Tax campaigner Richard Murphy’s estimate of the UK’s tax gap is ‘misleadingly high’, HMRC has said in a submission to the House of Commons Treasury Committee.
Tax campaigner Richard Murphy’s estimate of the UK’s tax gap is ‘misleadingly high’, HMRC has said in a submission to the House of Commons Treasury Committee. But in response to HMRC’s claim that he had badged the use of some legitimate reliefs as corporate tax avoidance, Murphy said his approach identified significant tax savings that, while legal, represented an outcome that ‘very few people would think appropriate and reasonable’.
Murphy told Tax Journal today that HMRC’s estimates of the tax gap would not include tax saved by multinationals by engaging in arrangements such as those featured in a Panorama programme last week.
In an annex to the government’s response to a recent Treasury Committee report, HMRC said it was convinced that its estimate of around £35bn was ‘much more accurate’ than Murphy’s estimate of £120bn. Murphy was a founder of the Tax Justice Network and is Director of Tax Research LLP.
As the Financial Times noted on Friday, his £120bn estimate has been adopted by trade unions and activists, including UK Uncut.
‘We think that these estimates could be dangerous if not countered by HMRC's published estimates,’ HMRC said. ‘Partly because they give a misleading view of HMRC's effectiveness and the amount of uncollected revenues. But also because they encourage the perception that deliberate non-compliance in the UK is the norm – a perception which could encourage further non-compliance.’
But the Financial Times quoted Mark Serwotka, General Secretary of PCS – the union representing almost 60,000 members in HMRC and the Valuation Office Agency – as saying: ‘The tens of thousands of staff in HMRC know that Richard is not overstating the tax gap, and they know that as well as it being an issue of political will, the problem is one of staffing.’
Serwotka added: ‘With 10,000 more job cuts planned by 2015, the government stands no chance of tackling this, when even a modest dent in the billions lost to our exchequer would change the debate about public spending overnight.’
Corporate tax avoidance
HMRC’s submission set out to explain the main points of difference between its own and Murphy’s estimates. While HMRC estimated that legal avoidance accounted for £5bn, Murphy’s estimate was £25bn.
‘For corporation tax avoidance, Tax Research UK calculates the “expectation gap”,’ HMRC said. ‘They describe this as a measure of the difference between the contribution society expects business to make by way of tax paid, and what is actually paid. This is defined as the difference between the headline or declared tax rate for companies, and the rate of tax they actually pay.
‘This means that legitimate use of specific exemptions and reliefs such as capital allowances or double taxation relief, which reduce the amount of tax payable, are badged as avoidance. Avoidance is also drawn very widely.’
David Gauke, the Exchequer Secretary to the Treasury, made a similar point last year. As Tax Journal reported in March 2011, Gauke quoted Murphy’s own report for the TUC. In that report Murphy acknowledged that ‘much’ of his £12bn estimate for corporation tax avoidance ‘may be due to legitimate tax planning’.
Tax Journal reported then: ‘Part of what Gauke calls “exaggeration” [of the scale of avoidance] appears to reflect the fact that some campaigners, including Murphy, regard as avoidance some arrangements that use corporate tax reliefs which they believe to be over-generous, such as relief for interest paid.’
The BBC’s recent Panorama investigation focused on alleged avoidance by UK companies. Private Eye reported last week that while the schemes were complex, they ‘work on a simple principle: paying tax-deductible expenses from the UK or other countries into Luxembourg companies that with some artful financial engineering pay less than 1% tax on the income. Result: multi-million pound tax savings all round.’
Murphy said on his blog that HMRC’s approach to the corporate tax gap was to start with the assumption that ‘the tax returns it gets are right and avoidance only exists if on investigation of the return an activity is found that they wish to challenge as avoidance’.
HMRC said its ‘bottom-up’ approach for direct taxes was based on ‘operational and intelligence data such as from random enquiries and risk registers’.
General anti-avoidance rule
PCS announced that later this week it would be launching a report calling for a ‘proper general anti-avoidance rule in UK law – rather than the apology for one that is now being proposed by the government’.
The report would support the introduction of country-by-country reporting for multinational corporations ‘so that we know which of them do, and do not, pay the tax that they really owe in the UK’; investment in more staff at HMRC; and reform of small business taxation to ‘discourage avoidance and tackle evasion’.
Limitations
Tax gap estimates have limitations but analysis informs deployment of HMRC resources, the government said in response to the Treasury Committee’s finding that the aggregate tax gap figure was ‘misleading’. The MPs had questioned whether estimating the tax gap served any useful purpose, pointing out that encouraging taxpayers to pay the right tax voluntarily was ‘by far the most efficient way’ to close the gap.
‘The tax gap helps the department understand and explore the various causes of non-compliance, how they occur and how they can be addressed, whether through tailored assistance, simpler legislation, redesigned processes or targeted interventions,’ the government said.
‘Calculating an aggregate figure allows HMRC to quantify, compare and prioritise its response to risk across the tax system and to benchmark performance against other fiscal authorities. Considerable resources go into tax gap analysis. However the various components of analysis, such as receipts forecasting, testing the accuracy of risk assessment and informing policy decision making, are required for other business reasons. The incremental cost of publishing an aggregate tax gap is therefore small.’
Tax campaigner Richard Murphy’s estimate of the UK’s tax gap is ‘misleadingly high’, HMRC has said in a submission to the House of Commons Treasury Committee.
Tax campaigner Richard Murphy’s estimate of the UK’s tax gap is ‘misleadingly high’, HMRC has said in a submission to the House of Commons Treasury Committee. But in response to HMRC’s claim that he had badged the use of some legitimate reliefs as corporate tax avoidance, Murphy said his approach identified significant tax savings that, while legal, represented an outcome that ‘very few people would think appropriate and reasonable’.
Murphy told Tax Journal today that HMRC’s estimates of the tax gap would not include tax saved by multinationals by engaging in arrangements such as those featured in a Panorama programme last week.
In an annex to the government’s response to a recent Treasury Committee report, HMRC said it was convinced that its estimate of around £35bn was ‘much more accurate’ than Murphy’s estimate of £120bn. Murphy was a founder of the Tax Justice Network and is Director of Tax Research LLP.
As the Financial Times noted on Friday, his £120bn estimate has been adopted by trade unions and activists, including UK Uncut.
‘We think that these estimates could be dangerous if not countered by HMRC's published estimates,’ HMRC said. ‘Partly because they give a misleading view of HMRC's effectiveness and the amount of uncollected revenues. But also because they encourage the perception that deliberate non-compliance in the UK is the norm – a perception which could encourage further non-compliance.’
But the Financial Times quoted Mark Serwotka, General Secretary of PCS – the union representing almost 60,000 members in HMRC and the Valuation Office Agency – as saying: ‘The tens of thousands of staff in HMRC know that Richard is not overstating the tax gap, and they know that as well as it being an issue of political will, the problem is one of staffing.’
Serwotka added: ‘With 10,000 more job cuts planned by 2015, the government stands no chance of tackling this, when even a modest dent in the billions lost to our exchequer would change the debate about public spending overnight.’
Corporate tax avoidance
HMRC’s submission set out to explain the main points of difference between its own and Murphy’s estimates. While HMRC estimated that legal avoidance accounted for £5bn, Murphy’s estimate was £25bn.
‘For corporation tax avoidance, Tax Research UK calculates the “expectation gap”,’ HMRC said. ‘They describe this as a measure of the difference between the contribution society expects business to make by way of tax paid, and what is actually paid. This is defined as the difference between the headline or declared tax rate for companies, and the rate of tax they actually pay.
‘This means that legitimate use of specific exemptions and reliefs such as capital allowances or double taxation relief, which reduce the amount of tax payable, are badged as avoidance. Avoidance is also drawn very widely.’
David Gauke, the Exchequer Secretary to the Treasury, made a similar point last year. As Tax Journal reported in March 2011, Gauke quoted Murphy’s own report for the TUC. In that report Murphy acknowledged that ‘much’ of his £12bn estimate for corporation tax avoidance ‘may be due to legitimate tax planning’.
Tax Journal reported then: ‘Part of what Gauke calls “exaggeration” [of the scale of avoidance] appears to reflect the fact that some campaigners, including Murphy, regard as avoidance some arrangements that use corporate tax reliefs which they believe to be over-generous, such as relief for interest paid.’
The BBC’s recent Panorama investigation focused on alleged avoidance by UK companies. Private Eye reported last week that while the schemes were complex, they ‘work on a simple principle: paying tax-deductible expenses from the UK or other countries into Luxembourg companies that with some artful financial engineering pay less than 1% tax on the income. Result: multi-million pound tax savings all round.’
Murphy said on his blog that HMRC’s approach to the corporate tax gap was to start with the assumption that ‘the tax returns it gets are right and avoidance only exists if on investigation of the return an activity is found that they wish to challenge as avoidance’.
HMRC said its ‘bottom-up’ approach for direct taxes was based on ‘operational and intelligence data such as from random enquiries and risk registers’.
General anti-avoidance rule
PCS announced that later this week it would be launching a report calling for a ‘proper general anti-avoidance rule in UK law – rather than the apology for one that is now being proposed by the government’.
The report would support the introduction of country-by-country reporting for multinational corporations ‘so that we know which of them do, and do not, pay the tax that they really owe in the UK’; investment in more staff at HMRC; and reform of small business taxation to ‘discourage avoidance and tackle evasion’.
Limitations
Tax gap estimates have limitations but analysis informs deployment of HMRC resources, the government said in response to the Treasury Committee’s finding that the aggregate tax gap figure was ‘misleading’. The MPs had questioned whether estimating the tax gap served any useful purpose, pointing out that encouraging taxpayers to pay the right tax voluntarily was ‘by far the most efficient way’ to close the gap.
‘The tax gap helps the department understand and explore the various causes of non-compliance, how they occur and how they can be addressed, whether through tailored assistance, simpler legislation, redesigned processes or targeted interventions,’ the government said.
‘Calculating an aggregate figure allows HMRC to quantify, compare and prioritise its response to risk across the tax system and to benchmark performance against other fiscal authorities. Considerable resources go into tax gap analysis. However the various components of analysis, such as receipts forecasting, testing the accuracy of risk assessment and informing policy decision making, are required for other business reasons. The incremental cost of publishing an aggregate tax gap is therefore small.’
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