### UNRAVELLING THE TAX GAP

**BLOG 175**

__UNRAVELLING THE TAX GAP__
HMRC recently issued a note about
calculating the 2014/15 tax gap. This
tells us that the tax gap for 2014/15 was some 6.5% of the total tax and duties
due to HMRC. It also says that “the
estimate announced for the previous year has been revised upwards from £34bn to
an actual figure of £37bn”.

I am not sure that it is helpful for the
government to lie to the citizenry. But
I suppose that when it ought to be obvious that it is a lie – as it is surely
not possible to “estimate” an “actual figure” that may not matter too
much. One can replace an estimate by an
actual figure and one can refine an estimate to produce a more accurate
estimate – which is what HMRC have done – but there will always be a
fundamental difference between an estimate (an educated guess) and an actual
figure (a fact).

The briefing note is of course little
more than an advertising puff for the full 86-page report, which is a lot more
honest. So what is the tax gap? HMRC say it is the difference between the
amount of tax due and the amount collected.
They point out that it is impossible to collect every penny
theoretically due, “for example, we cannot legally collect taxes from companies
that owe tax and are insolvent”. I like
that word “legally”. If HMRC believe
that there are illegal ways to collect tax from people who have no money,
perhaps they should explain what they are.
In the real world if a person has spent all his money he cannot pay
anything. But I digress. The full report breaks down the tax gap as
follows.

Criminal attacks £4.8bn 13%

Evasion 5.2bn 14%

Hidden economy

__£6.2bn____17%__
£16.2bn 44%

Avoidance 2.2bn 6%

Non-payment 3.6bn 10%

Legal interpretation £5.2bn 15%

Failure to take reasonable care
5.5bn 19%

Error

__£3.2bn____£13.9bn____9%____£35.9bn__

__103%__

I have totalled the first three items
together because they are all different forms of theft. I assume that HMRC have split them because
they try to counter them in various ways.

This is an interesting table. 44% of the £6.5bn shortfall, or £2.86bn is
lost due to theft. That is obviously an
estimate. If HMRC knew how much had been
stolen from taxpayers they would also know who stole it and would presumably
recover it. The reality is that they do
not know, because nobody knows. Many put
the figure much higher.

Bearing in mind the vast amount of both
government expenditure and new legislation designed to combat tax avoidance, it
is interesting to learn that this actually cost taxpayers only £2.2bn in
2014/15 and represented a mere 0.39% of the tax shortfall. Indeed the vast majority of this figure is
not a shortfall at all. It will be
collected (with interest at a rate that exceeds a commercial rate) in later
years because most attempted tax avoidance fails and the tax has to be paid (or
will fall into HMRC’s non-payment category) in a later year. Where avoidance is successful, it is not part
of the tax gap either (under HMRC’s definition) as the tax will never have been
“an amount of tax due”; it is an error in HMRC’s calculation of the tax due,
arising from a misunderstanding by HMRC of the tax laws.

Non-payment is factual and there is not
much to say about it; even HMRC cannot stop people becoming insolvent.

The three remaining items are all
estimates. How accurate they are is
questionable. HMRC enquire into a small
number of cases. Those enquiries throw
up areas where the taxpayer has taken a different view from HMRC. In most cases the two sides compromise. HMRC then consider imposing a penalty for the
extra tax that becomes collectible as a result of their challenge. If the taxpayer accepts a penalty, that extra
tax is labelled as arising from failure to take reasonable care; if he doesn’t,
it is attributed to error. If the
dispute has not been resolved by the time HMRC prepare their statistics, the
tax HMRC are claiming is labelled as lost due to legal interpretation. The statistics are generally based on HMRC
random enquiries. They do a very tiny
number of random enquiries. I do not
know how many but I would be surprised if it is more than 1,000. They then assume that the extra tax they pick
up from that small number is representative of the whole body of
taxpayers. So if they pick up extra tax
on, say, 200 of their 1,000 random enquiries they assume that 20% of the 9
million tax returns they receive are similarly wrong. That may or may not be a correct
assumption. I have no doubt that it is a
statistically reasonable one.

The legal interpretation category is a
bit more controversial because most challenges of legal interpretations take
years to resolve. Some, or indeed all,
of that £5.2bn may be tax that will ultimately be collected. It may equally not be tax at all but an
amount that HMRC thought was due because they misunderstood the law. This means that projecting from the sample to
the general body of taxpayers is fairly pointless. It is improbably that other taxpayers will be
interpreting or misinterpreting exactly the same bits of legislation.

The real breakdown of the tax gap is
therefore as follows:

tax stolen (estimated) £16.2bn

tax lost because HMRC did not manage to
collect it in time 3.6bn

tax lost because HMRC have not been
given the resources

to do more enquiries £

__13.9bn__
£33.7bn

tax that will be paid late as a result
of attempted

avoidance will never have actually been
due as HMRC

misunderstood the law

__2.2bn____£35.9bn__

This raises interesting questions about
HMRC’s use of resources.

__ROBERT MAAS__
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