A fascinating parliamentary answer by David Gauke MP, the Exchequer Secretary responsible for HMRC to Michael Meacher gives an extraordinary insight into a number of critical tax issues.
This is the exchange, which was noted on Tuesday:
Mr Meacher: To ask the Chancellor of the Exchequer pursuant to the answer of 13 May 2013, Official Report, column 29W, on taxation: business, how many large businesses contributed to HM Revenue and Customs' total additional revenue of £6.9 billion gained via compliance activity in 2011-12. [156966]
Mr Gauke: HM Revenue and Customs (HMRC) deals with around 10,400 large businesses. The largest 800 businesses are managed within HMRC's Large Business Service and 381 of those businesses contributed £5.0 billion additional revenue in 2011-12 as a result of HMRC's compliance activities.
The remaining large businesses are managed within HMRC's Local Compliance (Large and Complex Unit) and from these HMRC secured £1.9 billion additional compliance revenue in 2011-12. The information to show how many businesses were involved in the enquiries that produced this additional revenue could be provided only at a disproportionate cost.
Now let's analyse that.
First, let's note that £5 billion of extra money was raised from just 381 large businesses in the UK in 2011-12. That is an average of £13.1 million each.That's a staggering scale of tax avoidance per company.
But let's look at the total next. According to HMRC's most recent estimate of the tax gap total tax avoidance was £5 billion a year. However, since just 381 companies were seeking to avoid £5 billion in tax (and remember this excludes the well documented multi billion pound abuse of IT companies) it is obviously impossible that this estimate is right. If it was there could be no avoidance by any other companies, individuals or trusts of any other tax. That is obviously wrong. Between them the 30 million or more other tax payers do avoid tax; of that we can be certain. As a matter of fact therefore HMRC's estimate of tax avoidance is very clearly wrong and they should admit it. I would suggest my own estimate of the total (including that notorious IT company abuse HMRC refuse to recognise) of £25 billion is very much more likely to be accurate. In fact, it simply has to be on this basis.
But then let's also look at this large company tax avoidance in the context of the tax they pay. The latest data for corporation tax - for 2011/12 - shows that large companies paid £20.8 billion in all in corporation tax that year. That, presumably, includes the tax recovery by HMRC. This means that these companies did, in total, try to avoid total taxes (admittedly all taxes, not just corporation tax) equivalent to 24% of the corporation taxes they actually paid. That's a staggering proportion.
But it also implies that if only £1.9 billion was recovered from small companies that the total recovery rate there was much lower - at 15.1% of corporation tax receipts - and the whole area of evasion - which I am reasonably happy to say does not occur in the large business sector - was effectively not tackled at all.
What does this mean? I suggest these things. First that HMRC is still not telling the truth about the tax gap.
Second it indicates the scale of abuse by these companies is at what might literally be called an industrial scale.
Last, if this is true then very clearly yet more needs to be done to tackle this issue.
We need more resources at HMRC.
We need a strong General Anti-Tax Avoidance Principle.
We need law to expose which companies trade but do not declare tax - and the right to pursue the beneficial owners for that money.
We need automatic information exchange with tax havens.
We need reform to tackle tax abuse by the likes of Google.
We need country-by-country reporting to tackle big business more cost effectively and easily.
We need a change in attitude to tax.
We need it now.
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Although Gauke is not referring simply to tax avoidance. Presumably, these are adjustments to businesses filed tax returns on enquiry. We all know that tax is not black and white and many gray areas exist in interpretation of the law (both in letter and spirit). Lumping it all as tax avoidance as you have done is an error. The vast majority is likely to be the negotiation of uncertain tax positions.
That’s called tax avoidance then
No it’s not, it’s called an uncertain tax position.
For example, a company invests in some new business premises. Some of that cost will qualify for capital allowances, some won’t. The dividing line is unclear and keeps shifting – because case law changes, legislation changes, and HMRC’s views change.
So the company does a review of the costs incurred and puts in a claim for everything it thinks can reasonably be claimed. Where things are uncertain they will put in a claim anyway, as if they don’t claim they certainly won’t get relief.
HMRC then enquires into the return (with companies of this size there will be a Client Relationship Manager who will be reviewing all returns) and quite possibly disagrees with where the company has drawn the line. They discuss it for a couple of years, and some of the claims are withdrawn. The additional tax (which the company may very well have already paid, to be on the safe side) then goes into this pot of additional tax “as a result of HMRC’s compliance activities”.
This is a normal and necessary part of the tax system, as HMRC quite rightly challenge claims in the grey area. If companies were to only claim amounts that they were absolutely sure HMRC would accept without question, then a huge amount of tax would be paid in excess of that intended by Parliament.
Similarly with VAT – deciding whether things are standard-rated, exempt, zero-rated, outside the scope, zero-rated, mixed, composite etc is not a trivial task, and sometimes companies will get it wrong despite taking reasonable care – as is explicitly acknowledged by Parliament when the new penalty regime was brought in, providing that errors made after taking reasonable care do not attract penalties.
Some of the amounts Gauke is referring to will come from avoidance, some will be from evasion, and some will be from perfectly ordinary compliance discussions. No split has been given, and so the conclusions you draw from assuming it’s all avoidance are completely unwarranted.
No, it’s called tax avoidance
Compliance work does not recover uncertain tax positions – those are declared by companies
You’re confusing the financial reporting of uncertain tax positions with how the uncertainty is resolved in practice.
HMRC’s compliance units spend their time enquiring into companies’ tax returns and trying to increase the amounts of tax due. Some of that is countering avoidance, some of it is countering evasion, and a large part of it is discussing grey areas.
Take the Wetherspoons case on capital allowances in pubs. Are you telling me that Wetherspoons were engaged in tax avoidance when they claimed allowances on the costs of installing kitchens and toilets?
Did they disclose their uncertainty?
They are adjustments relating to an HMRC enquiry so I think mine and Pellinor’s stand. Enquiries are not restricted solely to tax avoidance as you know (and must have experience of them). You must have clients where you have filed a return and then an enquiry has been raised that you have either subsequently won or lost. For those you lost I presume that you will not put up your hand to say it was tax avoidance.
Oh come on – that’s pushing hope beyond possibility
I have no idea whether Wetherespoons disclosed their uncertainty, I haven’t looked at their accoutns and of course I haven’t seen the tax computations they submitted. But there was definitely enough there for HMRC to be alerted enough to open an enquiry.
“Oh come on — that’s pushing hope beyond possibility”
So have you never had HMRC successfully enquire into a return for one of your clients?
That seems highly unlikely – assuming you do submit tax returns, of course.
Thousands
Remarkably few enquiries
Being open and up front always paid
Richard, the tax payer may have been confident in their filings but they don’t necessarily anticipate that HMRC may take a different view. As Pellinor points out, practice changes and evolves over time.
Respectfully, this is just whitewashing by you
Your answer pre-supposses that I am a fan of tax avoidance (hoping to prove you wrong) which is totally incorrect. However, I think it is important to ensure the facts being discussed are right. The numbers clearly all aren’t associated with tax avoidance so you can’t draw the conclusions you have from that particular data. I am sure that you agree that the debate must be grounded in reality otherwise it’s pointless.
I don’t think what i said could be more grounded in reality
I’d not expect many enquiries – checking my records, I find that although we submit over a thousand ITSA returns a year we only had 10 ITSA enquiries in 2012. So that’s less than 1%, and several of them relate to new clients’ returns from before I started to act. As I’ve said, that’s with full disclosure so HMRC has every opportunity to object to anything they don’t like.
Where you’ve had enquiries closed with an amendment to the tax charged, do you regard the client as having tried to avoid tax?
For example, my client who got confused between retirement annuity premiums and pension contributions and so over-claimed relief (in last year’s return, before I started to act) – is this avoidance, or just a genuine mistake?
Asking rhetorical questions on issues where large companies would not get confused only proves the weakness of your argument
Avoiding other questions doesn’t do much for yours…
Capital allowances, then. Company claims for a bit of plant, HMRC decides it s structure and denies any allowances. This is an actual case, not hypothetical (FTSE – they don’t get much bigger). Avoidance or not?
Depends on motive
The evidence is the companies try it on – which is why tax provisions in accounts are usually adjusted downwards – so my answer is yes
Of course tax in the accounts is generally going to be adjusted downwards. HMRC won’t even talk about the treatment of something unless you stick a claim in the return, so if you want to get the right answer you have to put in claims which might be denied. The return submitted isn’t necessarily what the company thinks the final liability will be: if there’s any doubt, it is the hoped-for position that will be discussed and agreed.
The only exceptions are a narrow range of issues where HMRC will give clearance, and a small number of clients with CRMs who can discuss issues in real time. For most situations you have to claim now and discuss afterwards.
You can’t work it the other way. If you go to HMRC and say you’re not sure about something so you aven’t claimed the relief but please can we talk about it and see if we can actually claim, you will get one or more of the following responses:
– If you don’t claim it, you can’t have it
– Claim it and then we’ll talk
– The time limit for the claim has now expired, so the question is irrelevant
There is an even larger figure to take into account: the amount that never even came up for negotiation because the variety of schemes in use meant it never even came into question. Can’t help wondering if this might be a further £25bn on top. There is an awesome amount of money washing about out there, out of sight and out of reach.
On a related but slightly amusing note, Richard, perhaps an unintended consequence of the decimation of HMRC staffing over recent years is that there aren’t enough suitably qualified people to check that one piece of information doesn’t contradict or undermine a previous statement 🙂
Yes!
Surely the £6.9bn is by definition, not included in the HMRC estimate of the tax gap as it is tax that they have collected. Put another way, HMRC estimate of tax avoidance is where they believe tax is being avoided but they are failing to collect it, whereas the £6.9bn they have collected.
Still a large % of total corporation tax, is this HMRC trying to show that they fdo a good job on it?
No, recovery is allowed in their estimates
Fairly so
Can you point me to where HMRC state that recovery is included in their estimates? Everything I have seen published by HMRC indicates that it is not.
Look at their publications
Now I am confused – are you saying that the tax gap number is after recoveries have been accounted for (which is what the HMRC dopcument your referenced seems to indicate) or are you saying that the tax gap represents the attempted avoidance before any recovery is made.
Both
The definitions cover gross and net gaps
The sum received will be after recoveries
The sum offered will be before it
Is that really so hard to imagine?
The gross gap measured is pre-recovery
So the HMRC estimate of the tax gap that is published appears to be the net gap, given that they give the Total Tax under Consideration figure (I assume the gross gap) less the Compliance yield = tax gap.
Just to be clear, are your £25bn estimates of the gross or net gap?
Gross
It indicates the problem to be addressed
And the recovery is immaterial to my estimate anyway
With respect, Richard, I did. Could you clarify which part you’re referring to?
If you look at the 2012 tax gap paper published by HMRC it states: “The tax gap is defined as the difference between tax collected and the tax that should be collected (the theoretical liability)…The tax gap estimate is net of the Department’s compliance activities.” That paper estimated the 2010-11 tax gap at 32bn. So the 5bn tax gap avoidance figure does not include amounts recovered as a result of compliance activity.
But you ignore the gross and net gaps
The £20 bn paid does include the recovery – by definition
I’m not ignoring anything and the 20bn paid figure isn’t relevant to my point – your blog post states “But let’s look at the total next. According to HMRC’s most recent estimate of the tax gap total tax avoidance was £5 billion a year. However, since just 381 companies were seeking to avoid £5 billion in tax … it is obviously impossible that this estimate is right. If it was there could be no avoidance by any other companies, individuals or trusts of any other tax. That is obviously wrong.”
That last statement by you is clearly not correct, because the £5bn tax gap avoidance estimate is net of recoveries by HMRC.
No it isn’t
The figure for a year is gross – recoveries happen later
Then surely that comes within the definition of “legal interpretation” in the HMRC tax gap analysis, rather than “tax avoidance”? I just don’t see how your analysis of the 5bn figure is supported by the facts and you seem unwilling to explain further.
I think I have explained in full
But I accept the point re legal interpretation
However – that the means their record on avoidance is even worse
A few points on the numbers.
A large business in HMRC’s world is not necessarily one that pays corporation tax at the highest rate. It is defined by things like assets, employees, etc. So the smaller companies could still have paid at the high rate, while some of the larger ones might have paid at the lower rate (or not even any!) This makes it very hard to relate these figures with those for corporation tax receipts, where the terms large and small company mean the rate of tax charged.
Secondly, the Tax Gap figures are for 10/11 but the receipts/compliance activity figures are for 11/12, so again it is hard to properly compare.
And another factor to include if trying to gauge the ratio of “disputed” tax as against total receipts, is that to the £20.bn paid at the higher rate we have to add the c£9bn paid by North Sea oil and gas companies, and the £1.6bn bank levy. I imagine they are also companies managed by the LBS.
Third, we know from other statements that there are some very high settlements, some over £1bn, which argues against any straightforward averaging. And we also know that these types of settlement can easily cover more than one year. http://www.taxresearch.org.uk/Blog/2013/05/02/i-think-hmrc-should-realise-that-in-all-things-to-do-with-tax-telling-the-truth-pays/
We also know that in cases of potential legal interpretation large businesses may overpay in order to minimise any interest charges, so these large settlements may not bring in extra money but prevent repayments.
The HMRC Tax Gap figures claim that of the total Tax Gap £1.1bn was for avoidance in businesses managed by the LBS and £1.2bn for other large businesses.
So, I think it is very hard to draw any robust conclusions from these numbers other than to say HMRC seems to claw back a lot of extra tax. And maybe that if there were more of them then they cold claw back even more?