric information disadvantage as a consequence, which makes their current task almost insurmountable. This economic externality has to be removed if they are to have any chance of building successful states.

In these circumstances to suggest the problems faced are the result of home-grown tax evasion misses the largest part of the picture. Nothing but abuse by those unscrupulous businesses can explain the data differences we have consistently found. We can argue about the scale of the abuse but not its existence. Even then, suppose we had overstated the scale of this issue twofold and only half the problem could be effectively tackled using the mechanisms we promote. That would still eradicate extreme poverty and hunger, achieve universal primary education, reduce child mortality and improve maternal health while leaving some over to tackle AIDS and other major diseases.

Can anyone give a good reason why the tax profession would not want to do that when all the evidence suggests that tax compliance by multinational corporations – where tax compliance means seeking to pay the right amount of tax (but no more) in the right place at the right time, where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes – could achieve these aims?

We don’t know of any.

Richard Murphy Country-by-country, Development, Secrecy jurisdictions, Tax Havens, Transfer Pricing, Transparency

Vulture fund bill under threat from Tory backbencher | Business | guardian.co.uk .

The Tories are rightly known as the nasty party.

But I’m not really sure that’s an adequate description. Vicious would be better. Take this example:

Legislation to protect some of the world’s poorest countries from being sued by rapacious “vulture funds” in UK courts risks being scuppered tomorrow, after a Conservative backbencher tabled a last-minute amendment.

The private members’ bill, sponsored by Labour MP Andrew Gwynne, has won the support of both the government and the Conservative front bench. However, its supporters fear that with parliamentary time severely limited, the amendment, from Skipton MP Philip Davies, could prevent the bill reaching its third reading tomorrow, leaving it little chance of passing before a general election.

Vulture funds buy up the debts of poor countries, often at a fraction of their face value, and pursue them through the international courts, in many instances despite agreements by other creditors to give the country debt relief.

Davies’ amendment is aimed at stopping the bill applying to past judgments - an issue its sponsors believed they had resolved in parliamentary committee.

Campaigners are keen for the legislation to apply retrospectively, because it could help countries such as Liberia, which lost a $20m (£13m) case in London against two vulture funds late last year. Liberian president Ellen Johnson Sirleef has urged parliament to pass the new law.

A Tory goes out of his way to help corruption and abuse that exploits the poorest people on earth.

Where is David Cameron shouting No! Where are the whips telling him to back off? They’re not to be seen.

This is the true Tory at work - an enemy of the poor, a friend of the abuser.

Heaven help us if they get anywhere near power.

The corrupt, the powerful and the elites would prosper. For the rest - well, what do the Tories care?

Richard Murphy Conservatives, Corruption

FT.com / Companies / Banks - Lehman report blames top executives.

A one-year probe into the collapse of Lehman Brothers found “credible evidence” that top executives, including the former chief Dick Fuld, approved misleading financial statements and used an “accounting gimmick” to flatter results.

The long-awaited report by the court-appointed examiner Anton Valukas also said that there was enough evidence to claim that Ernst & Young, Lehman’s auditors, failed to “question and challenge improper or inadequate disclosures” in the firm’s results.

Now why aren’t I surprised?

Did anyone really think people did not know what they were doing? And that they turned a blind eye whilst their own coffers over-flowed.

This was grand corruption.

It wasn’t just in Lehman either.

Let’s say it.

And let’s say that restoring the system will perpetuate that corruption. Because it will.

Richard Murphy Auditing, Banking, Corruption

Tories boycott Commons inquiry into Ashcroft peerage | Politics | The Guardian .

The Guardian reports:

A Westminster inquiry into the row over Lord Ashcroft’s peerage was thrown into turmoil when the Tory MPs on the committee walked out and said they were boycotting it permanently.

In what is understood to be an unprecedented move, Conservative members have withdrawn from the public administration select committee, some following discussions with the party whips.

The committee, regarded as one of the most influential in parliament, announced an inquiry into Ashcroft’s ennoblement in the aftermath of the peer’s revelation last week that he has non-dom status.

Sources close to the committee have confirmed the three Tory members have walked out, claiming the inquiry is pursuing a Labour vendetta. Some are under pressure from their leadership via the party whips, one senior source claimed.

It also emerged that Lord Ashcroft failed to meet a 9.30am deadline today to respond to an invitation to give evidence to the committee next Thursday. Gordon Prentice, a Labour committee member who has campaigned vociferously against the peer, made the announcement on his website. The committee has no powers to order members of the Lords to give evidence.

Unprecedented.

But then so is the situation.

No wonder the Tories are slipping in the polls.

Day by day they reveal themselves to be the same old nasty party.

Richard Murphy Conservatives

‘Slash the tax’ - Accountancy Age.

My friends down at Oxford University ran an event recently on controlled foreign company rules, but it looked as though it was hijacked so that they can state the naked aim of the so called Centre for Business Taxation at the Said Business School.

As Accountancy Age reports about the event:

Finance chiefs at two of the UK’s most powerful companies have called for corporation tax to be slashed to 15% in what would represent one of the most sweeping changes to the UK tax system since VAT was introduced 30 years ago.

As more and more business giants turn their backs on the UK or threaten to move offshore, Julian Heslop, chief financial officer of GlaxoSmithKline, and John Connors, tax strategy director at Vodafone, laid down the gauntlet to the Treasury and pushed for the tax to be almost halved. They believe this would give the UK a dual boost, stemming the flow of companies leaving the UK while also attracting overseas investment.

How do I know 15% corporation tax is the aim of the Oxford Centre? because Chris Wales - who was instrumental in setting it up - told me that was the case, in person when I was t Oxford two or three years ago before Prof Mike Devereux, the head of the centre, contrary to all UK academic ethics, withdrew my invitation to all events there.

And let’s be clear what this call is. It’s another blatant attempt at re-engineering the social structure of the UK so that the rich get richer and the rest fall further behind.

I know all the twaddle Devereux, Jim Hines and other aficionados of so called free markets that are anything but free put forward about corporation tax being a tax on labour. And I’ve also shown they are wrong. The  data I prepared on trends in corporation tax in the UK from 2000 to 2006 based on detailed analysis of tax paid by  the largest 50 UK companies in that period, published in the Missing Billions in 2008 showed this:

The effective rates of corporation tax in the UK fell during this period from 26.1% to 22.5%.

If Devereux at al are right wages should have risen as a result. This graph is based on direct download of Office for National Statistics data and shows what actually happened:

From a high of 55.2% labour share of GDP in 2001 it fell to 53.2% in 2008. The return to capital, however, rose from 19.9% in 2001 to 23.5% in 2008.

Glaxo and Vodafone and their friends at Oxford want to increase the gap between rich and poor in this country. It’s the only explanation for their proposal there is.

And it’s sickening.

Richard Murphy Corporation Tax

Creative industries to replace finance? » Business » This Is Jersey.

I loved this. Being polite (which he has never been about me) I think John Boothman a bufoon, but I note he agrees with me after years of saying I’ve got Jersey wrong:

THE Island should be looking to the creative industries to replace the finance industry in future, a former senior banker told an audience of business leaders this week.

Members of the Jersey branch of the Institute of Directors heard John Boothman say that action needed to be taken, as the finance industry would disappear at some point.

‘Finance will go the way of cider making and privateering,’ Mr Boothman said.

He’s right of course.

I’m right that it’s going to happen sooner than expected.

And I know Jersey won’t be declaring UDI as some say it should on the back of film making.

It’s been fun for the Isle of Man and Ireland. But let no one pretend this is Jersey’s economic future. People cannot live on DVDs alone. Note least because Jersey is doing it’s damnedest to undermine the viability of the market for them.

Richard Murphy Jersey

Letters: Frail economy needs another stimulus | Politics | The Guardian .

I was one of 82 who submitted the following letter to the Guardian today:

The Conservative party’s calls for immediate cuts to the economy have been met by a growing chorus of criticism, warning that this risks sending the economy back into recession (Report, 8 March). The government was right to stimulate the economy with a variety of measures last year and so offset some of the worst effects of the recession. Yet, as some of the world’s leading economists have pointed out, the fragile nature of the recovery means that fiscal stimulus is still required. However, according to the IMF, Britain is one of only two G20 countries not currently planning any such fiscal stimulus in 2010.

A programme of government investment would not only stimulate the wider economy in the short term, but would increase long-term growth, thereby lowering the debt levels through a higher tax take. To this end, we encourage the chancellor to use the forthcoming budget to announce a second fiscal stimulus – especially in housing and transport, where investment has fallen most, and with a focus on developing a low-carbon economy – which would both help to secure economic recovery and create much needed jobs.

Colin Burgon MP

and 81 others

The need is obvious.

Will Alistair Darling respond?

Richard Murphy Economics

I’ve written a new report under the above title on behalf of PCS – the union that represents more than 80% of HM Revenue & Customs’ staff.

As the executive summary says:

The UK has been in recession, and may well be in recession again soon. Through no fault of its own, the income of our government has collapsed whilst its obligations have increased. A gap between government income and expenditure of up to £175 billion a year has emerged as a result. This though is not a spending crisis: this is an income crisis.

This report argues that the scale of that income crisis is being increased as a result of policies being pursued by HMRC. Those policies were created before the onset of recession. They have two aims. The first is to cut over time the number of staff engaged by HMRC by 25,000 – 17,000 have already left. The second policy is to close many of the local tax offices from which HMRC used to undertake its work in local communities. Over 200 offices have either closed already, are about to close, or are under threat of closure. It is fair to say that all offices are under scrutiny. When the programme is complete some people in the UK will live more than 50 miles from their nearest tax office, making it impossible for many of them to turn to this natural source of help and advice when seeking to fulfil their obligation to pay tax. In addition, HMRC are about to press ahead with the closure or severe reduction of its drop-in enquiry centre facility, which has previously provided a local and immediate tax advice service for both members of the public and tax professionals.

As this report also notes, too many people do not pay the tax due by them in the UK. HMRC have estimated the ‘tax gap’ in the UK – the difference between the tax they think is owed and the tax they actually assess – to be about £40 billion a year. We argue that this dramatically underestimates the total tax gap, particularly with regard to tax evasion.

To data previously published by the TUC which estimated total UK tax avoidance at £25 billion we now add an estimate of £70 billion for tax evaded within the UK. We can provide detailed and precise workings for this sum and also outline why the estimates of this sum produced by HMRC and the National Fraud Authority inevitably understate this figure.

When the total outstanding debts now owing to HMRC are added to these two sums, which when last estimated was £28 billion, we suggest the total tax gap in the UK is now likely to exceed £120 billion.

It is very obvious that the UK cannot afford this tax gap. It is equally obvious that if investment were made in additional resources for HMRC then this tax gap could and would be substantially reduced.

In arguing this we make the following points:

Recommendation 1: The basis for estimating tax avoidance should be revised to use a definition widely recognised in society and which correctly reflects areas of continuing policy concern as well as those abuses making use solely of artificial arrangements.

Recommendation 2: HM Revenue & Customs should be required to prepare estimates of evasion of direct taxes on a “top down” basis, as they do for indirect taxes.

Recommendation 3: H M Revenue & Customs should recognise that their existing bottom up methodology for calculating the tax gap for direct taxes will inevitably seriously under-estimate the size of that estimate.

Recommendation 4: HM Revenue & Customs should recommence publication of the many statistics on taxation produced by the former Inland Revenue which have ceased to be available since its demise, the lack of which make objective appraisal of the performance of the tax system hard to achieve.

Recommendation 5: HM Revenue & Customs should engage more staff to tackle tax avoidance and tax evasion.

Recommendation 6: HM Revenue & Customs must on occasion select cases for investigation without consideration of potential tax yield, and make clear that this happens to protect revenues from those on lower levels of earnings.

Recommendation 7: More staff should be engaged to scrutinise tax repayments before they take place.

Recommendation 8: More staff should be engaged to recover tax debt owing, and limits on sums to be pursued for collection should be lowered considerably.

Recommendation 9: The local office closure programme being pursued by HM Revenue & Customs should not just be stopped, it should be reversed. Tax must be seen to be collected in the community.

It is our firm believe that adopting these policies would highlight the true extent of the UK Tax Gap, provide the data needed to appraise progress in tackling it, and be cost effective methods of achieving that goal for al the reasons this report outlines.

I’ll be featuring more of what I say in this report over the next day or so.

The key issue is a simple one though: why, at a time when we need every penny of tax revenue we can get are HM Revenue & Customs doing everything possible to increase inefficiency in the tax system.

And remember – it’s not just me or PCS who are saying this. So too are the Treasury Select Committee. And I’d just point out that it’s not just PCS who are affiliated to the Tax Justice Network, so too are the Revenue & Customs’ group of the First Division Association of senior civil servants.

The Treasury select committee said, for example this week:

[HMRC’s Chief Executive] further that there was “lots of evidence” to show that HMRC’s anti-avoidance strategy was working. This is though not reflected in the Annual Report which records that it is too early to give an assessment of HMRC’s efforts to increase tax and National Insurance contributions actually received relative to the amounts that should be received.

And to reflect what I wrote on the lack of data and transparency from HMRC they also wrote:

As we have also previously noted, there is a similar lack of transparency in HMRC’s Annual Report on tax avoidance. In all, the Annual Report records no milestones against three out of the four [key] performance indicators .

Two reports happening to be in agreement does not say we’re both right. But I’ll venture on this occasion that we are.

Richard Murphy HMRC, TUC, Tax avoidance, Tax evasion, Tax management

The Press Association: MEPs call for tax on rich banks.

The PA reports:

Euro-MPs have called for an EU “Robin Hood tax” on rich banks to help fund development policies for the poor.

An overwhelming vote in favour of the move was welcomed by the TUC and Oxfam, but condemned by Tory MEP Kay Swinburne as giving tax-raising powers to Brussels.

A resolution approved by 536-80 votes said a “Financial Transaction Tax” could be used for “innovative financing” for climate change or development projects. It backed a worldwide tax but asked the European Commission to look into how to implement such a tax at EU level if a global agreement cannot be reached.

The campaign for financial transaction taxes marches on.

And rightly so.

Richard Murphy Transaction Taxes