Tabloids love to claim that governments are hopelessly inefficient. They do so using biased data provided by sources such as the Taxpayers’ Alliance, which is based in the now notorious 55 Tufton Street. Allegedly, the government is riddled with money-wasting activity. Their claims rarely stack though; when ministers go looking for this waste, they rarely seem to find it. Worse, the right tends to ignore flagrant abuse, like the PPE procurement scandal. And they also ignore the biggest waste of all, which is the tax that goes uncollected.
The tax gap
The tax gap is usually considered to be the difference between the tax that should be collected if everything was paid using the law as the government thinks it should be applied, and the amount of tax that is actually paid.
There are three parts to this version of the gap: tax evasion, tax avoidance and tax due but never paid.
- Tax evasion is the result of people breaking the law. In other words, they simply declare the wrong amount of tax owing on the returns that they make.
- Tax avoidance is usually the preserve of large companies and wealthy people using the law in a way that accountants and lawyers advise them to do, to get around their obligation to pay tax in the way that parliament intended.
- Tax not paid is bad debt, or money that HMRC never collects, usually because the company owing it has gone bust.
Can HMRC calculations be trusted?
If HMRC is to be believed, these tax gaps are remarkably constant at roughly £35bn a year. That figure is shocking enough – it would pay most of the defence budget – but I’m afraid HMRC should not be believed, for three reasons.
The first is that it gets its tax gap calculations wrong. That’s partly because HMRC’s definition of tax avoidance is so narrow that almost all the abuse by large companies is excluded from estimates.
Mainly though, this error arises because HMRC bases most of its estimates for everything but VAT on tax returns submitted, and has an extraordinary willingness to believe that the 50% or more of UK companies that do not submit corporation tax returns do not trade. HMRC has almost no evidence to support this assumption, and there is massive evidence that fraudsters know they can form UK companies to commit tax evasion. They do this through companies they can set up for as little as £12, knowing that their chance of being detected for doing so is close to zero.
Which brings me to the third reason for the tax gap being understated, which is that HMRC no longer has the people or the skills required to chase the most serious tax abuse. This is the result of an incompetent government-led policy linked to austerity that has created a focus on cost-cutting at HMRC rather than collecting tax.
The cost of not taxing things
There are additional two parts to the tax gap. One of these relates to things that aren’t taxed at all, like wealth – a figure that can be easily calculated.
The other missing element is the cost of tax reliefs and allowances that produce no useful economic gain. There are more than 1,000 such reliefs. Most are old, and the reason for them is long forgotten. Worse, we do not know the cost of a great many, but the total may come to £400bn, or more. That is half of government spending.
Time to address the tax gap
So, what can be done about the massive waste of tax that no one talks about, but which has a big cost for society? First, we need to collect tax owing. We should give HMRC the resources it needs, require that it properly estimates tax gaps, demand that these tax gaps be closed, and require reports on progress.
Then we should properly regulate companies in the UK and make it much harder to form them. All directors and large shareholders in UK companies should have to prove their identities to regulators, and those people should be personally liable for tax abuse by their companies.
Then we should better regulate lawyers and accountants so they cannot sell abuse. After that, banks should be required to tell HMRC the total amount of money each of their corporate clients has deposited in their accounts each year. That would quickly reveal which were likely to be fraudulent.
But we should also look at what is not taxed and ask if it should be, whilst a regular and comprehensive review of tax allowances and reliefs should weed out the wasteful ones that are not needed, or which are abused at cost to society.
Do all this and we could massively cut tax waste. Many of us might pay less tax as a result of cheats paying more. And importantly, tax could be restored to its proper role in society, in an economy that delivers those public services we all need to live well. That makes the tax gap the most important waste to chase.
A special pdf copy of this article can be accessed here, where you can sign up for more free content from the Bylines Network.
