In HMRC's response to my work on the tax gap, published by the Treasury Select Committee today, they say:
Non-payment
The figure for unpaid tax of £28bn that Tax Research UK use is a snapshot of the total amounts owing to HMRC on a particular day. We think this gives a misleading impression of tax that is lost. Most tax paid late is collected within a few days, and over 90% is eventually collected. Therefore the figure we include in our tax gap estimate shows only the amounts we don't ever collect. 90% of this arises because of insolvency.
So why do I include tax paid late in my estimate? Well, one very good reason is the fact that in 2005 HMRC issued the following diagram of the tax gap through the Large Business Service:
There, wou will note, in general non-compliance is tax paid late. If it's good enough for HMRC to include it in the tax gap it's good enough for me. The problem is for them to explain why they've chosen to understate the tax gap as a result of ignoring this number, not for me to justify its inclusion. And that's especially true when there are very good reasons for including it.
The fact is that ignoring tax debt as part of the tax gap is not helpful at a time when the government is borrowing about £120 billion a year, precisely because it is not collecting enough in tax. Every pound of late paid tax is a pound borrowed and when the government have made the reduction in government borrowing their key economic objective to exclude tax paid late from the tax gap is completely nonsensical. This sum has to be included or very obviously the goal of collecting this sum, which is essential to H M Revenue & Customs' objectives, will not receive the emphasis it deserves in the allocation of resources.
That's why I'm right to include this figure in the tax gap and HMRC are wrong to exclude it.
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I thoroughly agree here Richard. You’re right to take the wider view – £1 tax owed is £1 the government has to borrow, and it’s they who need to justify why this isn’t an issue.
On that note, would it be worth setting up an ‘aspirational’ target or measurement for efficient and effective tax collection, and working out what percentage of tax is paid:
1. in full
2. on time
3. to the spirit of the law
You could end up with a percentage for each year (and each country, if done internationally). I think it would be quite a powerful way of communicating the size of the issue, and highlighting the stupidity/wilful neglect of cutting HMRC’s resources.
But you have neglected to net off tax recovered from previous years. Now that *IS* misleading. Particularly as HMRC have included it in their diagram. You can’t pick bits of their diagram which you like and bits which you don’t.
The gross tax gap is a recognised measure
The recovery is unclear – and does not reconcile their data if only £13 million as recent reports suggest
So I treat it as unknown
According to the diagram above, the “gross tax gap” includes earlier years’ recovery.
You say that “recovery is unclear” – is that because you haven’t bothered to look into it, or because HMRC don’t know?
I find it utterly implausible that HMRC are not able to say which of their inflows relate to which tax years, which is what you are appear to be suggesting. I haven’t seen what you describe as these recent reports but I would be staggered if tax recovered in later periods (if only by a few days) was as little as £13 million – surely it would be billions.
Either way, the point is you haven’t even mentioned it in the report. Even if it is “unknown” (which I don’t believe it is), a credible report would say something along the lines of “some tax paid late is recovered in later years, and these should be netted off to avoid misleading”. The fact that you haven’t even described it as an unknown in the report, let alone explain why it is an unknown, suggests you are looking for the biggest tax gap figure possible. Which of course you are.
The gross figure is the right one – unless gross is the target there is no incentive to recover
Again, the point has been made many times
And is also glaringly obvious to any KPI developer
So all your logic is utterly wrong and your logic is false
I see that some tax paid late is voluntarily paid eventually: and some is not. It seems to me that this shows that it should be included, because there is at least the possibility that without enforcement action much less of it would be collected. As the cuts to revenue staff necessarily reduce the effectiveness of enforcement to exclude this sum undermines the longer term income stream.
The revenue has figures for the yield per head for tax inspectors I am sure. Rather than guessing it seems to me that there is s simple solution: keep employing more tax inspectors and compliance officers until the yield = costs. That is what a business model would dictate and we are, after all, to pretend that all public service is a business these days. It is not normally possible to do that in any sensible way and artificial “performance indicators” are very often counter productive: but in this case it seems a bit simpler
“Every pound of late paid tax is a pound borrowed and when the government have made the reduction in government borrowing their key economic objective to exclude tax paid late from the tax gap is completely nonsensical.”
This is an issue that some people don’t seem to get. The less tax that is recovered, or the more people that are made unemployed eventually shrinks the tax base, creating a bigger gap between what the government eans in tax and what it needs to borrow.
This creates a shortfall of money for past borrowings, which has to be found from somewhere. The government either cuts more public spending to fill in the gap, which only exacerbates the problem, sells off national assets which undoubtedly causes more unemployment and eventually the balance of payments has to be made up by further borrowings.
It demonstates why cutting back on spending in a prolonged and deep recession makes absolutely no sense.