Closing the Tax Gap – Delivering for the Nation

Debunking myths, identifying challenges and maximising opportunities

In brief

 

  • Closing the tax gap is an imperative in a time of      austerity and when all are meant to be in it together

 

  • Sustained and additional investment in HMRC is part      of the solution to shrinking the Tax Gap

 

  • ARC has shown that an investment of £312m invested in key personnel would deliver £8bn for nation. Surely the most compelling invest-to-save argument ever.

 

Introduction

 

ARC welcomes you to this meeting on Tax myths, challenges and opportunities. We’re a small trade union that represents the more senior members of HMRC. Our members deal with the whole range of tax affairs, from large corporates, through trusts and affluent individuals, legal advice, policy maintenance, and more.

 

Tax, tax policy and tax administration have recently generated a high level of public, media and Parliamentary attention. But we have become increasingly concerned at the lack of public awareness of many of the issues, indeed even of some of the basics[1], such as conflating turnover with taxable profits, or what is a Tax Gap.

 

The meeting has been organised because we strongly believe in the need to increase understanding and allow a focus on some key issues, such as policy choices[2].  We also believe by investing in HMRC to help reduce the Tax Gap the country has the opportunity to increase its tax revenues (without increasing tax rates) and reduce the Deficit. In some fundamental areas, like international taxation or for digital services, the current rules and policies no longer work and need to be modernised.

 

Tax Gap

 

Every economy has a tax gap. But there are problems in defining and measuring it.  HMRC describes the Tax Gap as the shortfall resulting from fraud, error, non-payment and artificial avoidance schemes, and refers to the ‘spirit of the law’[3].  There is, however, some confusion between the official Tax Gap – estimated by HMRC at £32 billion – and other sums of money avoided through technically legal means.

 

There are many opinions, across the world, on the best way in which to provide robust estimates on the scale of the tax gap. Some doubt its value. Apart from figures produced by individual tax authorities, some come from academic studies by economists, some from campaigning groups and some from official bodies such as the OECD. None ever seem to agree, some disagree very substantially[4]. ARC’s view is whether the figure is £32bn or £120bn, it is big enough to invest more to reduce it.

 

Does a Tax Gap matter?

 

There are a number of economic and policy reasons to care about non-compliance. It reduces the planned tax yield, potentially harming public services, and redistributes the tax burden on an ad hoc basis. Since not all taxpayers avoid or evade tax, it is both unfair and can undermine incentives that the Government intends to provide through the tax system.

 

It can waste public and private resources, through capacity devoted to devising and, in Government, countering, avoidance/evasion schemes rather than creating wealth. Fair competition is harmed by the distortions created via sophisticated legal and accounting techniques, making use of mismatches in taxing provisions across countries. Similarly, corporations that operate only in domestic markets, including family-owned businesses or new innovative companies, have difficulty competing with international businesses that have the ability to shift their profits across borders to avoid or reduce tax.

 

The UK position

 

The UK is not alone in having a Tax Gap. It can be hard to measure reliably across different countries but estimates put the UK near the bottom of the range. HMRC estimates that nearly half the gap is down to fraud, evasion and criminal attacks. £1.1bn is put down to avoidance by businesses managed by the Large Business Service, and £1.2bn for large and complex businesses. There are also international dimensions to the Tax Gap in how it impacts on developing economies and where solutions for the G8 or G20 may even decrease tax revenues in continents such as Africa[5].

 

According to the last HMRC figures the Tax Gap has fluctuated, but not greatly. These figures are net of HMRC compliance activity, worth £13.9bn in 2010/11, £16.6bn in 2011/12 and £20.7bn in 2012/13.

 

                       

 

 

Tackling the Gap

 

HMRC can tackle some aspects of the Gap by investing in better IT (to allow more effective risk assessment), in more clerical support for compliance staff, by employing more people to actively review and challenge were necessary . ARC members bring in yields far higher than their costs and we believe even a modest additional investment would bring in very substantial returns – £312mn to raise £8bn[6].

 

Reducing the Tax Gap, especially tackling high end avoidance, can be a complex and often time consuming process. Commentators agree that defining avoidance is not easy, with some arguing that transactions are either legal or not. Others have strongly criticised HMRC’s performance[7].

 

The House of Lords recent report on tackling avoidance[8] quoted from a study by the Oxford Business School. This suggested three types of avoidance: ineffective avoidance, effective avoidance, and using legislation or the international tax system to one’s advantage[9]

 

ARC believes that better staffing and better support can deal with the first two of these. But to tackle the third requires legislative changes and political will. Public demands will play a role here, as people realise the degree of under-taxation that current rules allow and even encourage. We are pleased to see that the OECD and its members have supported a review and Action Plan that addresses these issues of base erosion and profits shifting[10]. Changes to the international tax system are realistically only possible via international agreements and the UK government – and legislators – will have to work with their counterparts in Europe and across the world.

 

Conclusion

 

Today we are starting the work of debunking the myths around what are very complex taxation issues, not least how to reduce the tax gap.  Despite the Government’s austerity programme the UK budget deficit is still estimated to be over £100bn. And at the same time HMRC’s latest estimate of the UK tax gap is £32 billion.

 

HMRC is on course to deliver the additional £7 billion each year to 2015 as part of the £917 million reinvestment programme. ARC believes that in achieving that, HMRC will have demonstrated what we have been saying consistently over recent years – that by investing in key personnel in HMRC, its main revenue raising department, the Government will be guaranteed a significant return; one it could use to draw down the deficit, to avoid further austerity measures, or to fund economic recovery and growth.

 

 

 

Further information can be found in the following publications

 

Action Aid paper on Tax Responsibility for Investors (http://www.actionaid.org.uk/news-and-views/actionaid-releases-new-tax-responsibility-guide-for-ftse-investors)

 

ARC, 2013 Budget Submission, http://www.fda.org.uk/Media/Tax-gap-is-closing-but-further-8-billion-could-be-recouped-by-HMRC-providing-an-alternative-to-cuts-or-tax-increases-says-ARC-Budget-submission.aspx

 

R Brooks, The Great Tax Robbery, 2013.

CBI Papers on Tax and Business http://www.cbi.org.uk/media/2145560/making_the_case_-_july_2013.pdf

 

HMRC Factsheets:

(http://www.hmrc.gov.uk/about/briefings/profits-multinationals.pdf)

 

House of Commons debate, 5 February 2013, HMRC capacity and resources, http://www.publications.parliament.uk/pa/cm201213/cmhansrd/cm130205/halltext/130205h0001.htm

 

House of Lords, Report on Tackling Corporate Tax Avoidance in a Global Economy, The 58pp executive summary (http://www.publications.parliament.uk/pa/ld201314/ldselect/ldeconaf/48/48.pdf)

 

Institute of Fiscal Studies, Green Budget, February 2013, Chapter 10, Corporate tax, revenues and avoidance, http://www.ifs.org.uk/budgets/gb2013/gb2013.pdf

 

OECD Action Plan on Base Erosion and Profit Shifting (http://www.oecd.org/ctp/BEPSActionPlan.pdf)

 

Oxfam paper on Tax Havens (http://www.taxjustice.net/cms/upload/pdf/oxfam_paper_-_final_version__06_00.pdf)

 

Oxford business School Report for the NAO on Tax Avoidance http://www.sbs.ox.ac.uk/centres/tax/Documents/reports/TA_3_12_12.pdf

 

Parliamentary Accounts Committee:

http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/870/870.pdf

 

Tax Research, http://www.taxresearch.org.uk/Documents/PCSTaxGap.pdf

 

Treasury Select Committee, 6 March 2012, Closing the Tax Gap: HMRC’s record at ensuring compliance, http://www.publications.parliament.uk/pa/cm201012/cmselect/cmtreasy/1371/1371.pdf


[2] One very strong critic of UK tax administration believes “The central issue in British tax avoidance today is a political one”, R Brooks, The Great Tax Robbery, p22

[7] See the PAC reports in the reading list.

[10] OECD Action Plan on Base Erosion and Profit Shifting (http://www.oecd.org/ctp/BEPSActionPlan.pdf)

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