Let’s get serious – the tax gap is big – and sometimes a little bit of it is collected

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It’s become mildly fashionable in right wing circles to have a pot shot at my estimates of the tax gap. Mark Field MP was the most recent to do it on 21 July, saying in parliament:

The third myth is that IFCs engage in harmful tax practices. The Foot review suggested that the potential for tax leakage from so-called full tax jurisdictions, such as the UK, towards low-tax or zero-tax regimes, is relatively limited. Although the TUC has argued that the tax gap created in UK Government tax receipts as a result of offshore centres is some £25 billion, the Deloitte report commissioned by the Treasury at the time of the Foot report showed that only £2 billion is potentially lost in tax leakage per annum. Foot also concluded that the real figure might even be lower than that.

IFC is his preferred term for a secrecy jurisdiction — meaning international finance centre, which is the last thing these places are. But let’s leave that aside and instead note the reference to the tax gap. First, there is no suggestion whatsoever in my TUC calculation that all the loss referred to arose offshore. Far from it in fact. So the claim in the context he made is wrong. Second, even HMRC dismiss the Deloitte claim in their October 2009 report as ludicrous. HMRC said in December 2009 that large business (most likely to work offshore) avoided at least £3.1 billion a year in tax — substantially higher than the Deloitte number, showing just how ludicrous the work of that firm was (and what a shocking waste of taxpayer’s money it was to give them the commission to do the work).

But let’s also look at the reality. On July 23 Bloomberg reported:

Vodafone Group Plc, the world’s biggest mobile-phone company, agreed to pay 1.25 billion pounds ($1.93 billion) to the U.K. to settle a lawsuit over taxation of its European units based outside of Britain.

The deal with U.K. Revenue & Customs calls for 800 million pounds to be paid in the current financial year with the rest to be paid in instalments over the next five years, Vodafone said today in a statement about its first-quarter earnings.

Vodafone set aside 2.2 billion pounds to cover tax payments and interest in the case, the company said last year after it lost a Court of Appeal ruling. The dispute involved Vodafone’s Luxembourg unit and Britain’s so-called Controlled Foreign Companies laws relating to U.K. corporations that have units in European Union countries with lower tax rates.

“No further U.K. CFC tax liabilities will arise in the near future under current legislation,” Newbury, England-based Vodafone said in the statement. “Longer term, no CFC liabilities are expected to arise as a consequence of the likely reforms of the U.K. CFC regime.”

One company. One settlement. £1.25 billion, most of it from one deal.

The tax gap is £3.1 billion a year? Pull the other one, please. The idea is quite ridiculous.

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