I haven’t written a blog post for a while. The project I set myself – of educating the interested public in tax matters – ran aground on the banks of a disinterested public. However, I was so irritated at a piece of chicanery in yesterday’s budget that I was moved to pick up the metaphorical pen.

The biggest tax raising measure in the budget is the extension of the so-called Accelerated Payments Regime pursuant to which those engaged in particular types of alleged tax avoidance transaction stump up the disputed tax upfront rather than waiting for the courts to declare it payable. Just hold on, it gets interesting I promise.

The so-called ‘yield’ from this measure over the five year term for which HM Treasury forecasts is about £4bn give or take. That makes it the biggest single revenue raising measure in yesterday’s budget. It pays – or is said to pay – for 1p off a pint, a freeze in cider duty and a halving of bingo tax five times over.

Except it doesn’t.

The measure merely accelerates payments which would have been received in later years to earlier years. Tomorrow’s money today. So over, say, a ten year time-scale the measure would be yield neutral.* But over a five year time-scale, which is the only time-scale HM Treasury (publicly) looks at, it has a £4bn yield. So manipulate the time-scales and shazzam! you’ve manufactured a four billion quid budget give away. Much of it going to wealthy savers and the elderly.

Of course, if HM Treasury’s time-scales were wrong, such that, for example, the tax collected today would otherwise have been paid in year two or five rather than in year six or after as the forecasting anticipates, the measure would be revenue neutral even over a five year term.

Which makes this line in the Budget 2014 Policy Costings Document: “The main uncertainties in this costing relate to the… payment profile” (see page 37) really rather telling. Translated it means, we think we’ve magicked up £4bn but there’s a real risk about that.

*Actually, on one view it’s even worse than that. Once you factor in that the failed tax avoider who gets his fiscal come-uppance in year six has also to bear interest at a rate which substantially exceeds the Government’s borrowing rate, and that interest is foregone by Government if it gets the disputed tax now, the measure may be argued to be revenue net negative for Government.

Today I turn to look at the second call in Progress’ Tackle Tax Avoidance Charter:

Open up the tax affairs of large quoted companies, starting with the FTSE 100. We should require companies to be much more transparent about their businesses and profits in the accounts they file with Companies House.

Let’s start by putting the issue in context. According to HMRC, the total ‘tax gap’ for all corporates amounts to some £4.1bn, or 8.8% of the tax gap. This £4.1bn figure includes SMEs as well as larger corporates and the tax gap attributable to the 800 or so largest businesses is only £1.4bn (of which 75% is due to “avoidance”). So the tax gap attributable to avoidance for those 800 businesses is £1.05bn (or about £13m each). That’s not an especially significant amount of money – by way of comparison the tax gap for VAT (the overwhelming majority of which is attributable to household spending) is almost £10bn.

(Important but lengthy side note. One must be cautious when using tax gap figures. They reflect HMRC’s estimates of the tax which is caught by the letter or spirit of the law. But they don’t reflect the tax which many would think should be paid but which is not caught. To take an obvious example, if important intellectual property is held offshore and rented to the UK operation at a market rent, the fact that those arrangements significantly reduce the profits of the UK operation will not be reflected in the tax gap.

There is a perception that there is widespread use of this and similar arrangements such that the tax gap is hugely understated. That perception may very well be right. However, the evidence for this is not clear. Over a ten year period there has been no real decline in corporation tax receipts – a surprising fact if one’s perception of avoidance by large corporates is that it is enabled by the internet age.)

So, using HMRC’s measure of the tax gap, the problem is not substantial in scale. And, although it might be reasonable to expect that increasing transparency would have some effect on corporate behaviour, the strength of this causal relationship is (to the best of my knowledge) unexplored. Anecdotally, there is conflicting evidence on the point: on the one hand, the growing consensus that being a good corporate citizenship involves paying your fair share is (undoubtedly) leading to changes in behaviour; on the other hand, there is an, I think, quite genuine concern on the part of corporates that a falling tide grounds all boats. In other words if they are to be pilloried regardless of whether their behaviour can sensibly be described as tax avoidance they may as well take the financial benefits available to them.

So, where does all of this get us? Some suggestions:

1. Transparency is a side-show. What we really need is a just tax system.

2. Legislation is not the answer. The fruits do not justify it. And – because we cannot legislate beyond our shores – it would not be effective.

3. However, a corporate citizenry kite-mark would be a good idea. It would usefully harness the self-interest that corporates have in being seen to behave properly. However, to achieve corporate take up, the methodology for qualifying must be fair and sensible. In other words, it must be drawn up by representatives of the business community – and not just tax campaigners.

Today I mean to look at the first of the proposals in Progress’ Tackling Tax Avoidance Charter which is to:

‘Name and shame’ companies and individuals engaged in tax avoidance. This would both have a powerful deterrent effect and help to change the culture among those people who see tax avoidance as legitimate and desirable rather than the abrogation of civic duty that it really is.

The attractions of this course are manifest.

• Few people, today, would agree with Lord Oliver, speaking as a Law Lord, in Craven v White that:

the fact that the purpose of a scheme is tax avoidance does not carry any implication that it is in any way reprehensible or other than perfectly honest and respectable.

• The specialist tax tribunal is often confronted with applications for appeals to be held in private and – these days – almost never accedes to them. One can, thus, say that the notion that one has the right to privacy in relation to ones, controversial, tax affairs is already in heavy retreat.
• Naming in shaming is bound to have a powerful deterrent effect. As US Supreme Court Judge Louis Brandeis observed, “Sunlight is the best disinfectant”. And so it is in this field – as anyone who has picked up a newspaper recently will tell you.

The attractiveness of the outcome ought not, however, cause you to close your eyes to the difficulties of getting to it. These problems might best be explained by comparing what is proposed to that which already exists.

Section 94 of the Finance Act 2009 enables HMRC to publish the names of “deliberate” defaulters. The operation of the provision was considered by HMRC in October 2010 in a well argued paper which revealed that naming and shaming deliberate defaulters was a powerful tool which would work and which raised the stakes for would be tax evaders.

So far so good. However, the operation of section 94 is subject to two (relevant) limitations. First, it applies to those who engage, broadly, in evasion (rather than avoidance). And, second, names are published only once the subject (in effect) accepts that s/he or it is a deliberate defaulter.

So what do these limitations tell us about the call to name and shame tax avoiders?

First, whilst there is a settled understanding of what constitutes tax evasion, there is no equivalent for tax avoidance. This is no mere matter of semantics.

Amongst commentators there is profound and genuine disagreement as to what avoidance actually is (a matter I have explored in several of my previous blog posts – see in particular that of 11 June 2013). And this is not (or not just) a question of how you describe tax avoidance; there’s an even more important (prior) question about what avoidance actually is.

The consultation group which considered and devised the General Anti Abuse Rule wrested at some length with these questions. And the concepts and language they ultimately adopted to resolve them (which can be found here) are so complex as to be described as unworkable by many. I disagree; I think the GAAR will prove highly effective but the fact remains that tax avoidance is conceptually and definitionally extremely complex.

Second, unlike “deliberate” default, “tax avoidance” is not a term of legal art. So, again unlike “deliberate” defaulter, there is no ‘other’ legal conclusion to which the label “tax avoider” might be attached.

What are the consequences of this?

You would need not merely to work out what tax avoidance is and then define it (my first limitation) but you would also have to create, and fund, a mechanism to determine whether a particular transaction satisfied that description.

And basic considerations of fairness would dictate that if you were to be ‘named and shamed’ by HMRC you would  need an opportunity to contend before an independent tribunal that you had not engaged in tax avoidance. And HMRC would have to spend money defending their decision. And that money, because expended only upon pinning a label to someone, could not lead directly to the recovery of tax. It might, in other words, fairly be considered ill-spent.

It is not easy to see a wholesale solution to these difficulties. But there is a limited one.

Tax law does, from time to time, badge transactions as “abusive” (the GAAR) or as having a main tax avoidance object (any number of targeted anti avoidance rules (“TAARs”)). Legislation could, relatively easily, be introduced that those engaging in transactions caught by the GAAR or a TAAR should be named and shamed. Such a measure would not go quite as far as Progress propose – it would not catch all tax avoiders – but it would catch a fair number and achieve much of the deterrent effect that Progress seeks.

A short diversion from yesterday’s plotted course.

Compass today released its alternative spending review. The plan includes closing the structural deficit by raising £85bn in extra tax including £32.5bn from “Clamping down on tax avoidance” (see page 8). This figure is borrowed from HMRC’s calculations of the tax gap (see “Further Details on Eliminating the Structural Deficit” in the Compass Plan). But a perusal of HMRC’s own calculations show that only £5bn of the tax gap is attributable to avoidance. The vast majority is linked to various types of criminality – under or non reporting, criminal frauds, the black market – or simple non-payment. In these areas the tax gap is wide and persistent. There is no magic wand to be waved.

As I argued in my blog post of yesterday:

“A (completely wrong-headed) belief has grown up that £32bn per annum of prospective income – i.e. the so-called tax gap – is just lying around waiting for the Labour Party to come back into power and pick it up.”

I went on to argue that perpetuating this belief was damaging because it undermined the party’s inclination seriously to address the lingering public perception that the Labour Party can’t be trusted with the economy.

Compass rightly recognises the need to tackle that perception:

Earning the trust to spend money wisely in the future is paramount for any progressive party or coalition, including the Labour Party who have a particular problem in that many voters think it was not careful enough with the public finances when in Government.

Unfortunately its alternative spending review is a rather retrograde step.

Recent internal debate in the Labour Party around its spending plans has helped to move the party back into the centre-ground from the tax-and-spend hinterlands. However, that debate has focused on the “spend” bit; there has been no real soul-searching in relation to the party’s position on the “tax” bit.

This absence is both surprising and damaging.

It’s surprising, because, unlike spending, where the Tories have a natural head-start, fairness in the tax system is much more obviously Labour territory.

It’s damaging, because a (completely wrong-headed) belief has grown up that £32bn per annum of prospective income – i.e. the so-called tax gap – is just lying around waiting for the Labour Party to come back into power and pick it up. And this belief undermines the commitment of many of the party faithful to tackling the “spend” bit.

But perhaps worse still, the absence of a sensible debate – or perhaps more accurately the focus on insensible debate – is a missed opportunity to articulate a set of effective and actionable principles for a sensible approach to taxation around which the Party, the electorate and even the business community might cohere.

The most recent attempt to galvanise the party into action is Progress’ ‘Tackling Tax Avoidance Charter‘. But as I have observed before, it has both the strengths and the weaknesses of Margaret Hodge: it’s a powerful call but to unworkable action.

Over the coming days, I will look at each of the Charter calls. But I start with its introduction:

“This month the G8 will be discussing international action against tax avoidance. While this is hugely important, it is not an excuse for inaction at home, where HMRC estimates  a ‘tax gap’ of at least £32bn exists. At a time of squeezed incomes and public spending cuts, it’s simply unfair a group of global corporations and wealthy individuals are avoiding paying their fair share.”

This introduction – an otherwise sensible call for fairness – perpetuates a number of unhelpful fictions. In fact, of the £32bn tax gap, “only” £5bn is attributed by HMRC to tax avoidance. And I am aware of no evidence at all that global corporations are disproportionately responsible for this £5bn of “avoidance” – indeed I am not even aware of any suggestion that they are. And, although I know other commentators disagree, I argue tax avoidance transactions before the specialist tax tribunals day in and day out and I have no doubt that the General Anti-Avoidance Rule (the “GAAR”) will have an enormous effect in shrinking that part of the tax gap attributable to tax avoidance.

I don’t make these points (and those I will make in the days to come) because I think there’s no need for action on tax avoidance. I don’t make them because I don’t think £5bn matters. I don’t make them because I mean to defend global corporations. I make them because I would like to see Progress as a useful participator in the debate around closing the tax gap. And I think it ought to set it sights higher than making noise.

We all know a little about the tax gap. It’s £32bn right? A fairly big number. It’s just under 5% of government spending – or about half the budget of the DfE – or about 50% more than we spend on primary health care. So it’s quite important.

Over the course of this week, I’m going to look at three things connected to the tax gap. First, what is it? It’s probably not what you thought it was. And the Real Tax Gap may, in fact, be a lot bigger than £32bn. Second, where does the tax gap arise? There are real surprises here. It’s only once you know where it arises that you can begin to formulate practical policy to close it. Third, to what behaviour is the tax gap attributable? Again, an appreciation of this last point is critical to identifying the practical measures one must take to close the tax gap.

But first, what is the tax gap?

According to HMRC (see paragraph 1.1):

“The tax gap is defined as the difference between tax collected and the tax that should be collected (the theoretical liability). The theoretical tax liability represents the tax that would be paid if all individuals and companies
complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law).”

Two points about this explanation.

First, the “tax that should be collected” is not (or not just) the tax that tax legislation says should be collected. That number’s smaller than £32bn. It’s tax satisfying both of two conditions (1) the legislation says it should be collected and (2) HMRC thinks Parliament intended the legislation to collect. This is interesting recognition that the law doesn’t always do what HMRC thinks it should.

Second, the tax gap is a function of the difference between the tax that is collected and the tax that the law (both in letter and in spirit) says should be collected. In other words, it doesn’t include tax that you and I might think should be collected but the law does not presently collect. That’s quite important so let me say it again. If Google’s tax affairs were compliant with the letter and the spirit of the law then the tax that you and I might (sensibly) think they should pay in the UK will not be captured in the tax gap.

So the tax gap on a different measure – i.e. between what the tax law should sensibly collect and what is actually paid – might be a number really quite a lot a bigger than £32bn. Call this number the Real Tax Gap.

Now I am but a mere technician. But occasionally released, blinking at natural light, from the stacks. But if I was campaigning for an effective tax system, I might begin by defining some parameters that would enable me to model the size of the Real Tax Gap.