BRIEFING PAPER Number 7948, 30 January 2019
Tax avoidance and tax By Antony Seely
evasion
Contents: 1. Introduction - what is tax avoidance and what is tax evasion? 2. The tax gap 3. The Coalition Government’s approach 4. Follower notices & accelerated payments 5. The Conservative Government’s approach 6. The 2019 Loan Charge
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2 Tax avoidance and tax evasion
Contents
Summary 3 1. Introduction - what is tax avoidance and what is tax evasion? 5 2. The tax gap 9 3. The Coalition Government’s approach 23 3.1 A new anti-avoidance strategy 23 3.2 Assessing the impact of HMRC’s strategy 31 4. Follower notices & accelerated payments 39 4.1 ‘Raising the stakes on tax avoidance’ - summer 2013 39 4.2 Budget 2014: introduction of accelerated payments 45 4.3 Finance Bill 2014 50 4.4 Impact of the new regime 60 4.5 Subsequent proposals regarding ‘serial avoiders’ and offshore evasion 66 5. The Conservative Government’s approach 73 5.1 Budget 2015 73 5.2 Offshore evasion & the Panama Papers 76 5.3 Spring Budget 2017 84 5.4 The Paradise Papers & Autumn Budget 2017 103 5.5 Budget 2018 111 6. The 2019 Loan Charge 117 6.1 Disguised remuneration & Finance Act 2011 119 6.2 DR schemes & the 2019 Loan Charge - Budget 2016 121 6.3 DR schemes and the ’Rangers case’ - July 2017 127 6.4 The Contractor Loan Settlement Opportunity - November 2017 132 6.5 The 2019 Loan Charge & Finance Act 2018 137 HMRC’s warnings to scheme users & its action against promoters 141 Early Day Motion 1239 of 2017-19 143 Guidance for taxpayers liable to pay the Charge 145 6.6 Recent developments 150
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3 Commons Library Briefing, 30 January 2019
Summary
In recent years tax avoidance has been the subject of considerable public concern, although there is no statutory definition of what tax avoidance consists of. Tax avoidance is to be distinguished from tax evasion, where someone acts against the law. By contrast tax avoidance is compliant with the law, though aggressive or abusive avoidance, as opposed to simple tax planning, will seek to comply with the letter of the law, but to subvert its purpose. As Treasury Minister David Gauke has observed, there is a distinction between tax planning and tax avoidance, “although there will be occasions when the line is a little blurred.”1 In recent years HM Revenue & Customs has produced estimates of the tax gap, the difference between tax that is collected and that which is ‘theoretically due’: 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) ... An equivalent way of defining the tax gap is the tax that is lost through non-payment, use of avoidance schemes, interpretation of tax effect of complex transactions, error, failure to take reasonable care, evasion, the hidden economy and organised criminal attack.2 In June 2018 HMRC published revised estimates, which put the total tax gap at £33 billion for 2016/17, representing 5.7% of total tax liabilities.3 There has been a long-term reduction in the tax gap, which was estimated to be 7.3% in 2005/06. HMRC’s analysis provides a breakdown of the gap by reference to the different types of taxpayer behaviour that lead to a shortfall in receipts, though as HMRC note, the “estimates give a broad indication of behaviours and are calculated using assumptions and judgment.” This work suggests that in 2016/17 the annual cost of tax avoidance was £1.7 billion, while the cost of tax evasion was £5.3 billion.4 Historically UK tax law has been specifically targeted rather than purposive; in tackling the exploitation of loopholes in the law, governments have legislated against individual avoidance schemes as and when these have come to light. Often the response to this legislation has been the creation of new schemes to circumvent the law, which in turn has seen further legislation – an ‘arms race’ between the revenue authorities and Parliamentary counsel on one side, and on the other, taxpayers aided and abetted by the legal profession. In recent years concerns as to the scale of mass marketed tax avoidance schemes have led to three major initiatives to undermine this market, and encourage a sea change in attitudes: the Disclosure of Tax Avoidance Schemes regime (DOTAS); the General Anti-Abuse Rule (GAAR); and the system of follower notices & accelerated payments. Over the past twenty years many commentators have suggested having legislation to counter tax avoidance in general: by providing certainty for both sides as to the tax consequences of any transaction, a ‘general anti-avoidance rule’ might dissuade the most egregious efforts to avoid tax, encourage taxpayers and legal counsel to redirect their energies to more productive activities and allow the authorities to simplify the law without fear of it being systematically undermined. In the late 1990s the Labour Government
1 HC Deb 12 July 2010 c706 2 Measuring Tax Gaps 2013, October 2013 p6. HMRC’s work on the tax gap is collated on Gov.uk 3 HMRC press notice, Low tax gap results in £71 billion for UK public services, 15 June 2018; see also, HMRC, Calculating the 2016-17 Tax Gap: Issue Briefing, 14 June 2018 4 Measuring Tax Gaps 2018, June 2018 p5 4 Tax avoidance and tax evasion
consulted on an anti-avoidance rule before deciding against it. Concerns over the scale of tax avoidance rekindled interest in the idea, though in its 2004 Budget the Labour Government announced a new ‘disclosure regime’ as an alternative, whereby tax avoidance schemes would be required to be disclosed to the revenue departments.5 Under ‘DOTAS’ accountants, financial advisers and other 'promoters' selling tax avoidance schemes are required to notify the tax authorities of any new scheme they are to offer to taxpayers. Each scheme is given a reference number which, in turn, taxpayers have to use in their tax return, if they have used it. HMRC have used this information to track the take-up of avoidance schemes, challenge individual schemes in the courts if HMRC have assessed that they do not work in the way the promoter claims, or to address unintended loopholes in the law that some schemes seek to exploit. In its first Budget in June 2010 the Coalition Government announced it would consult on a general anti-avoidance rule, and commissioned a study group, led by Graham Aaronson QC, to consider the case. In his report, published in 2011, Mr Aaronson recommended a narrowly focused rule targeted at ‘abusive arrangements’ only, and following a consultation exercise, in December 2012 the Government announced the introduction of a General Anti-Abuse Rule (GAAR) in 2013.6 In 2014 the Coalition Government announced the introduction of a system of follower notices & accelerated payments.7 Broadly speaking, in cases where someone is in dispute over their assessment, HMRC may issue a ‘follower notice’ if this arises from the use of an avoidance scheme that is either the same or has similar arrangements to one that HMRC has successfully challenged in court. Taxpayers must settle their affairs, or pay a penalty. HMRC may also issue a notice for an accelerated payment, where the taxpayer is required to pay the disputed sum ‘up front’, before their assessment had been definitively decided – either by the taxpayer agreeing HMRC’s assessment, or the courts making a final judgement in their case. Taxpayers do not have the right to appeal HMRC’s decision to the Tribunal. Controversially, the Government announced these arrangements would apply to outstanding disputes for past tax years, and that HMRC would also issue demands for accelerated payments in relation to avoidance schemes notified under ‘DOTAS’. Despite concerns as the ‘retrospective’ nature of the new regime, the new rules were agreed, with only minor amendments, in July 2014. In July 2017 HMRC reported that it had issued over 75,000 notices worth in excess of £7 billion and collected nearly £4 billion.8 The Government has continued to introduce provisions to tackle tax avoidance and tax evasion, including measures in the last three Budgets.9 This paper provides an introduction to the issue of tax avoidance and evasion and the measurement of the tax gap, looking in detail at the development of follower notices and accelerated payments, before discussing the current Government’s approach, and the introduction of the 2019 Loan Charge. Two other Library papers look at the Labour Government’s consideration of a general anti-avoidance rule and the establishment of the disclosure regime, and at the Coalition Government’s decision to introduce a GAAR.10
5 Budget 2004, HC 301, March 2004, p202. Guidance on DOTAS is on Gov.uk 6 Autumn Statement, Cm 8480 December 2012 para 1.178. Guidance on the GAAR is on Gov.uk 7 Budget 2014, HC 1104, March 2014 para 1.198-201 8 HMRC Annual Report 2016/17, HC 18, July 2017 p24. Guidance on follower notices & accelerated payments is on Gov.uk. 9 Spring Budget 2017, HC 1025, March 2017 para 3.42-49; Autumn Budget 2017, HC 57, November 2017 para 3.65-77; Budget 2018, HC 1629, October 2018 para 3.76-91. 10 Tax avoidance: a General Anti-Avoidance Rule - background history (1990-2010), CBP2956, 13 April 2016; and, Tax avoidance: a General Anti-Abuse Rule, CBP6265, 7 September 2018. 5 Commons Library Briefing, 30 January 2019
1. Introduction - what is tax avoidance and what is tax evasion?
During a debate on tax avoidance and tax evasion in July 2010 Treasury Minister David Gauke drew the following distinction between these two terms: Tax evasion occurs when someone acts against the law. Tax avoidance involves compliance with the letter but not the spirit of the law, and it is right that the Government seek to minimise that. Tax planning is a case of acting in both the spirit and the letter of the law. There is a distinction, although there will be occasions when the line is a little blurred.11 A longer definition was provided in answer to a PQ in the Lords a few years before: Lord Patten asked Her Majesty's Government: Whether they will clarify their use of the terms "tax avoidance" and "tax evasion". Lord McKenzie of Luton: These terms lack any single or universally applied legal definition and their meaning will depend upon the context in which they are used. The term "tax evasion" refers to reduction of tax liability by illegal means. The term "tax avoidance" is usually used to refer to an inappropriate reduction in tax liability and was described by Lord Nolan in the following terms: "The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability."12 The reference is to an expression used by Lord Noland in a case heard by the House of Lords in 1997, when he distinguished between avoidance and actions where the taxpayer mitigates his tax liability: The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability. The hallmark of tax mitigation, on the other hand, is that the taxpayer takes advantage of a fiscally attractive option afforded to him by the tax legislation, and genuinely suffers the economic consequences that Parliament intended to be suffered by those taking advantage of the option.13 (The appeal of this definition is not unchallenged – as one standard guide to the law notes, “the trouble with this explanation is that while it provides a coherent reason for saying in a particular case that the facts do not amount to avoidance and so do not trigger the application of some rule, it does not provide a way of telling whether those particular
11 HC Deb 12 July 2010 c706 12 HC Deb 24 May 2006 ccWA111-2 13 IRC v Willoughby & Another [1997] 6 Tax avoidance and tax evasion
facts fall one side of the line or the other – it is a conclusion, not a test - and so it restates the problem rather than solving it.”14) While it is often noted that tax avoidance is not illegal, in the past governments have drawn a distinction between the exploitation of the tax system and simple compliance with the law – for example, in answer to a PQ in July 2010: Andrew George: To ask the Chancellor of the Exchequer what definition of the terms (a) tax avoidance and (b) tax efficiency his Department uses. Mr Gauke: The Government have not published a definition of avoidance. However it is widely understood to entail taking a view of the tax treatment of a transaction that is tenable but has tax consequences that were not intended by the legislature. This does not prevent taxpayers organising their affairs in an efficient manner, consistent with the intentions of the legislation. Tackling tax avoidance is essential and we make every effort to do so. The Government consider the economic efficiency of tax measures as part of the tax policy-making process.15 The House of Lords Economic Affairs Committee considered this question in their 2013 report on the Government’s proposals for a ‘General Anti-Abuse Rule’ – or GAAR. The Committee cited Mr Gauke’s distinction between avoidance and evasion, reproduced above, but went on to quote the evidence of Ms Judith Knott (then HMRC Director, Corporation Tax International Anti-Avoidance) when she appeared before the Committee: “What we mean by legitimate tax planning is tax planning that is very much in line with Parliament’s intentions when it passed the rules. A good example would be putting cash into an ISA account. That is legitimate and what Parliament intended to happen. Avoidance, on the other hand, is behaviour that seeks to bend the tax rules in a way that Parliament did not intend. It is often accompanied by artificial transactions—trying to seek a result that was not intended.”16 The Committee observed that the definitions “depend on the existence of a common interpretation of what the original lawmakers had in mind in enacting a particular tax statute”: The courts interpret Parliamentary intention as that revealed by the wording and context of the legislation itself and extraneous comment or other guidance can be taken into account only in very limited circumstances. This is a much narrower definition of Parliamentary intention than the wider colloquial definition which might either infer intention or take into account external information. Consequently, in practice, a good deal of uncertainty can often attach to the question of whether a particular arrangement constitutes ‘tax avoidance’ and, if so, whether it is to be regarded
14 Tiley & Collison’s UK Tax Guide 2016/17 para 3.2 15 HC Deb 12 July 2010 c544W 16 The draft Finance Bill 2013, 13 March 2013, HL Paper 139 2012-13 para 12 7 Commons Library Briefing, 30 January 2019
as ‘acceptable’ (tax planning or tax mitigation) or ‘unacceptable’ (aggressive or abusive avoidance).17 The concept of “parliamentary intention” is not a simple or obvious one – as noted in a paper on tax avoidance published by the Oxford Centre for Business Taxation: The aim of the courts is to construe legislation in a way that gives effect to “parliamentary intention”. Parliamentary intention in this context is a term of art, extensively debated in legal literature and should be distinguished from a colloquial usage. Lord Nicholls has explained: "...the 'intention of Parliament' is an objective concept, not subjective. The phrase is a shorthand reference to the intention which the court reasonably imputes to Parliament in respect of the language used. It is not the subjective intention of the minister or other persons who promoted the legislation. Nor is it the subjective intention of the draftsman, or of individual members or even of a majority of individual members of either House.”18 In other words the political and authoritative process of Parliament passing legislation produces the text of legislation, the intention of which is found by the courts looking at the wording of that legislation.19,20 Further to the questions of legal interpretation, the choice of words in this area has important political consequences. Graham Aaronson QC made this point when he gave evidence to the Lords Economic Affairs Committee in January 2013: “Avoidance” is a rather unfortunate word in this context because avoidance can be regarded as a particularly nasty thing to do or, if it is an accident, it is a very sensible thing to do—you avoid an accident. So I would rather use words that are less emotive when describing the intellectual process in determining whether you should be paying a smaller amount of tax than you would otherwise pay. You can call that tax planning because it is planning. Whether it is good planning or bad planning, whether it is abusive planning or innocent planning, it is planning. Tax avoidance is a very dangerous expression to use if you want to have a serious debate because one person’s avoidance is another person’s perfectly reasonable planning.21 However, the term ‘tax avoidance’ has continued to be widely used, and in a paper on its tax policy over the 2010-15 Parliament, the Coalition Government provided a terminology that, arguably, illustrates how the debate about this issue changed over this period:
17 op.cit. para 14. For more details on the distinction between evasion and avoidance see, Hamilton v Hamilton & Anor [2016] EWHC 1132 (Ch) (13 May 2016) para 37. 18 R v Secretary of State for Environment, Transport and the Regions [2001] 2 AC 349. 19 See also Lord Reid in Black-Clawson International Ltd v Papierwerke Waldhof- Aschaffenburg AG [1975] A.C. 591, at 613: “In seeking for the intention of Parliament we are seeking not what Parliament meant but the true meaning of what they said”. On Parliamentary intention see also Judith Freedman, “Interpreting tax statutes: tax avoidance and the intention of Parliament”, Law Quarterly Review 2007, 53 at 72 et seq. especially the literature referred to there. 20 Michael Devereux, Judith Freedman & John Vella, Tax Avoidance, OCBT December 2012 p4. See also, “Seeking after meaning”, Taxation, 21 April 2016, and for another view barrister Jolyon Maugham’s blog post, “Is tax avoidance like hardcore pornography?”, Waiting for Godot blog, 30 August 2016. 21 Draft Finance Bill 2013: Oral & Written Evidence, March 2013 pp12-13 (Q10) 8 Tax avoidance and tax evasion
Clarifying tax terminology Tax evasion is always illegal. It is when people or businesses deliberately do not declare and account for the taxes that they owe. It includes the hidden economy, where people conceal their presence or taxable sources of income. Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter – but not the spirit – of the law. Most tax avoidance schemes simply do not work, and those who engage in it can find they pay more than the tax they attempted to save once HMRC has successfully challenged them. Tax planning involves using tax reliefs for the purpose for which they were intended, for example, claiming tax relief on capital investment, or saving via ISAs or for retirement by making contributions to a pension scheme. However, tax reliefs can be used excessively or aggressively, by others than those intended to benefit from them or in ways that clearly go beyond the intention of Parliament. Where this is the case it is right to take action, because it is important that the tax system is fair and perceived to be so.22
22 HM Treasury, Tackling tax evasion & avoidance, Cm 9047, March 2015 p5 (Box 1.A: Clarifying tax terminology). See also, PQ HL4794, 25 February 2015 9 Commons Library Briefing, 30 January 2019
2. The tax gap
In recent years HM Revenue & Customs has produced estimates of the tax gap - the difference between tax that is actually collected and that which is ‘theoretically due’: 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) ... An equivalent way of defining the tax gap is the tax that is lost through non- payment, use of avoidance schemes, interpretation of tax effect of complex transactions, error, failure to take reasonable care, evasion, the hidden economy and organised criminal attack.23 In June 2018 HMRC published revised estimates, which put the total tax gap at £33 billion for 2016/17, representing 5.7% of total tax liabilities.
• The UK tax gap in 2016-17 is estimated to be £33 billion. This is 5.7% of total theoretical tax liabilities and the same level as 2015-16. • There has been a long-term reduction in the overall tax gap, from 7.3% in 2005-06 to 5.7% in 2016-17. • The tax gap for income tax, National Insurance Contributions and Capital Gains Tax (IT, NICs and CGT) was 4.2% in 2016-17 — its joint lowest level since 2009-10. • There has been a long-term reduction between 2005-06 and 2016-17 for the VAT (Value Added Tax) gap (12.5% to 8.9%) and for the duty-only excise tax gap (8.1% to 5.8%).
23 Measuring Tax Gaps 2013, October 2013 p6. The department’s work on the tax gap is collated on Gov.uk 10 Tax avoidance and tax evasion
• The Corporation Tax gap has been on a long-term downward trend, from 12.4% in 2005-06 to 7.4% in 2016-17. • There has been a steady downward trend in the avoidance tax gap, from £4.9 billion in 2005-06 to £1.7 billion in 2016-17.24 HMRC suggest the percentage figure is a better measure of compliance over time, “because it takes account of some of the effects of inflation, economic growth and changes to tax rates, whereas the cash figure does not. For example, in a growing economy where the tax base25 is increasing, even if the percentage tax gap remained level, the cash figure would grow.”26 Notably HMRC describe the tax gap as “a useful tool for understanding the relative size and nature of non-compliance”: This understanding can be applied in many different ways: • it provides a foundation for HMRC’s strategy. Thinking about the tax gap helps the department to understand how non-compliance occurs and how HMRC can address the causes. • drawing on information on how other countries manage their tax gaps, our tax gap analysis provides insight into which strategies are most effective at reducing the tax gap. • although the tax gap isn’t sufficiently timely or precise enough to set performance targets, it provides important information that helps us to understand our long-term performance.27 The report provides a breakdown of the gap by reference to the different types of taxpayer behaviour that lead to a shortfall in receipts, though as they observe, the “estimates give a broad indication of behaviours and are calculated using assumptions and judgment.” This puts the annual cost of tax avoidance in 2016/17 at £1.7 billion:28
24 HMRC press notice, Low tax gap results in £71 billion for UK public services, 15 June 2018; HMRC, Measuring Tax Gaps 2018, June 2018 p4, p6 25 The aggregate value of the financial streams or assets on which tax can be imposed. 26 Measuring Tax Gaps 2018, June 2018 p7 27 op.cit. p3 28 op.cit. p11. 1Figures may not appear to sum due to rounding. 11 Commons Library Briefing, 30 January 2019
The report gives a more detailed description of exactly what type of behaviour falls under each of these categories:29
1 More information and frequently asked question on the OECD’s Inclusive Framework on BEPS can be found at: www.oecd.org/ctp/beps-frequentlyaskedquestions.htm
29 op.cit. p20 12 Tax avoidance and tax evasion
As noted in its summary, the report also provides estimates of the tax gap by type of tax, and by customer group. In the latter case, it is estimated that over 40% of the tax gap is attributed to small businesses, while 10% is attributed to individuals: Figure 1.5 shows the 2015-16 and 2016-17 tax gaps by customer group. In both 2015-16 and 2016-17 more than 40% of the tax gap was attributed to small businesses. Individuals account for the smallest share of the tax gap in both 2015-16 and 2016-17. This section of the report underlines that, “an additional element of judgment and uncertainty is present in the customer group estimates”:
Table 1.4 (at the end of the chapter) shows a time series of tax gap by customer group, as a percentage of total theoretical liabilities. This shows that the breakdown of the tax gap by customer group over the past five years has been broadly stable.30 In September 2011 the Treasury Committee took evidence from HMRC on its action to close the tax gap; during this session Dave Hartnett, then Permanent Secretary for Tax and his colleague, Melanie Dawes, Director General, Business Tax, explained how analysis of the size of the tax gap shaped the department’s priorities: Dave Hartnett: I think … for us, the tax gap is quite an important tool, if I can put it that way, in promoting understanding of all the causes of non-compliance and helping us to focus on ways of reducing them. If I can put it this way, it is a bit like a long-term health check for us. A definition of it is the difference between what the Government can expect to receive and actually do receive, but I think, as you may have seen, unlike some other countries, we include avoidance in it, and also the slightly contentious issue of measuring that in line with the spirit of the law-what the intention of Parliament might have been … Q180 Stewart Hosie: … Some of the professional bodies take the [the department’s estimate of the tax gap] and say it is inflated because it includes legitimate disagreements over legal interpretation, which is a perfectly valid position for them to take. Others say it is understated due to inadequate information. You
30 Measuring Tax Gaps 2018, June 2018 p10 13 Commons Library Briefing, 30 January 2019
say it is your best guess but you invest a lot in calculating it … What more do we all need to do to get this right, given how important it is? Dave Hartnett: …On legal interpretation and other things in particular, the focus we put on legal interpretation is where we lose-but not while the argument is going on-and where the Government are therefore going to receive less than expected. We recognise that "legitimate debate" contention around issues will always happen. Melanie Dawes: Yes, and it is important to say on avoidance that where we resolve an issue with a taxpayer and we agree with their legal interpretation, we do not record that as a tax cut. We record that as the tax gap having been closed because the treatment has been agreed. In terms of what we should be doing with this …we think it is a very useful strategic tool. We used it to get a feel for the overall big areas of risk when we were putting together our plans for the spending review, for example, so it is very helpful. The important thing is not to use it in the wrong way, so we are not using it for performance targets to measure up actual operation performance in the business.31 In 2010 HMRC’s approach to measuring the tax gap was questioned, in the context of alternative estimates published by Tax Research UK, which put the tax gap in the region of £70-£120 billion.32 In a debate on tax avoidance in June 2010, Treasury Minister David Gauke acknowledged these figures implied the gap was much, much greater than HMRC had estimated, but went on to argue that the analysis was ‘deeply and systematically flawed’; the Ministers comments are worth reproducing at some length: It must be accepted that in preparing estimates, organisations external to Government have access to much less data than HMRC ... However, having considered the methodology used to produce the figure of £120 billion, I must tell the House that even a brief analysis reveals that it is deeply and systematically flawed. For example, Tax Research LLP estimates total revenue lost due to tax evasion at £70 billion. That figure is obtained by applying the percentage tax gap from VAT to direct taxes. There are two main problems with that. First, different tax regimes have different tax gaps. According to independent research by the OECD, for example, the operational experience shows that tax regimes such as pay-as-you-earn that withhold tax at source have far smaller tax gaps than other types. To apply the VAT gap percentage to taxes collected by PAYE or otherwise at source greatly overstates the tax gap, because the VAT tax gap is considerably higher. Secondly, an element of double counting is involved, although, to be fair, that might not be apparent from the numbers used by Tax Research. The VAT gap already includes amounts due to tax avoidance and tax debt. Applying that percentage to direct taxes and then adding additional amounts for both avoidance and tax
31 Administration and effectiveness of HMRC: closing the tax gap – Oral Evidence, HC 1371-iii, 12 September 2011 Q178, Q180 32 Tax Research UK is run by the writer Richard Murphy. See, Tax Justice and Jobs: the business case for investing in staff at HMRC, March 2010. These estimates have been widely quoted in the press: eg, “On charity George Osborne must stand up to the self-interested super-rich”, Guardian, 16 April 2012 & “Editorial - Tax: share the burden fairly or anger will grow”, Observer, 15 April 2012. 14 Tax avoidance and tax evasion
debt, as does Tax Research, results in the double counting of losses from the avoidance of direct taxes and non-payment. The Tax Research estimate of tax debt is £28 billion. That is a snapshot figure of all tax owed to HMRC on 31 March 2009, which does not represent the actual losses to the Exchequer from non-payment. Almost all tax owed to HMRC is eventually paid, sometimes within days of becoming due. A proportion of debts outstanding are in staged repayment plans, such as those covered by the business payment support service. Only the tax debt written off as uncollectable by HMRC is an actual loss to the Exchequer from debt. That is therefore the amount that HMRC uses in its estimate of the tax gap, which in the 2007-08 tax gap figures was not £28 billion but £3 billion … The final and most significant point concerns tax loss due to tax avoidance, which Tax Research estimates at £25 billion. That estimate includes the use of legitimate reliefs promoted by the Government to encourage certain activities, such as capital allowances to encourage investment and research and development tax credits to encourage innovation. Tax avoidance is generally regarded as the use of legal structures and allowances to reduce tax bills in manners not intended by Parliament when enacting the legislation. It is simply nonsense to categorise as tax avoidance the use of allowances for purposes intended by Parliament ... Furthermore, the Tax Research estimate does not provide HMRC with any credit for the significant amount of tax that it recovers by challenging avoidance schemes. The figure of £25 billion therefore seems somewhat wide of the mark.33 In a follow-up report published in March 2012 the Treasury Committee expressed some doubts as to the value of completing such a detailed annual assessment of the tax gap: “HMRC should not be aiming to collect more tax at any cost, but should be ensuring that all taxpayers pay the correct amount of tax … [in addition] the tax gap calculation is … misleading as a comparison from year to year, because its size depends on a number of factors which have nothing to do with whether the correct amount of tax is being paid, for instance the applicable rates of tax.”34 A longer extract is given below: The tax gap can be a useful concept for assessing trends in the amount of possible unpaid tax. We are not, however, convinced that the process of calculating, publishing and publicising an aggregate figure for the tax gap is a sensible use of HMRC's limited resources. The aggregate tax gap figure is misleading and risks focusing HMRC on the wrong task as it only provides an order of magnitude. We recognise that it is useful for HMRC's employees to have some idea of the difference between what HMRC should be collecting and what is collected, particularly in the case of criminal activity. However, in other areas it would be more useful for it to identify ambiguities in tax law rather than employ resources in calculating how much tax would be collected if everyone shared its interpretation of the law. Separate reports on how much tax was lost through criminal activity and areas where HMRC had encountered different interpretations of tax law would be a better use of resources. We would welcome further submissions from
33 HC Deb 16 June 2010 cc190-1WH 34 Twenty-ninth report: Closing the tax gap – HMRC’s record at ensuring tax compliance, 9 March 2012, HC 1371 of 2010-12, para 14-15 15 Commons Library Briefing, 30 January 2019
HMRC and tax experts both on how the tax gap calculation can be improved, and on whether it serves any useful purpose in HMRC's work.35 In turn the Government gave a robust defence of HMRC’s approach: HMRC believes the aggregate tax gap analysis is a valuable tool in prioritising resources, as the Committee recommends, and agrees that the focus of work on tax gaps needs to be proportionate and help the best use of the resources available. HMRC does identify areas where there are different interpretations of tax law. Quantifying the scale of these issues helps set priorities for policy development and resource deployment. This allows the department to compare these priorities against tax losses resulting from other types of behaviour. There have been recommendations from both the Public Accounts Committee and the National Audit Office36 to develop and use tax gap estimates in this way, and to publish the figures. In the interest of clarity HMRC thinks it makes sense to describe all of our tax gap estimates in one document so that a reader can understand more easily how the figures are calculated and the methodological issues which underpin them.37 HMRC also provided a detailed submission on measuring the gap, specifically in relation to the estimates published by Tax Research UK.38 The department argued that the £120bn figure “could be dangerous if not countered by HMRC’s published estimates … partly because they give a misleading view of HMRC’s effectiveness and the amount of uncollected revenues. But also because they encourage the perception that deliberate non-compliance in the UK is the norm—a perception which could encourage further non-compliance.”39 The submission raises similar concerns to those set out by the Exchequer Secretary to the House in June 2010 – quoted above – though further detail is given on the question of measuring tax evasion. Richard Murphy had claimed the annual cost of evasion was £70 billion – while HMRC had put it at £26 billion. The primary explanation for this disparity is that Mr Murphy had assumed that the size of any tax gap would be the same across all taxes: Tax Research UK particularly criticises HMRC’s use of bottom-up methodologies to measure the direct tax gap and applies the VAT gap rate to arrive at an evasion figure for all direct taxes. This is highly inappropriate for three reasons: • the VAT gap includes all forms of non-compliance such as non-payment, avoidance and criminal attack as well as
35 HC 1371 of 2010-12 para 16-18. For a critique that these estimates should ignore the sums that would be paid if taxpayers complied with ‘the spirit of the law’ see,