Collect taxes and boost the economy!

Main Image : 

The tax gap is about £120bn a year… 80 times bigger than the benefit fraud the government hopes to recover, argues expert Richard Murphy

Published: 4th November, 2010

THE government has made great play of its intention to crack down on benefit fraud in the UK and collect, in total, £1.5billion of additional revenue as a result.

I’m delighted that the government is to tackle fraud, but I doubt the wisdom of allocating considerable resources to tackling benefit fraud when there is a much bigger issue to address. That is the massive cost that uncollected tax imposes upon all honest taxpayers.

The difference between the amount of tax that should, theoretically, be paid if everyone was honest, no one tax-avoided, and everyone paid their tax on time in our economy and the actual amount of tax that the government collects each year is called the tax gap. 

In 2009 HM Revenue and Customs (HMRC) estimated this total at £40billion. Less than a year later, in September 2010, it increased the estimate of £42billion. Of this sum the vast majority is tax evasion. Tax evasion is fraudulent; it is deliberately not paying tax by withholding information from HMRC. A small part, amounting to a little over £4billion is, according to HMRC, caused by tax avoidance. That is deliberately exploiting tax loopholes in a way that parliament did not intend. 

What HMRC totally forgot about at the time of publishing these figures was that more than £25billion is at any time overdue for payment to HMRC. In other words, people are withholding this money from the government and, as a result, the government has to borrow this money instead. 

This overdue tax is at least the one area where I can agree with HMRC about the size of the tax gap. I do not agree with their calculations on tax avoidance and tax evasion. 

In 2008 I estimated total tax avoidance in the UK amounted to about £25billion a year. 

About half of that was by individuals and half by large companies. The individual tax avoidance I calculated on the basis of HMRC’s own published statistics, most of which have not been updated since then. This includes tax avoidance within families by use of small limited companies, abuse of capital gains tax, abuse of the domicile rule, inheritance tax avoidance and more. To calculate the loss from companies I reviewed the accounts of the largest 50 companies in the UK for a period of seven years. 

Although they should have been paying tax at 30 per cent their average tax rate in 2006 was 22.5 per cent and is now, on the basis of recent work, about 21 per cent. They are simply not paying the tax that we expect.

As for tax evasion, what my research showed was that HMRC are dramatically under-estimating this for all taxes except the VAT. 

The reasons are technical, but if the same basis of calculation used for VAT was applied to income tax, National Insurance, corporation tax, capital gains tax, inheritance tax and some other revenues then, I estimate, about 13.7 per cent of all taxes due in this country are evaded. That’s about £70billion a year. Curiously just after I published my work in March this year the World Bank produced their own estimate of the tax loss. They said it was 13.5 per cent .

If you add my estimates together then I believe the tax gap is about £120billion a year, three times bigger than the official total and 80 times bigger than the benefit fraud the government hopes to recover. 

In that case this is the biggest issue in closing the government deficit.

Importantly the tax gap can be reduced. 

Over the past five years HMRC has got rid of 30,000 of its staff, leaving 70,000 at present. 

It plans to get rid of another 13,000. 

This is madness. 

These are the people who could collect the missing billions, but the government is refusing to employ them. 

I estimate that for £1billion of extra spending on staff up to £20 billion of tax could be collected each year. 

It is hard to explain why the government won’t collect this tax. 

It seems as if they believe that it’s better to leave tax in the pockets of the cheats and cut government spending instead. If that’s their real attitude then their whole cuts agenda is morally bankrupt. 

Tackling tax fraud and tax avoidance is the way to close the deficit, and all honest taxpayers should demand that the government take action on this, starting right now by giving HMRC the staff it needs to collect the taxes owing.

• Richard Murphy is a director of Tax Research LLP