People only form companies for economic reasons. There really is no other reason to have one.
Despite that just one in three companies in the UK pay tax. The data is based on the year to March 2010. All the details on how I got the data is in a report here. The facts are:
a) There were about 2.6 million companies on the Register throughout most of that year.
b) Of these about 500,000 claimed to be dormant.
c) That leaves 2.1 million potentially taxable.
d) But I guessed at least 180,000 of the companies likely to be formed that year would never trade and so would not owe tax.
e) That left 1.92 million trading companies.
f) H M Revenue & Customs asked for tax returns from 1.88 million companies. It looks like they got to the same place as me, working from different data.
g) Unfortunately they only got 1.18 tax returns back (yes that's 63% near enough bothered to reply). Of those 915,000 paid tax (almost exactly 33% of the peak number of companies in existence during the year).
h) That left (depending on whether you start from my number or their number for taxable companies) about 730,000 companies that should have submitted corporation tax returns that did not.
i) I accept that some of those companies would have made a loss and owed no tax. Based on the ratio of loss making companies amongst those that did submit returns that would still leave 536,000 taxable companies that should have submitted returns and did not.
j) The average corporation tax paid by small companies in the year was about £10,000 (a remarkably consistent figure over time).
k) That means that more than £5 billion of unpaid corporation tax a year probably arises for this reason: that is more than the entire cost of running H M Revenue & Customs a year.
l) In addition it's logical to assume that if a company did not submit a corporation tax return they also failed to pay PAYE and VAT as well. Based on extrapolation of HMRC data these other taxes might have been £20,000 a company for that year.
m) That means the total tax loss was, on this basis, maybe £16 billion.
That's more than the tax raised by increasing VAT this year.
And all that happens because H M Revenue & Customs is committed to cutting the number of people it employs at HMRC.
This is a choice: it is not a necessity.
By choice our politicians are leaving business unregulated.
By choice our politicians do not collect enormous sums in tax.
This issue could be tackled, cost effectively and easily. Some ways of doing so are included in Caroline Lucas' Tax and Financial Transparency Bill, but ministers are showing no enthusiasm to even recognise this issue.
We need to ask: why is that?
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There are some mistakes in your assumptions. Starting from the biggest to the smallest mistake:
1. BIGGEST ERROR: why do you take the ratio of those that submitted returns and generated profit to somehow induce that the same ratio can be applied to those that didn’t submit a return? making a profit is the REASON that one files a tax return. If you don’t owe anything, you don’t file. Especially if you’re a small business with limited resources and don’t want to waste your money on a blood sucking accountant. ahem.
2. What % of companies actually make a profit? The number is surprisingly low. It’s more of a bell curve. 90% of businesses fail in the first year, that means a very large % of businesses just don’t generate any profit. But what’s the percentage of profit making businesses after year 2? year 3? year 4? still very low.
3. Many of the companies that are registered, and in fact still trading, are owned by people like you, accountants, engineers (i’ve never met an engineer or professor that doesn’t have a company). they keep these ‘on the side’, book a bit of revenue through them for speaking engagements, book their travel or research costs off. To the point – many companies are formed by small time professionals to reduce their out of pocket expenses, and don’t generate much profit.
4. It’s not true to assume that a company that doesn’t generate profit, doesn’t also pay PAYE or VAT. What are you basing that correlation on? think like a small business owner with limited funds. you import or export something. VAT is a day to day fact of life you have to deal with and you create an account. annual tax return – blah, do it when you actually own the tax man something.
So yah, if only HRMC could just find magical money by following your back-of-the-napkin analysis, but sadly the money’s just not there mate. Nice try though.
All of these explanations are wrong precisely because I have already allowed for them.
You are right, at least 700,000 companies are dormant: HMRC does not request tax returns from them although they have absolutely no evidence that this claim of dormancy is right, and it could (and I think it quite probably does) cover significant fraud
The near enough 1.9 million tax returns that HMRC does request is from those companies that they have good reason to think trade: the obligation to submit a tax return exists whether or not there is a loss. Making a loss is no excuse to not make a tax return. It does not give the option to not file: you are wrong
I have allowed for the proportion of companies that make a loss amongst the returns that are actually submitted in my calculation. In that case I have covered the fact that losses arise.
I have allow for 50% of all new companies to fail without making a profit. You cannot therefore double count this.
The figure of average tax paid is that which is due by the companies that pay: I have not made it up. It is, as I noted, remarkably consistent over time. It is therefore reasonable estimate. You cannot dismiss it.
The fact that some of these companies make relatively modest amounts of income does not mean that they do not have a tax liability, or excuse the fact that that liability is evaded. you appear to have a casual approach to this issue, which is precisely why so much abuse goes on.
You will note that I’ve been exceptionally generous in assuming the companies that do not make a profit did not have PAYE and VAT liabilities: I having ever to be under estimated the amount of tax owing as a consequence. I always err on the side of caution.
The result is that my figure is almost certainly an underestimate: you are just seeking to excuse criminal behaviour.
[…] published on the Tax Research UK Blog . Tags: HMRC, Tax, Tax Avoidance, Tax Evasion, […]
“the obligation to submit a tax return exists whether or not there is a loss. Making a loss is no excuse to not make a tax return. It does not give the option to not file: you are wrong”
This is correct, but it does not address the point Randall was making and which I also think is the biggest fault in your analysis.
The point being made is that you are more likely to file a Return if you have made a profit then if you have made a loss. Therefore it is incorrect to assume that because 1/3rd of Returns submitted show a loss, then you can use the same fraction to assume that of the Returns not filed, 1/3rd would also show a loss – the fraction is likely to be much higher.
Consider the situation when HMRC send an individual a notice to file a Tax Return – the person is far more likely to file it if they’ve made a profit precisely because of the consequences of not declaring taxable income are serious. If they’ve got no taxable income or made a loss then they’ll think sod it, why pay an accountant to do that.
Another point which you I think you need to explain is why someone would incorporate if they want to fraudulently evade tax?! Registering a company puts a trade under the radar, with personal details and addresses of officers going on the record. Why would someone want to draw attention to that? The same logic applies to illegal trading – gambling or prositution for example. I suspect the number of companies whose principal activities are either of those are remarkably small.
The point very glaringly obviously is that incorporating does the exact opposite of what you claim: people are chased for tax returns: the obligation to pay continues without limit. But the Revenue and Companies House do not at present chase companies for anything. People now know that so the fact is that forming a company now is a perfect way to commit a fraud – and I am quite sure that the abuse is as widespread as I suggest and you’re offering lame excuses to exonerate those undertaking it.
I don’t think you have adequately addressed the first of Philip Vincent’s points. His point seems fair. To concede a fair point would give me confidence that facts always lead the ideological horse. Otherwise an excellent blog and fun to read…
I am struggling to see why this nis a fair point, that’s why
Over 200,000 companies that owe no tax submit corporation tax returns
I am baffled as to why you therefore think that companies that make a loss do not file
That’s not ideological
That’s a simple statement that I do not see why without any evidence at all you can make your claim
I at least have evidence to support ,mine
So your hypothesis has to be very strong indeed to trump it
I look after various companies within a corporate group. There are probably around 20 in all, of which maybe five are legally dormant. Of the remainder, only 4 have any operating activity, and only two are profitable. The others either bear some interest costs or do nothing but have not been declared dormant. We do submit returns for every non-dormant company, but due to group relief (etc) we usually only have tax payable by one company. There is nothing underhand going on, nothing is undeclared, and everyone is paying what is rightfully due on profits, after allowances… but that’s only giving tax paid from one company in a group of 20… 5%!
There is, I’m sure, an issue to be dealt with.. mainly in small and unaudited companies who are not filing returns and are not adequately pursued. However, the nature of bigger groups is that they are often littered with non-trading entities, or non-profitable ones, upon which no tax is due. Your figures would be helped enormously if you were able to take those into account.
They are taken into account
You are compliant
I am sure most big groups are in this way
So they’re in the data for the 33% who pay or at least file
Perhaps I have not quite followed your numbers right.
I can see that you take into account that my companies are compliant, but how many of my non-tax-paying entities are nonetheless included in the overall 67% that don’t pay tax? Because if some of them, compliant or otherwise, are in that figure then isn’t your headline a little misleading? There would be nothing wrong with only 33% of companies paying tax if only 33% of companies made a taxable profit.
If there are 1.18m tax returns from 1.92m trading companies then that’s, surely, already over 60% of companies that are compliant… well in excess of 33%. So your assertion may be technically accurate, but it’s disingenuous.
The 33% ratio is 900,000 that pay (near enough) out of 2.7 million in total
That’s an easy ratio
Your non paying companies are in the 200,000 or so who submit returns and don’t need to pay
My question is about the 1.6 million who don’t submit returns and might need to pay
It’s really not hard to see that such a ratio of non- submitting companies could hide massive tax fraud
Richard,
With respect, I feel one of points above has merit which hasn’t been addressed.
Set #1: Companies that file their taxes
X% owe something
Y% owe nothing
Set #2: Companies that don’t file their taxes
A% owe something
B% owe nothing
You seem to be ‘straight-lining’ that
A = X and B = Y.
This is a classic mistake that the so called ‘rational expectation’ theory of economics addresses (or if you wish, the Heisenberg uncertainty principle of physics).
The companies in Set #2, Subset A, there is a compounding economic consequence to not file. So naturally, the market metrics better support the hypothesis that:
A <> Y.
Yes or no?
Sorry that last part should say AY
wow i’m having a problem wiht greater than less than signs.
that last part should say
A is far less than X
and B is far greater than Y.
Candidly, so you want to try again, making clear what you mean?
The point being made is the same as mine, but more elegant:
==
Set #1: Companies that file their taxes
X% owe something
Y% owe nothing
Set #2: Companies that don’t file their taxes
A% owe something
B% owe nothing
==
Your model states:
A equals X; and
B equals Y
Filing taxes has a financial cost – about $1K let’s say.
If taxes are not due, there’s a financial incentive to NOT file your taxes. ‘Why bother’ the average SME owner will say. Why enrich an accountant when I don’t have to file this year?
To this end, given the financial dampening of $1K either way, it’s far more likely that:
A is far less than X; and
B is far greater than Y
QED.
Oh dear: you got that wrong in a big way
You have assumed that there are only two categories. There are not two categories in my analysis. There are three. You have ignored the fact that I have already allocated 800,000 companies to a group where I say that there is no requirement to supply a tax return because they have no income. Or because they make losses. This of course is not proven: there is no data to prove that these companies do not have income or make losses: it is an assumption on the part of the revenue, and one that I severely question. But I have accepted it. Therefore, generously, I’ve assumed that there is no tax loss in this enormous category. That is highly unlikely to be true. You entirely ignore this fact. The reality is that if there is any overstatement in estimate in the second category, which is those copies which which should file, but do not, then it is almost certainly over compensated for by two things: the first is that I have accepted that none of the 800,000 companies who are not asked to file should do so, and secondly I have assumed that the loss-making company owes no VAT or PAYE, which is obviously a very generous assumption to make.
Your analysis is simplistic, and wrong. There is no other interpretation possible.
On the same basis, I am not saying for one moment that my estimate is, of course, correct: it is an estimate. But I am saying it is a reasonable estimate given the evidence that exists and the logic behind it. If you can show using the real facts that I use that my logic is wrong, of course I will change my estimate. But which ever way I change it the resulting number will still be very big indeed, plenty big enough to justify ministerial action. Why do you wish to dismiss that possibility?
£5bn is enough to pay for HMRC for at least 4 years
Not according to their accounts….but it does, I agree, depend which art of the organisation you look at
Richard,
I enjoy reading this blog and often find what you write illuminating, but I think on this occasion it would be better for you to hold up your hand and admit that there is in fact no reason to assume that the proportion of companies who don’t file a Return that are loss making is substantially greater than those who do file a Return. You give no reason for using the same ratio. You keep pointing out that there is still an obligation for a loss making company to file a Return, which is true – but irrelevant for the purposes of determining the ratio of loss making companies in those who do not file Returns. More than one person has explained that you are far more likely to file a Return if you make a profit than if you make a loss and you have been repeatedly unwilling or unable to refute this.
With the very greatest of respect, there is not a hope that I will agree with you or admit that what I’ve written is wrong until you can provide any evidence at all to suggest otherwise.
You, like many others who are commenting here, are obsessing with the ratio of loss-making companies. Yes, of course I rely on it in making my estimate, but only in very small part. The reality is that I am saying that only one in three companies in this country pay tax. I believe that at least one in two should be. Why is it that you were ignoring the very obvious fact that at least 500,000 copies a year are likely to be committing some form of tax evasion and yet you wish this to be swept under the carpet?
I openly acknowledge that my estimates are just that: of course they cannot be exactly right. It would be foolish to say otherwise and I am not. But I am pointing out and massive regulatory gap inside the UK which is inevitably contributing to the enormous tax gap that exists. Why don’t you want is to collect tax from companies that though it? Why do you not want the law to be enforced? Why are you happy that there’d be a blind eye turned to cheats? Why are you willing to allow honest business in this country to be undermined by those cheats? Why do you want an unlevel playing field in the British economy that favours fraudsters? Why don’t you want copies to file their accounts on public record when they are legally obliged to do so? Why can you turn a blind eye to 325,000 companies not doing so in one year? Why are you willing to accept that our regulators do not impose the finds required to be charged in the circumstances? Why do you obsessed with minor aspect of this is a diversion from these massive questions? Can you answer those points before coming back to the ratio of loss-making companies, Which is being put forward by you and others is a complete red herring to ensure that the real questions aren’t being answered?
Why do you assume that someone who questions your findings must therefore approve of criminal activity? I think it does your case no good at all.
“the very obvious fact that at least 500,000 copies a year are likely to be committing some form of tax evasion”
You are still ignoring what people have been telling you: that a company is more likely to file a Return if it has made a profit than if it has made a loss. In no way does this ratio play a “very small part” – it is fundemental to the final figure of £16bn. And I note you have the temerity to now say that 500,000 companies is a “very obvious fact”.
As I said before, you often make good points and what you write is rarely dull, but you’re doing yourself no favours here.
Respectfully, I am seeking to uphold the law, seeking to ensure that there is a level playing field for honest business, and am seeking to ensure that tax is paid. You are condoning criminal activity. Now tell me, who is doing themselves no favours here?
If you are promoting tax evasion, the undermining of the law, the destruction of honest business, the increase in the tax gap, the destruction of public service because people do not pay, and the undermining of the credibility of the business sector in the UK because it considers that compliance with the law is an optional extra, then that’s fine; be honest, and say so. But please do not pretend that that isn’t ethical, appropriate, or honest position to take. It isn’t.
You don’t do yourself any favours by suggesting that people who disagree with your findings must be approving or supportive of criminal activity.
The ratio of loss making companies amongst companies that do not file Returns is not a “very small part” of making your estimate, it is a fundamental part. You still have provided no evidence that the ratio of loss making companies that don’t file Returns is the same as in that subset which do file Returns. And there are very good reasons, which have been told to you many times just on this page alone, why it is likely to be much lower. And you’ve haven’t refuted them.
” You don’t do yourself any favours by suggesting that people who disagree with your findings must be approving or supportive of criminal activity.”
Oh, I do: it follows like nights does day.
Answer my questions. Tell me why you are happy for more than 700,000 companies a year to break tax law by failing to submit a tax return. Tell me why you are more than happy for more than 300,000 companies a year to break the law by failing to submit an annual return or their accounts to companies house. Then reconcile why your contentment with this situation cannot be reconciled with condoning criminal activity. These offences carry criminal penalties.
And remember, making a loss is no excuse for criminal activity. Your argument to the contrary is irrelevant.
“You have assumed that there are only two categories. There are not two categories in my analysis. There are three. You have ignored the fact that I have already allocated 800,000 companies to a group where I say that there is no requirement to supply a tax return because they have no income. Or because they make losses.”
I think you are saying that these 800,000 companies form your “dormant” category (it is not clear because this is the first time I”ve seen that number mentioned). But you include companies that make losses in that number. But companies that make losses are not dormant and should not be treated as such. A dormant company is not that broadly has no transactions going through it.
“This of course is not proven: there is no data to prove that these companies do not have income or make losses: it is an assumption on the part of the revenue, and one that I severely question.”
Doesn’t this statement just prove the complete futility of this report? By your own admission we don’t have any figures for the number of companies that make losses, yet your hypothesis is based on assumption laid on top of an assumption laid on top of another assumption. It might make sense to base a conclusion on one assumption (but I’d still have doubts), but when you’ve got so many assumptions due to the fact, as you freely admit, that you don’t have the relevant numbers, then the error in any result after the application of one assumption is magnified severely after you’ve added another two or three assumptions down the line.
It is not hard to see why many regard this £16bn figure as a complete load of crock.
The idea that the average of £32,000 tax lost for all these 500,000 missing companies is quite ridiculous.
In order to be trading to the extent that they have that size of liabilities a company will have a turnover many times that size. Rational businessmen do not let their businesses go to the wall, break contracts with suppliers, customers and employees in order to pull a fast one on the tax man earning them a fraction of the value of the business if left as a going concern.
A 5 minute browse through records at Companies House will show what is really going on. Businesses incorporate companies to put new ventures in. The new companies may be party to initial contracts and the business may take off, or it may just lapse and fall by the wayside until it is struck off.
“Answer my questions. Tell me why you are happy for more than 700,000 companies a year to break tax law by failing to submit a tax return. Tell me why you are more than happy for more than 300,000 companies a year to break the law by failing to submit an annual return or their accounts to companies house”
This is astonishing. I have never said that I am happy for companies to break the law, either by failing to file accounts, annual returns, or tax returns. Any company that is not complying with its statutory duties should be chased, and if necessary, punished. Happy now?
Now tell me, how is questioning the methodology of your report, in any way condoning criminal activity? And yet again, you fail to provide any evidence for your assertion that the ratio in the two subsets is the same.
My report is saying only one in three companies pay tax.
Are you arguing with that fact? It is, after all, true. there were over 2.7 million companies in that year, and just over 900,000 of them paid tax.
And my report is saying that no checks are undertaken at all on about 800,000 companies a year who are not asked to submit corporation tax returns as a consequence of their self certification that they are dormant. Are you arguing with that fact? that you are doing with the fact that some of those companies will, invariably, have a tax liability because they are exploiting this opportunity to commit fraud?
In my report is saying that about 700,000 companies that were asked to submit a corporation tax return do not actually do so. Are you arguing with that fact?
That is what my report is saying. And I am saying that it is a scandal that this situation exists, particularly when action can be taken to correct it. Are you denying that is what my report is saying?
And I am saying that as a consequence of this nonpayment both by companies that have deliberately broken the law by not sending in corporation tax return, and by companies that may be breaking the law by claiming to be dormant when they’re not, there is a massive underpayment of tax. Are you denying that possibility exists?
I have estimated the potential cost of that. In doing so I have made some extremely reasonable assumptions. First of all I have assumed that the average rate of tax paid by small companies might be applied to all those companies who have an obligation to submit a corporation tax return. I can see no reason why that is not relevant. The sample base is, after all, consistent over time, indicates a consistent level of payment, and is substantial, amounting to more than 900,000 companies in year. Why can’t I use that data as the basis for extrapolation given the enormous size of the sample population?
Secondly, I assume that the ratio of loss-making companies amongst those who are trading and not submitting returns is the same as it is amongst those who submit Corporation tax returns. What is wrong with that assumption? Do you honestly believe that at least half of all companies in the UK that are trading are making losses? That would be the consequence of your extrapolation and it is utterly implausible. But if that is so, what does it say about your competence as an accountant, because that is what I think you are? And if that is the case, why does it suggest that our government is right to believe that we should be relying upon the private sector to generate new wealth in this country? Clearly they aren’t competent to do so. Why do you think that making a loss entitled someone to break the law?
I believe that my assumption is entirely plausible, given the other caveats that I have already provided i.e. that I’ve accepted that there is no tax liability among the 800,000 companies who self certify that they are dormant, even though it is obviously the case of this cannot be entirely true.
My point is a simple one: you are nitpicking to avoid the fact that this is an enormous area of regulatory failure which you do not wish to address.
So I return to my point: if you continue to argue in this way I will continue to assert that as a consequence you are supporting those who are clearly breaking the law. No other conclusion is possible, whatever you say
You can of course suggest a different figure for the tax loss: that’s entirely reasonable and within your right. But what is it going to be? 8 billion? Half my sum? If so, do you think that should be ignored? Why do you believe it is appropriate to allow this tax loss to continue?
Please answer the issues of substance and stop putting forward nitpicking and utterly irrelevant diversionary tactics to avoid the questions are raised, or my overall conclusion but you are seeking to exonerate lawbreaking of these companies by saying that it is justified by loss-making, for which you have absolutely no evidence whatsoever, is justified.
“Secondly, I assume that the ratio of loss-making companies amongst those who are trading and not submitting returns is the same as it is amongst those who submit Corporation tax returns. What is wrong with that assumption? Do you honestly believe that at least half of all companies in the UK that are trading are making losses? That would be the consequence of your extrapolation ”
It wouldn’t, because I have not as yet suggested a figure for the ratio of loss-making companies, merely said that I believe it to be a lot lower than you have.
And I do actually think you are overestimating the number of profitable companies in the economy. Huge number of companies have made losses in the last couple of years due to the recession. Huge number of companies are dormant. In the example Lee T gave, only 2 of the 20 group companies made profits, the others were either dormant or were just used to stuff expenses through. I think that is a pretty common occurrence. I am an accountant as you surmise, and I would say that of all my companies, only a third have paid tax in their most recent accounting period. So we agree on one thing.
well at least I have to thank you for confirming that the private sector is utterly incompetent most basic task, which is making profit. In that case George Osborne is utterly wrong to rely on it to generate new economic growth. My argument that the state is the only organisation capable of delivering this is justified.
And I note that you admit your own involvement in this incompetence. An accountant who can say that only one third of the companies he is involved with have made a profit is surely admitting that he’s either failing his clients or should shortly be applying for a form P 45.
Wow what a classy answer. There’s book called ‘how to win friends and influence people…’ I strongly recommend it Richard. You’re flailing and relying on personal attacks to people that are complimenting you about your blog, when all you need to do is admit just one small logical leap in your analysis: that the ratio of the two sets of companies can not be assumed to be equal, because there’s a cost to file and companies that are small, and don’t want to incur that cost – won’t file.
As for the loss making part, well microsoft lost money for the first 3 years of operations, so I guess all the engineers, secretaries, bill gates’ at microsoft in those first 3 years were failures?
And since when is the caliber of accountant judged by the profit success of his clients? That defies logic by all accounts.
Failure is good, it helps people make mistakes and learn and grow.
Incredible to assert that an accountant has to be blamed for the business success of his clients. Hilarious in fact!
Yes it is a classy answer
Because the logic is the best available
Unlike the crap you’ve written
I would sure as heck think it indication of the success of an accountant that their clients made a profit. Don’t you know that’s what most people want their accountant to help them do? It’s called value added. But as you indicate, most accountants have no clue how to do it
Any more than you clearly have a clue about drawing reasonable conclusions from data in the absence of alternative data
“And I note that you admit your own involvement in this incompetence. An accountant who can say that only one third of the companies he is involved with have made a profit is surely admitting that he’s either failing his clients or should shortly be applying for a form P 45.”
With all due respect, this is nonsense. I cannot speak for Alistair, but I can speak for myself.. and none of the companies I look after that don’t make a profit are supposed to. It is, obviously, not ideal that we have a number of unecessary entities.. but that is a function of the evolution of the group which, alas, I am not able to clean up. That is also irrelevant here.
[…] Only one in three companies in the UK pay tax. […]
WOW! I never thought my comments would cause so much of a fight! Que cosa! I’m sorry if I offended you Richard, it was not my intent! I’m a big fan of your blog and the TJN work. But honestly, there is 1 key mathematical error in your calculation. Maybe it’s easier for me to explain it with an example?
SET 1: the average income in the UK is 18,000 gbp.
SET 2: The average income for accountants in the UK is X,000 gbp.
YOUR CALCULATION STATES:
X,000 gbp = 18,000 gbp
But we both know that’s not true. The incomes of average people and accountants (whom I assure you are exceptional people – haha) are correlated yes, but you can’t “straight-line” your numbers from one set to the next.
Anyways, I hope people can stay civil and stop fighting. This is just math!
Respectfully, please don’t treat me like I’m stupid: I’m not. I know exactly what you’re all saying. I do know something about stats, extrapolation and all that.
And with the greatest of respect to you all, I still maintain that you are utterly wrong.
First of all, you have all, it seems to me, deliberately missed the point of my article. I don’t know whether that is deliberate, or not, but I suspect that in some cases it is. I made the point that 33% of companies in the UK pay tax, and the rest do not. That’s a fact. Nobody seems willing to discuss that: everybody seems willing to nitpick. No one has been willing to explain why. There is good reason: it is a desire to cover up the fact that massive fraud is going on.
Second, as I have repeatedly said, you’re ignoring the existence of the third category within this analysis: the 800,000 companies which I have assumed have no tax liability because they are treated as dormant even though only 500,000 actually claim that in submissions to companies house. It is an extraordinarily generous assumption on my part that every company in this category is both honest and has no liability to either corporation tax or any other form of tax. That extraordinarily generous assumption more than compensates for any risk in the calculation to which you all wish to refer. But although I pointed this out repeatedly none of you seem willing to take it on board. Why is that?
Thirdly, all seem willing to point out that I cannot extrapolate from one group to another but that is a simple assertion, there is no evidence whatsoever to prove it. In a massive sample of about 1.1 million tax returns there is evidence of a fairly consistent pattern of both tax paid, and losses declared. In the missing group of tax returns why is it wrong to assume that the same pattern might arise? I do not believe that all those companies are loss-making. I accept that is an assertion, but there is absolutely no evidence to prove that they are. In that case I think it reasonable to presume that some are profitable, and some are not. And in the absence of any other evidence I think to use the ratio found in the larger sample group is the only rational basis for extrapolation.
Lastly, note I assume that if a company has no corporation tax liability it also has no liability to VAT or PAYE, which is again quite extraordinarily generous assumption on my part. There is absolutely no reason why a company should not have those additional liabilities, but I have deliberately understated my estimate as a consequence.
So, all of you seem quite determined to dismiss my work on the basis that I’ve overestimated the potential loss arising because you maintain that companies may act illegally and not submit tax returns because the entire sample set of companies who fail to comply with the law are loss-making. Even if that were true (which is a quite absurd assumption to make) it is impossible to believe is that these do not trade: more than adequate provision has been made for non trading companies within the sample set already. Therefore two thirds of the liability that I estimate, arising from PAYE VAT, would arise anyway: therefore the minimum sum that I should estimate on this basis would be a little over £10 billion of tax loss. However, that is obviously too low: some of these companies are, I think most of you would agree, bound to be profitable. Let’s assume then that they are only half as profitable as the companies in the main sample set. Now that adds back a little over a 2.5 billion of additional tax. Let’s call that a fair compromise. But then let’s assume that at least 100,000 of the companies that claim to be dormant have in fact submitted a false declaration: this is entirely possible, the declaration is in fact made once every five years to HMRC and is not checked up on in the meantime, meaning that it is quite possible for these companies to start trading without telling HMRC. Let’s assume that each of them might have a liability of, say, £30,000 in various taxes in a year as for the rest in the sample. That would add 3 billion back into my estimate. Guess but what? We are now back to near enough the £16 billion I started with.
In other words, if you will also be bothered to work through the logic you would have seen that my compensatory adjustments are just that: they ensure that overall the estimate is plausible, with any risk of overstatement being more than compensated for by risk of understatement. I am not so daft as the put forward ideas that have no logical support: this one has ample, clear, logical, factual, statistical support and that is why I stand by it. And that is why I maintain all of you are guilty of making obvious, simple, logical errors. Because that is what you’ve done.
But I remain perplexed as to why No one has anyone tried to suggest why you picked on this one, rather obscure issue, and did not deal with the fundamental questions that I’ve asked, including why you are happy with the government ignoring the rule of law and why you are happy with the competitiveness of honest British business being undermined by tax cheats.
So, with the greatest of respect, given the counter arguments are absolute nonsense, unless you can now deal with the real, and fundamental issues in this, I’m closing debate on this issue because so far but one of you has shown any ability to contradict my logic.
Richard
If it helps, whilst I see why people think your extrapolation is wrong, I accept that there’s no data upon which to make a different assumption and as you’ve stated your method, so whilst the point merits discussion, all is fair.
What I still don’t like is the ‘headline’, because I think that you insinuate that 67% of companies are doing something wrong. You state that 1 in 3 pay tax where you think it should be 1 in 2… so your quarrel is only with 17% of companies. Why isn’t your headline ‘17% of companies are not paying their tax’, how can we assume that it’s for any reason other than to sensationalise, and to mislead a casual reader?
Secondly, it’s really not on to accuse commentors of being supportive of fraudulent activity just because they want to discuss your methodology. Furthermore, it’s insulting to question whether commentors are capable of doing their jobs. I have already pointed out that only 2 of ‘my’ 20 companies are profitable… that’s not because I’m a poor accountant, it’s because the other 18 are not supposed to make profits. That they exist continually annoys me, but that’s down to the evolution of the group and I’m not in a position to tidy it up.
Lastly, without any understanding of what the missing companies do, it’s a wild leap to assume that they would also be avoiding VAT and PAYE. What is your basis for assuming that they all employ people or trade above the VAT threshold?
I agree entirely that there is a problem here, and that HMRC and companies house should be empowered and equipped to go after these missing companies. I’m also sympathetic to the ideas in your subsequent post about linking through to banking records – the least that someone benefiting from limited liability can do is accept enhanced banking transparency. You are highlighting a real issue, and I don’t think that anyone here has disputed that core fact. That they think that the scale of the issue should be determined differently is not cause for your disdain.
You may not like or agree with people who challenge your findings, but if you resort to insulting them then you drive them away and, soon, you’re only preaching to a choir of people who either entirely agree with you, or lack the knowledge to follow your thinking and discuss what they perceive to be wrong with it. That would be a shame.
Respectfully: I’d listen to counter argument if it was rational
There has been none as yet
All you’re saying is I have no right to make logical assumptions but you have a right to assert
That’s crass stupidity
I’m entitled to assume as a consequence a) incompetence b) a desire to cover up for tax evasion
I can in particular conclude the latter as no one – not one of you – has addressed the issue of why it is acceptable for about 700,000 companies to break the law
You all seem to see such mass law breaking as acceptable
It speaks very little of you
You’re welcome to go away if you wish: the fact is people have said that to me for about eight years now, and around the world more and more people listen
Take an example: until 2008 no one talked about the tax gap. Then I published a report on it. Now it is HMRC #1 priority, or so they say
The more you, very patronizingly, say no one will the more I know you’re simply seeking to excuse abuse.
Schopenhauer was bang on the money when he said that truth goes through three stages. In the first stage, it is ridiculed (some of you). In the second stage, it is violently opposed (the rest of you). And in the third stage it is accepted as self-evident.
Don’t worry – I’ll get there
It looks like the point about the proportion of loss making companies has been flogged to death so I’ll concentrate on my second point, to which you replied:
“The point very glaringly obviously is that incorporating does the exact opposite of what you claim: people are chased for tax returns: the obligation to pay continues without limit. But the Revenue and Companies House do not at present chase companies for anything. People now know that so the fact is that forming a company now is a perfect way to commit a fraud — and I am quite sure that the abuse is as widespread as I suggest and you’re offering lame excuses to exonerate those undertaking it.”
This seems highly implausible. Why would someone even risk the chance of being traced by Companies House/HMRC when they can operate in the black economy as a sole trader? The idea that if you want to reduce your chance of being busted then you should incorporate is absurd.
Precisely because the revenue don’t send individuals a form saying “please don’t tell us if you don’t trade and we’ll come back in five years’ by which time you can have safely gone away for good
They have nop record of having ever investigated the claim to be dormant – I’ve asked
It’s made so laughably easy to defraud it’s ridiculous
“Precisely because the revenue don’t send individuals a form saying “please don’t tell us if you don’t trade and we’ll come back in five years’ by which time you can have safely gone away for good”
But these people (i.e. individuals operating in the black economy) wouldn’t respond to such letters anyway.
If someone is a sole trader who is not declaring their income or the fact that they are trading then no amount of letters from HMRC is going to make a blind bit of difference. So why risk trading through a company, and what benefit would be attained by not declaring income through a company as opposed to not declaring income as an individual?
Also, I understand that HMRC receives details of all bank interest paid to UK companies. It would thus be a relatively simple exercise to check whether these companies are declaring themselves dormant.
Oh, wrong
They know
They know how to abuse
They tick the box saying ‘no tax returns please’
You bet on it
Richard,
1. NIT PICKING
I ‘nit-pick’ at details as my profession! So sorry, don’t take it personal, it’s just business :). Nit-picking is important because if a small part of the details are wrong, then the whole CONCLUSION can be wrong – see Enron’s financial statements circa 1996-2002.
2. YOUR HEADLINE AND CONCLUSION
Is this:
ONLY 33% OF COMPANIES IN THE UK PAY TAX
It’s a powerful message. I admit, when I read it, I thought – WOW UK PLC are all crooks! Throw the lot in jail! But then after 5 minutes, I asked myself…. wait a second, 33%: is that Low? Is that “Normal”? Is that “High”? Well let’s look at the details!
I won’t repeat myself again where I think you’ve gone wrong in your details. Even if you have a ‘third set of companies’, it still doesn’t negate the incorrect attribution of % to the second set. Or rather,
Set 1: Average UK salary is 18K.
Set 2: Average UK Engineer salary is 50K.
Set 3: Average Accountant Salary is XK.
Your logic still states that XK is 18K. And your counterpoint is: “look, I’ve taken into account that engineers are high paid, so i’m not attributing their average to the accountant average, they’re an outlier”. Still wrong. Sorry the nit-pickers alliance wins!
3. NEWS OF THE WORLD
To be honest, your headline reminded me of a news of the world headline about immigration!
IMMIGRATION FROM POLAND HAS GONE UP 300% IN 1 YEAR
uh-oh, are we soon to be eating sausage for breakfast lunch and dinner? then you read the headlines – oh, they’re all in the uk on temporary work visas as old age carers and nurses, and we have a shortage of those professions. okay it’s not so bad.
About 10 posts up, somebody told you the ‘average’ in their company is 10% (2 out of 20 companies). That sounds ‘normal’ from many of the companies I’ve been involved in.
Anyways, everybody chill out, have a beer and enjoy the weekend!
Thanks!
And you still not pick
You’re still wrong
And you still refuse to address the real issues
Let me put you in the box marked ‘friend of tax evaders’
Curious. Despite the fact that I *explicitly* said that I agree with your key point, and that I agree that something should be done about it, you think that because I consider some of your reasoning worthy of discussion that I exhibit crass stupidity, am incompetent, and support both fraud and the covering up of fraud.
Your contempt for people who are actually interested in your work and your perspective is truly astounding.
Ah, so you agree
Now answer the questions I posed then
Then I might believe you
Because right now you’re displaying that classic line: give in and agree with us and we’ll let you into the club
Except right now I’ve seen no evidence I want to be in the club because right now I’ve still got no evidence of competence
So it’s just the standard crap line of ‘toe the line or we won’t talk to you’
Oddly, if I’d done that you wouldn’t be reading this blog
Which question do you want me to answer? Excuse me if I’ve missed something in this lengthy, but entertaining, debate.. but it appears that you stated your view, others either challenged your logic (usually constructively) or put forward their views, and you accused them of supporting fraud.
I’ve not asked you to give in and agree with anyone. I’ve asked why you chose a title that I deem to be misleading, albeit it factually (if one accepts your assumptions) justifiable.. and you’ve singularly failed to respond to that… perhaps because it’s obvious tabloid-style sensationalism and you know it? They use factually defensible statistics too, but they carefully choose the ones that back up their agenda in the minds of people who don’t look too closely. By your own calculations, ‘only’ 17% of companies are evading tax.. that’s a massive number, and if you’d just gone with that then maybe we’d be talking about it.
I don’t read this blog because of the way you conduct any debates that arise. In general, I don’t much like your approach and deem it counterproductive.. but you have the right to speak as you please here and I respect that (and no offense is meant). I liken it to UKUncut, who are running an inventive and effective campaign about some real problems.. but spoiling it (for me, as someone that actually understands a bit of this stuff) with unnecessary spin and obfuscation. I want honest debates about the facts and the problems. Our politicians won’t give us that, but why should that be a surprise when the media/bloggers/unions/campaign groups/public are, when given the chance, no better? Alas, that’s just a beef I have with the whole world, and if I’ll I’m going to do is complain about it on the internet then, perhaps, I should shut up.
But I digress… I read this blog because you consistently raise interesting points on topics which interest me, and which balances out against other viewpoints that I read. I often entirely agree with you… but I’m a ‘whole of market’ blog consumer. You do, indeed, talk to people who don’t ‘toe the line’, but, funnily enough, I don’t get a fuzzy feeling from being insulted for saying anything that you consider isn’t precisely aligned with your view.
Still.. thanks for keeping the debate going and taking the time to read/respond. There’s something to be said for that, though I’m still not entirely sure what. [insert your smiley of choice]
My point is simple: a number of you have objected to what I’ve written
But what I’ve written is logical, and factually based and accurate
What you’ve done is assert I’m wrong
You’ve made the most incredible claims – for example that a sample of 20 is the basis for extrapolation when my use of a sample of 1.1 million nis not, apparently
Or that a sample of one accountancy practice is a basis for extrapolation
That’s not just wrong: it shows personal bias
I have assumed the bias is in favour of tax evasion. I have done so because no one has tried to address the real issues, the points I made as follows:
“But I am pointing out and massive regulatory gap inside the UK which is inevitably contributing to the enormous tax gap that exists. Why don’t you want is to collect tax from companies that though it? Why do you not want the law to be enforced? Why are you happy that there’d be a blind eye turned to cheats? Why are you willing to allow honest business in this country to be undermined by those cheats? Why do you want an unlevel playing field in the British economy that favours fraudsters? Why don’t you want copies to file their accounts on public record when they are legally obliged to do so? Why can you turn a blind eye to 325,000 companies not doing so in one year? Why are you willing to accept that our regulators do not impose the finds required to be charged in the circumstances? Why do you obsessed with minor aspect of this is a diversion from these massive questions? Can you answer those points before coming back to the ratio of loss-making companies, Which is being put forward by you and others is a complete red herring to ensure that the real questions aren’t being answered?”
So you chose to nitpick on an issue where I openly acknowledge there is an estimate and have shown there are compensating biases to ensure my estimate is fair
You nitpick for three reasons I suggest a) incapacity to see the big picture b) because this is trolling behaviour c) because you don’t want the failure in regulation nto be addressed.
I have been generous with my time when faced with such behaviour: what encourages me is that none of you have got remotely near a logical counter argument to my suggestion. That’s why it’s been worth engaging in this. Candidly: your failure is extraordinary – but it has made me demonstrate how robust my estimates are
Theerafter I leave it to you to decide in which category you are
And on a final note: if you think I’m robust at least I argue my case: try reading the drivel and outright abuse on the right wing web sites. If I don’t suffer those I consider fools gladly, so be it. That’s different from what happens there
Che??!?!?!?!
Amico… Richard, I’m not a friend of tax evaders. NON NON NON! NUNCA NEVER NEVER! My WHOLE family has been involved in the trade union movement my whole life. My university was paid for by a train workers salary.
Being RIGOROUS with the facts and numbers is OUR DUTY. If you’re not honest with the numbers, che, you ruin your – no no, you ruin OUR ability to honestly chase and criticize tax evaders.
Your headline says:
“ONLY 33% of companies in the UK Pay Tax”
Watch the math based on your own numbers:
1.88 Million asked to File Taxes
1.18 Filed taxes
0.915 Million filed and paid taxes (48.67% of those asked)
Por lo menus, at the very minimum, you have to concede your headline needs to say:
ONLY 48.67% of TAXABLE UK CORPORATIONS PAID TAXES
Reporting any LOWER than this number is a mathematical fabrication.
I know you English are full of hyperbole and using big words to get your points across. But the numbers are the numbers, they don’t lie.
Have a good weekend!
That’s drivel
My headline was absolutely 100% correct
Just over 900,000 dividend by a bit over 2.7 million is 33%.
Please don’t waste my time again – your number is garbage – because there weren’t 1.88 million companies. The rest simply didn’t get tax returns: it still didn’t mean they weren’t taxable.
So please don’t tell me that I’ll undermine the trade union movement by getting figures wrong when I got them right and you have very emphatically got yours wrong
Indeed of the all the claims made here this one is the most absurd of all