How do you solve a problem like tax avoidance: what’s the scale of the problem

In the last stop on my whistle stop tour of the tax gap, I address how much of the tax gap is made up of tax avoidance.

HMRC publish data in relation to how, their statistics indicate the gap arises. That data is summarised in the following table:

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HMRC describes ‘avoidance’ (for the above purposes) as that which is ‘operating within the letter but not the spirit of the law’. As such, HMRC say, it does not extend to “legitimate tax planning” which “involves using tax reliefs for the purpose for which they were intended. For example, claiming tax relief on capital investment, saving in a tax-exempt ISA or saving for retirement by making contributions to a pension scheme”.

Two cautionary notes must be sounded in considering these figures. First, some commentators appear to eschew the notion of “legitimate tax planning”. Richard Murphy, for example, the controversial tax campaigner, appears to regard even pro-purposive tax planning as the mere exploitation of “loopholes”. Second, as I have previously noted, the tax gap only refers to tax which is within the letter or spirit of the existing legislation. It does not refer to tax which should be within the letter or spirit of existing legislation.

If pro-purposive tax planning is included, or the gap is defined as including that which should be taxed, then the size of the tax gap will increase and the proportion of that gap attributable to avoidance will increase substantially.

However, as things stand, the proportion of the tax gap attributable to avoidance, whilst large in absolute terms, is relatively small expressed as a percentage of the tax gap. Despite this, it almost entirely dominates the political debate.

I will turn next week to look at the Progress Tackle Tax Avoidance Charter. But, and this has been the point of my quick survey of the tax gap, an efficacious tax policy is one that goes everywhere the tax is uncollected, and does not merely follow the noise.

 

How do you solve a problem like tax avoidance: where is the problem

In yesterday’s blog post, I looked at the tax gap and what, conceptually, the headline figure of £32bn represented. I noted that it might, in fact, considerably underestimate the tax that you and I might think is due on activities in the United Kingdom.

Today I want to make a short point about where the tax gap arises? Because it’s only once you know where it is that you can begin to formulate practical policy to close it.

The areas where the tax gap arises are set out at page 4 of this document. I don’t mean to go through them all (they’re summarised in the chart below) but there is one surprising fact which jumps out at you.

By far the single biggest constituent element in the tax gap is VAT, which accounts for £9.6bn of the £32bn. So VAT makes up 30% of the tax gap but only 19% of tax receipts. The VAT tax gap is both huge in absolute terms – and far higher as a percentage of the tax that should be collected than for other types of tax.

Even if one one strips out VAT that’s declared but not paid (about £0.9 bn) and VAT lost to a particular infamous type of VAT fraud (so-called Missing Trader Intra Community Fraud) (£0.5-£1bn) one is still left with £8bn of VAT that’s not even declared. That’s about double the corporation tax tax gap (which is £4.1bn, split fairly evenly between SMEs, Large and Complex Businesses; and Businesses Managed by the Large Business Service (don’t ask)).

This comparison tells us a number of things. First, and most obviously, we ought to be talking more about VAT and less about corporation tax. Second, given that the overwhelming part of the VAT liability falls upon households (over 80% if one strips out exempt transactions) we should be exploring ways in which households might help HMRC collect VAT, for example by requiring households to ask traders with whom they deal for invoices. And, third, once we ‘sense-check’ our understanding of where the gap is against the data about the behaviour to which the gap can be attributable we begin to be able to formulate further ideas about the measures necessary to close the gap. I’ll examine the behaviour question tomorrow.

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How do you solve a problem like tax avoidance: where am I going (and why)

Thanks to everyone who took the time to read my blog yesterday. As I seem already to have gathered a number of readers, I thought it might be helpful to say where I hope I’m going, and what I want to do along the way.

My aim is to educate and inform my readers with the hope of improving the quality of debate around tax and tax avoidance. To be effective participants we don’t need to be tax experts. We do need commonsense, clear headedness and a little help.

A little help? Let me propose three golden rules. One: we should understand how the choices we make about our tax system affect the functioning of our economy. Two: the tax system ought to be conceptually fair. Three: it ought to be properly administered.

I start with these golden rules because (although no-one could disagree with them) they’re frequently ignored. They are ignored because they’re inconvenient. And they’re inconvenient because the debate is unnecessarily politicised: the participants all too often sacrifice the chance to propose sensible policy advances at the altar of playing to their constituencies. Bluntly, in order to give their constituencies what they want, they ignore what they know is right.

Let me give examples of each of the golden rules being ignored.

My first. Yesterday I read a prominent (and expert) commentator on the left arguing that we should close the “loophole” of the Enterprise Investment Scheme.

Closing a loophole sounds like a good thing, but what’s actually at stake here? To quote HMRC’s website: “The Enterprise Investment Scheme (EIS) is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.”

Helping smaller, higher risk trading companies raise finance also sounds like a good idea. So you might have thought that, before arguing for the closure of EIS, there should be an assessment of its efficacy and the consequences of withdrawing it. But there was no assessment.

My second. The ongoing debate around Google’s tax affairs. Eric Schmidt, Google’s Executive Director, has argued that Google is “fully compliant” with the law. He’s ignoring whether the law is conceptually sensible or fair.

My third. Again, the ongoing debate around Google’s tax affairs. And the suggestion from the Public Accounts Committee that it was “extraordinary” that HMRC “did not challenge” Google over its tax affairs.

HMRC might be a convenient scapegoat but take a look at the facts for a second. We have a government department, with expert staff, with full fact finding powers, and under huge political pressure in relation to Google’s tax affairs. We have an enormously well-funded Google which is bound to have taken advice before implementing the arrangements in question which has argued forcefully that it accounts correctly for the tax. We have a Public Accounts Committee which isn’t as expert as either Google or HMRC and is only in possession of the facts it asked for. Against that background, isn’t the more likely explanation that HMRC looked very closely at Google’s tax affairs – but the tax system just doesn’t function as the Public Accounts Committee thinks it should? In other words, it’s the second rather than the third golden rule that’s being breached?

To be an effective participant in this important debate,  you need to be better at diagnosing the (real) disease, better at prescribing the (effective) medicine – and you also need to understand the (economic) side effects of the prescription. I hope my golden rules will help you do this.

So where am I going?

I’m going to continue on my path of seeking to improve the quality of debate: I make no apology for being ambitious. As a member of Progress, I have a particular interest in its Tax Avoidance Charter and I’m going to test its efficacy against my three golden rules. Disappointingly, I will show that, it, too, is often a function of considerations of doctrine rather than efficacy.  And then I’m also going to advance a number of proposals of my own for how we might more effectively tackle ‘bad’ tax avoidance.

Do follow me on @JolyonMaugham