Designing good compliance into the tax system

HM Revenue & Customs estimates the total UK tax gap, the difference between the tax collected and the amount that should be collected “in theory”, at £34bn. Just £1.7bn relates to avoidance (excluding international tax planning strategies such as profit shifting, which are being addressed slowly but multilaterally), and £6bn relates to interpretation of the law.

In contrast, criminal attacks account for around £5bn and evasion another £5bn, while £3.5bn is attributed to the “hidden economy”.

Read more: My article for AAT Comment, 12 January

UK tax gap update highlights evasion, legal interpretation losses

A shift in the public debate is needed to ensure that everybody sees tax evasion as unacceptable, a leading UK tax expert said after official figures suggested that avoidance accounted for £1.7bn of a £34bn tax gap.

HM Revenue & Customs estimated that evasion, criminal attacks, and the hidden economy together accounted for £13.8bn, and error and non-payment for £6.4bn. Losses arising from differences in interpretation of the law accounted for £6bn, and failure to take reasonable care accounted for £6.1bn …

My news story for Tax Analysts, October 30 ($)

HMRC: Measuring tax gaps

Perception that ‘odds are stacked’ against HMRC drives evasion, report says

A perception that the odds are stacked against HM Revenue & Customs and in favour of business impedes the effectiveness of the tax authority’s anti-evasion efforts, according to research that identifies four “distinct profiles of evader” among small and midsize businesses in the UK.

For any intervention strategy to work there is a basic requirement for those evading to “believe that there is a real risk that the evasion will be detected and proven,” said Quadrangle Research Group, a London-based consultancy that conducted the research in April 2016. “The main barrier to effectiveness” is that this is not currently the case, Quadrangle said in a report published on HMRC’s website on September 29.

A new offence listed in the Criminal Finances Act, failure to prevent the facilitation of tax evasion, came into force on September 30. HMRC published guidance on September 29, inviting companies and partnerships to “report on their own behaviour”. Read more:

My news story for Tax Analysts, September 30 (paywall)

HMRC research report: September 2017: Understanding evasion by Small and Mid-Sized Businesses

HMRC guidance September 29: ‘Tell HMRC about a company helping people to evade tax’

HMRC press release September 30: ‘Stop facilitating tax evasion or face criminal prosecution, HMRC tells corporations’

HMRC vows to pursue tax evaders in ‘intentionally scary’ documentary

HM Revenue & Customs officers made it “absolutely clear” in a TV documentary that there is no hiding place for people intent on tax evasion, RSM UK partner Mike Down observed.

Catching the Tax Dodgers is “intentionally scary,” Down said, after the programme makers sought to portray what they called “the war between the tax dodgers and the taxman.” The documentary, filmed over a period of four years, was broadcast by Channel 4 on August 13.

HMRC thinks it has “discovered a £36 billion black hole,” the documentary’s narrator said in reference to the department’s estimate of the tax gap for 2014/15. That sum represented 6.5 percent of theoretical tax liabilities, HMRC said in its October 2016 report. The report notes that the tax gap showed an “overall downward trend” from 8.3 percent in 2005/06 before levelling out in recent years. Read more:

My news story for Tax Analysts, August 21 (paywall)

UK government urged to do more to tackle tax evasion by landlords

A local authority urged Philip Hammond to do more to tackle tax evasion as it suggested that “rogue” landlords could be costing the Treasury as well as exploiting vulnerable tenants.

Sir Robin Wales, mayor of the east London borough of Newham, said the council’s “private rented licensing scheme” introduced in 2013 had “unearthed that many unscrupulous landlords may be benefiting from undeclared tax.” The Newham council works in close partnership with HMRC to help ensure that landlords meet their financial obligations, Wales wrote.

“We understand that nearly 13,000 Newham landlords have questions to answer and we estimate that across London unpaid tax by landlords could be costing the public as much as £183 million,” Wales said in the council’s emailed statement. HMRC did not recognise the estimate of 13,000, which represents almost half of the borough’s registered landlords, but a spokesman told Tax Analysts that it was working with the borough as part of its UK-wide Let Property Campaign. Read more:

My news story for Tax Analysts, August 21 (paywall)

Tax professionals call on U.K. government to help dispel avoidance ‘myths’

HM Revenue & Customs and politicians could do more to educate the public about tax and dispel “misleading impressions” about tax avoidance given by media reports, the Chartered Institute of Taxation has told the All Party Parliamentary Group on Responsible Tax.

The idea that there is a large “pot of gold” that could have reduced the need for austerity measures is a myth, the CIOT said, adding that “the concept that HMRC has failed to raid this non-existent pot is a fundamental misreading of reality.”

An APPG consultation was launched in September to consider HMRC’s ability to fight tax avoidance and evasion …

Read more: My news story for Tax Analysts, 26 October (paywall).

The tax gap and Labour’s review of HMRC

Ed Miliband announced at the weekend that, if elected, Labour would open an “independent, root and branch review of the culture and practice of HMRC” in relation to tax evasion and aggressive tax avoidance.

Today the Financial Times reported that there was support for the idea of a review among tax experts who “thought HMRC had lost too many skilled people in the pursuit of efficiency”.

Miliband said: “What we are seeing is the growth of hugely complex and aggressive tax avoidance schemes, often based offshore. The sort of activity that has left the UK a £34bn hole in our nation’s finances.”

HMRC’s estimate of the total UK tax gap is £34bn. The Independent reported – correctly, if we’re using HMRC figures (emphasis added): “The use of offshore aggressive tax avoidance schemes … contributes to a £34bn gap in much-needed public funds.” Continue reading The tax gap and Labour’s review of HMRC

Tax transparency, public understanding and a shared purpose

The role of greater transparency in improving public understanding of tax issues and enhancing confidence in the system was the subject of an informative and good-natured debate at the House of Commons on 8 July, hosted by Mazars and the Association of Revenue and Customs and chaired by Margaret Hodge MP, chair of the Commons Public Accounts Committee.

My report focuses in turn on some of the key issues relating to tax authorities, tax advisers and taxpayers – three groups forming what Mazars has called the “transparency triangle”.

Read more on the Mazars Tax Transparency blog.

See also recent Published work.

Tax evasion and ‘shadow companies’

Richard Murphy’s latest report on the UK’s tax gap has been criticised by HMRC for its “highly inappropriate” methodology, the Financial Times has reported today under the headline “Evasion and hidden economy leave £40bn a year tax gap, says campaigner”. The report, running to 80 pages, has also been criticised by some tax professionals and commentators. I’ve read most of it today and here are my initial thoughts. Much of the report focuses on an important compliance issue that has received very little attention.

As the FT reported: “Murphy put the spotlight on an estimated 400,000 registered companies that tell the Revenue they are not trading. He said there was almost no checking of these accounts, raising a ‘strong possibility that significant fraud and tax loss could result from this almost total absence of regulation’.”

HMRC estimated (in October 2013) that the total tax gap of £35bn for 2011/12 included:

Evasion (illegal activity, eg. deliberate understatement)  £5.1bn
Hidden economy (undeclared economic activity)  £5.4bn
Total evasion and hidden economy £10.5bn

Murphy’s estimate is four times the official estimate, so I decided to look for an explanation. This is where I’m up to …

HMRC estimated the VAT element of the tax gap on a “top-down” basis, comparing consumption expenditure data with tax receipts. The direct tax (income tax, corporation tax etc.) element was estimated “bottom-up”, using HMRC data and management information.

So VAT losses were measured by comparing the net “VAT total theoretical liability” (VTTL) with actual VAT receipts, and the main methods used to estimate tax gaps for direct taxes were random enquiries, data matching and risk registers.

Murphy has suggested that £100bn of UK trading income may not have been recorded in accounts sent to HMRC in 2011/12, and his estimate is based on HMRC data and EU studies on VAT not paid.

It is clear from HMRC and EU data, he suggests, that around £1 trillion of trading income “should have arisen” in the UK in 2011/12. He adds: “If [as UK government estimates suggest] VAT is lost on about 10% of all VAT-chargeable sales then it is highly likely that about 10% of all sales, or £100bn in 2011/12, were unrecorded.”

Murphy’s report suggests that the total tax lost because of unrecorded sales alone in that year “might have been £40bn”.

He uses a “top-down” approach for all taxes and argues that HMRC’s “bottom-up” approach for direct taxes cannot take account of tax returns that are not received.

One likely explanation for the “astonishing” £40bn figure, he suggests, can be found in an estimated 400,000 “shadow companies” that are not declaring trading income:

“These 400,000 missing or ‘shadow’ companies provide one of the best possible explanations for where much of the UK’s missing £100bn worth of trade is taking place although some of that missing trade will, of course, also be the undeclared and under­declared income of the self-employed and some will also be the undeclared income of companies that do actually submit corporation tax returns.”

An average of 400,000 sets of accounts per year “are not [filed at Companies House] by companies who may well have traded”.

HMRC has said, the FT noted, that Murphy’s approach might give the correct order of magnitude for the tax gap for business profits of companies and sole traders but it gave ‘completely the wrong answer’ for the income tax due from employees, where international research suggests the tax gap is very small, at about 1%”.

HIs study was “seriously flawed”, HMRC said, because it was based on “among other things, a significant overestimate of the UK’s VAT gap”.

Clearly, the methodology behind the £40bn estimate is open to challenge. But the “shadow companies” issue is a compliance issue that deserves closer scrutiny, despite HMRC’s assurance that “we are extremely good at identifying companies that need to send in a tax return”.

Fair Tax Mark: Corporation tax criteria to be revised

Since I noted on 28 February the cautious welcome given to the new Fair Tax Mark by ICAEW and Baker Tilly, ICAEW’s Tax Faculty team has published a second statement on its tax forum. The cautious welcome remains, but ICAEW stresses that “to succeed [the FTM] needs further work”.

A key question for anyone considering the invitation to support the FTM or become a “Fair Tax Business” is the question I asked on 23 February: “What is the ‘right amount’ of tax, and who decides?” I guess there are two questions.

First, what is the “right amount” of tax? Continue reading Fair Tax Mark: Corporation tax criteria to be revised

Double counting in the UK tax gap debate

Last June the National Fraud Authority estimated fraud against the public sector at £20bn a year, including £14bn lost to tax fraud (see page 8).

This was based (see page 14) on HMRC’s estimate of the 2010/11 tax gap. The NFA said at page 53:

“For calculating an estimate of tax fraud it is assumed that the underlying behaviours described as ‘evasion’, ‘the hidden economy’ and ‘criminal attacks’ represent fraud. It is estimated that these behaviours accounted for £14bn [of the estimated tax gap of £32bn] in 2010/11.”

Clearly, the NFA’s £14bn is included in the tax gap figure.

Two months ago HMRC estimated the tax gap for 2011/12 at £35bn and revised its estimate for 2010/11 to £34bn.

This week the Commons public accounts committee reported that: “[Taxpayer] losses due to fraud and error are worryingly high. It is staggering that, in one year, the public sector was defrauded of over £20bn and the tax gap rose to £35bn.”

Can you see the problem here? When the committee puts it like that, are you inclined to add the two figures together? Well, yesterday this happened …

The Times had this:

Watchdog: taxpayers losing out on £55bn

Sky News had this:

Govt Losing A ‘Staggering’ £55bn A Year In Taxes

The tax fraud figure has been counted twice, as Heather Self and others have pointed out.

Calum Fuller at Accountancy Age took this up with the PAC, whose response was that “three sets of figures are prepared for different audiences at different times with different bases, including both actuals and estimates and there is a degree of overlap between all three with no single figure currently prepared to present a unified view”.

The PAC report called on the Treasury to come up with a better way to present “cross-government figures” within the Whole of Government Accounts, which can be used “to show the impact of the government’s counter-loss activities”.

The tax debate would benefit from more light and less heat. This sort of confusion doesn’t help, and the PAC’s report and press release could have been much clearer.