The tax gap in parliament

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From Hansard yesterday (edited):

John McDonnell: The debate was about how to resolve the deficit that has arisen as a result of the credit crunch and the economic crisis that we face. Clearly, the division was around the level of reductions in public expenditure required and the time scale for their implementation. There was fierce debate about the level of public expenditure decreases and their implications for jobs losses, cuts in services and the impact on communities.

What was absent from the debate was a discussion of increasing tax revenues as an alternative to cuts. Everyone appreciated that the deficit needs to be reduced. There was some agreement, even across Benches, on some cuts, particularly with regard to ID cards and, perhaps, Trident. With regard to cuts in education and welfare benefits, however, there were strong differences. We need to look again at tax avoidance and evasion. There has been confusion about definitions in previous debates. Tax evasion is defined closely as the illegal non-payment or under-payment of taxes, usually resulting from the making of false declarations, or from no declarations of taxes to tax authorities, and can result in legal penalties. Tax avoidance is seeking to minimise a tax bill without deliberate deception, but contrary to the spirit of the law.

The difference is clear with regard to legality and illegality. The technical implementation of tax legislation can be complex, so people can misunderstand which side of the fence they fall. During earlier debates in the House, the Denis Healey quote was cited that the difference is a prison wall. The implementation of measures to tackle tax evasion in particular is critical to the sound management of public finances and, obviously, to probity in the management of tax resources.

I investigated various sources in my search for estimates of the tax gap. The latest HMRC estimate that I could find was £40 billion, but there is an element of uncertainty reflected in a reported memorandum circulated to staff in HMRC and the wider Treasury, asking people to come up with ideas for identifying and calculating the gap.

The HMRC estimate has been challenged by others. I chair a group called the Left Economics Advisory Panel, which brings together a number of Left economists including some who have been working with the Tax Justice Campaign. Over the years many Members will have worked with Richard Murphy and John Christensen, who are held in respect across parties because of the work they have undertaken in this sphere, and the advice that they have given to the Treasury and other organisations for a number of years. According to their estimate over the past year, the tax gap could be anything between £70 billion and £120 billion.

From which point on, much of the ensuing debate seemed to focus, quite heavily, on the issues I have raised over time and with which many readers of this blog will be familiar.

I am grateful for the time devoted to that discussion by so many MPs: I can only quote in small part what was said. John McDonnell was not the only MP to support my work, or the support I have given to those who think making thousands of revenue staff redundant at this time quite illogical.

The following observation was wise:

Dr John Pugh (Southport) (LD): Should we not recognise that tax avoidance and tax evasion are two very different things, and that although we can make a rational guess as to the extent of the former, tax evasion that is successful is not detected at all and therefore any estimate of it must be highly speculative?

But that does not mean that the HMRC estimate, suggesting there was just £1.1 billion of personal tax avoidance can be anywhere near in the right region.

This was also insightful:

Andrew George (St Ives) (LD): I congratulate the hon. Gentleman both on raising the issue and on the manner in which he is doing so. He has made it clear that he has raised it under two Governments. Putting aside the tribal aspects of the debate, I agree that we need to bear down on this issue, and I have asked parliamentary questions on evasion and avoidance that are due for answer today. Does the hon. Gentleman agree that it is to be hoped that once we understand a great deal more about this issue, we will be able to close the loopholes, and address other issues such as where Treasury officials go and work after they leave the Treasury?

He hit the reason fro doing this work fairly and squarely on the head. As John McDonnell put it:

I am trying to come at this from a straightforward administrative perspective, asking how we can arrive at a situation in which HMRC will report to the House—to the Chancellor of the Exchequer—on the extent of evasion and avoidance and the measures that are going to be pursued. The reason why I am making a link to the changes in tax measures is that I want there to be a time limit, so that we get a report back to the House; otherwise, this situation will continue year after year.

But the Tories didn’t get it. John Redwood showed either complete ignorance or complete contempt for the issue — seeking to claim that ISAs are tax avoidance. I will not address the obvious error in his remark — presumably made to hide the avoidance activities he’d rather not have highlighted — John Christensen at TJN does it well here.

John McDonnell showed complete understanding of the issue in contrast:

That is an interesting point. Tax compliance should be a duty in law, so there should be a requirement on us all to pay our appropriate level of tax. Tax planning is perfectly consistent within the law and is appropriate for individuals and organisations in order to ensure that they pay the appropriate tax. However, such devices should not be used to avoid paying the rightful level of tax and certainly should not be used for the purposes of tax evasion, which is the illegal avoidance of tax.

So did Stephen Timms, who asked this of John Redwood:

Stephen Timms (East Ham) (Lab):  The question is this: does he deprecate any tax avoidance, or is he saying that as long as it is strictly in compliance with the law, anything goes? As he knows, there have been some very ingenious, and indeed expensive, schemes used by companies to avoid paying tax, clearly contrary to the spirit of the law but arguably in compliance with the letter of the law. Does he not deprecate that kind of activity?

Mr Redwood: I do not want to get drawn into the moral issue of deprecating or not deprecating.

I’m sure you’d rather not Mr Redwood.

And as Stephen Timms had to respond:

Stephen Timms: The right hon. Gentleman is uncharacteristically abusing the English language. To say that something that is explicitly provided for in the law is tax avoidance is not what most people mean by the term.

The reality is that the term tax compliance — whether used or not — is now clearly being understood, which is good news.

And, although Stephen Timms made it clear he did not agree with all my work on the Tax Gap — he made clear he sympathise entirely with the substance and that Redwood’s old approach is just wrong saying:

Having listened to the arguments put forward by the right hon. Member for Wokingham (Mr Redwood), I imagine that he would be opposed to that initiative [a report to parliament on the Tax Gao], because he would feel that it should simply be a matter of asking, “Are you or are you not complying with the letter of the law?” and that, if a problem arose, the Government should legislate to close the loophole. The problem with that approach is that we can get into an arms race, as we have certainly done on many occasions, in which the Government and Parliament agree on changes to the law and everyone knows perfectly well what they mean, but the banks then commission ingenious accountants to find ways round the spirit of the law, even though the letter of the law is being complied with. If we were to stick with the approach for which the right hon. Gentleman is arguing, Parliament would then have to close the loophole, perhaps a year later, and the circle would continue to go round. He made an interesting case, but we have to find a way of breaking that vicious circle, because huge amounts of money are being spent by taxpayers and by HMRC, and, in the end, nobody benefits.

Quite correct.

So what of the minister — David Gauke. He proved he has read this blog — assiduously. I am grateful. No wonder traffic is so high at present. But unfortunately all he picked up on were the minor points relating to double tax relief on corporation tax — affecting a tiny part (at most) of a £120 billion tax gap. Like many others on the right he seems more intent on analysing one sentence I wrote in The Missing Billions than actually addressing the issue. It’s nice to find my work is subject to as much linguistic analysis as a Jane Austen novel — but the tax gap remains despite this diversion of effort. But there is a positive outcome as he said in conclusion:

The hon. Gentleman is right to hold Ministers and HMRC to account in regard to how we seek to reduce the tax gap. The Government are taking the matter seriously, and, in the spirit of transparency in which we operate, we will provide as much information as we can so that our debate is as well informed as possible. In the light of that assurance, I hope the hon. Gentleman will accept that the amendment is not necessary and will withdraw it.

John McDonnell welcomed that, saying:

I think that the debate has been helpful to Members on both sides of the Committee. An attempt has been made to get out of the trenches, and to engage in a wide-ranging discussion of how we can proceed in a pragmatic way. I believe that this will become one of the key issues that people will expect us to address as the economic crisis continues. If they see public expenditure cut so that their local schools are not refurbished, and if they see a tax on welfare benefits, they will expect us at least to maximise the revenue from the tax that people and organisations should be paying. Justice and fairness in the taxation system will become critically important to more and more people.

He is right.

He continued:

I welcomed the Minister’s statement about the continuation of, and consultation on, the commitment to the anti-avoidance rule, but I hoped that at some stage a future report from Government would enable us to engage in a wider debate on how we could install in legislation the duty to comply more simply and effectively. As my right hon. Friend the Member for East Ham (Stephen Timms) pointed out, the issue that arises time and again is the ingenious use of devices to avoid the spirit of the law. In other contexts, we draft legislation in such a way that when a device appears it can be seen to be a device, which is patently against the spirit of the legislation and whose effect can therefore be outlawed. I also welcomed the wider debate on the anti-avoidance principle to be installed in legislation.

Again he is right.

And I am at the same time delighted and a little humbled that this blog  and the work I have done has helped highlight this key issue in our economy at this time. I do not think the matter will go away. And In do hope that as Stephen Timms said:

There is debate about whether the £40 billion figure is correct. I believe that HMRC did a serious and careful analysis. I also think there should be more discussion with people like Richard Murphy. I believe his figure for the tax gap on corporation tax was about £12 billion—not vastly more than the £9 billion or so in the HMRC figure. Richard Murphy also makes the point that there is uncertainty—perhaps more uncertainty—about that figure than some of the others that he estimates. Continuing discussion between people such as the tax justice campaign and HMRC is important so that we make these figures as accurate as possible. I very much hope that the Minister will confirm that it is his intention regularly to update the analysis that has been published, to be frank and robust in publication and to discuss the issues with the tax justice campaign, which takes a different view, and the TUC, which has also taken a close interest. Ultimately, it is in everyone’s interest to have the best possible information available. I hope that the Minister will reassure us on that.

The minister did, almost. And he would not have done but for the work of the Tax Justice Network, TUC, PCS and others — and I guess this blog. That’s called “a result”, I think.