The tax gap debate in Parliament yesterday

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There was another dimension to yesterday’s debate in parliament on tax avoidance and tax evasion. This referred to the Tax Gap. As Vince Cable noted, again referring to Conservative denial that there was data on this issue:

The hon. Member for Banbury (Tony Baldry) rightly asked for an evidence base. There is fragmentary evidence. Her Majesty’s Revenue and Customs estimated three years ago that the British Exchequer was losing something in the order of £10 billion to £40 billion a year‚Äîa wide range‚Äîto tax avoidance and evasion activities of various kinds. Richard Murphy, who has rightly been praised for his practical work on the matter, has estimated that HMRC is losing something in the order of £18 billion specifically through tax havens. High net worth individuals account for about half of that through legal avoidance; £3 billion is lost through corporates; and the rest is lost to illegal evasion. A lot of evidence has come through in the past few years, for which The Guardian has rightly been praised, on corporate tax avoidance, as distinct from evasion.

In 2005-06, a third of British companies in the FTSE 100 paid no tax at all on their profits—none whatever—and a third paid very little. We have an extraordinary state of affairs. The average corporate tax rate for small companies in Britain is 21 per cent., which is supposed to be concessional, but the average tax paid by big companies is 20 per cent., because the latter have access to the lawyers and accountants that the former do not. That is utterly perverse.

Much of this comment was based on my work.

But that’s not to say that work did not come in for criticism. It did. Conservative MP David Gauke said:

We must be careful about what we are addressing. There is a danger of confusion in some of the criticisms made about the level of tax avoidance. A number of hon. Members have mentioned the Trades Union Congress report that refers to a tax gap. The work was undertaken by Mr. Richard Murphy, who identifies a £25 billion tax gap caused by tax avoidance. Essentially, he looked at headline tax rates and then at the total tax rate, measured the gap and said that it was caused by tax avoidance, but that fails to take into account that we as a Parliament deliberately introduced measures that mean that entities, individuals and companies are not necessarily paying the headline rate.

It appears that half of the £25 billion gap is due to a combination of independent taxation in the UK between spouses and civil partners and the fact that companies can defer taxation through capital allowances. Bill Dodwell of Deloitte put it well when he said:

    “The TUC’s report doesn’t inform the tax avoidance debate: it seems to be challenging policy choices (independent taxation; the taxation of the self-employed; capital allowance rates) by labelling them as tax avoidance.”

We must be careful not to devalue the terminology. There is such a thing as tax avoidance, which should be addressed, but let us not become confused.

Bill Dodwell did, of course, dismiss the Tax Gap work. But such was his conviction he also refused to meet or debate the issue. I am sure there was good reason for that. Most importantly of all, it was because he was himself on decidedly dodgy ground, deliberately confusing and abusing terminology to undermine debate.

The reality is that independent taxation has given rise to substantial abuse of the UK tax system: income and gains have been systematically shifted between the spouses to reduce overall household income subject to taxation at higher rates, and this process has heavily favoured those on higher levels of income with have opportunity to do this. Of course that is tax avoidance.

Just as the process of creating artificial self-employment structured through limited companies with income shifting taking place as a result is also tax avoidance.

There is no doubt whatsoever that capital allowances have been substantially abused with the aim of reducing the overall rates of tax in some companies, and banks in particular. The whole leasing business is tax avoidance driven: let us be realistic.

In that case of course it is appropriate to raise the systemic question, which the TUC report does, as to whether facilitation of this tax avoidant behaviour is appropriate. It is most certainly not an abuse of terminology. And to address these issues at the micro level that Bill Dodwell chooses to do is evidence, in my opinion, of a small minded approach to this issue, not presentation of a reasoned argument.

What David Gauke should do is clarify his own use of terminology. I think we would agree that tax evasion is securing a tax advantage by breaking the law. It is, however, completely untrue that every other form of activity is tax avoidance. That is confusing and devalues terminology. Tax avoidance is the process of getting round the law to secure a tax advantage. After all that, precisely explains what avoidant behaviour is: it suggests one goes round something. That is the type of minority pursuit that Bill Dodwell appears to exonerate but which I criticise because I, instead, promotes the concept of tax compliance. Tax compliance is 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.

I think most of the Members speaking in the debate yesterday fully understood the nature of tax compliance. David Gauke appears not to do so. He should spend less time talking to Bill Dodwell and rather more time thinking about the systemic issues which will face him if, in due course, he becomes a member of a government. Then he will understand exactly the point I made, about which I have no hesitation as to its accuracy, appropriateness, or as to the validity of the findings.