Tax experts warned that HM Revenue & Customs was underestimating the size of Britain’s tax avoidance problem after the agency claimed that Britain’s annual tax shortfall was only £36bn – a figure that ignored controversial structures used by multinationals such as Google, Apple and Starbucks.
Top HMRC officials will face questions from MPs next week over their refusal to challenge tax avoidance by multinational corporations. Members of the public accounts committee are also expected to further investigate HMRC’s claims that its compliance team generated record revenues of £26.6bn by chasing down tax dodgers.
Official estimates from HMRC, published on Thursday, show Britain’s public finances missed out on tax revenues of £36bn in 2014-15. HMRC’s tax gap figures have remained at about the same level for several years despite increasing claims the agency has made about the impact of its compliance work.
In a report published this year, the public accounts committee noted: “HMRC told us that its performance in addressing tax fraud was good. But HMRC’s assessment of the tax gap shows that the level of tax fraud has remained virtually static over the last five years. The impact that HMRC claims for its work far exceeds any reduction in the tax gap.”
Next Wednesday, top HMRC officials are to appear before the committee again to answer questions about the tax office’s performance. “One of the areas where we’ll be focusing hard is on claims about [HMRC’s] compliance performance,” a source close to the committee said.
The “tax gap” is the shortfall between the amount of tax expected in Treasury coffers and the sums actually received. The figure includes estimates for losses caused by tax evasion, avoidance, the hidden economy, errors and other non-payments.
HMRC’s tax gap figure has been repeatedly criticised because it does not take into account estimates for tax losses caused by multinational corporations such as Google, Amazon, Apple and Starbucks. These international businesses are able to lawfully use complex structures to shift taxable income from the UK to their operations overseas.
A year ago, the Organisation for Economic Cooperation and Development (OECD) said, based on extremely conservative estimates, profit-shifting by multinationals was costing governments between $100bn and $240bn (£65bn to £160bn) a year in lost corporation tax – equivalent to between 4% and 10% of global corporation tax revenues.
Some independent estimates of Britain’s tax gap, including work by the tax campaigner Richard Murphy, have suggested the figure could have reached as much as £119bn in recent years, taking into account estimates of tax avoidance by multinationals.
Of HMRC’s £36bn tax gap estimate for 2014-15, £9.5bn was attributed to large businesses. Only £600m of that sum related to large business tax avoidance. That £600m estimate is equivalent to less than 1.5% of the £41.4bn of corporation tax revenues for 2014-15.
Prem Sikka, a professor of accounting at University of Essex, who has advised the Labour party on tax reform, said: “HMRC’s measure of the tax gap is not credible as it excludes profit-shifting techniques used by Google, Microsoft, Apple and others.”
In a recent report for Labour, Sikka said: “The [HMRC tax gap] estimate depends on the policies and practices that HMRC is willing to accept or challenge ... HMRC has not challenged [multinationals’] tax practices whereas other countries have shown a greater willingness to challenge the same.”
Alex Cobham, research director at Tax Justice Network, said: “ There is a real risk that this tax gap analysis may be taken seriously as the basis for policy – in which case HMRC would continue to ignore the major revenue risks represented by multinationals. It’s important for public confidence, as much as for better policymaking, that HMRC swiftly addresses this spurious estimate.”
But, on Thursday, the Treasury minister Jane Ellison said: “This government is committed to tackling tax evasion and avoidance wherever it occurs. The UK has one of the lowest tax gaps in the world. By investing £1.8bn since 2010 in boosting HMRC compliance capabilities, we’ve brought our tax gap down to its lowest ever level.”
The official tax gap estimate of £36bn – equivalent to 6.5% of expected tax revenues – is down from £37bn for 2013-14.
HMRC’s tax gap figure includes an estimate of losses caused by tax avoidance of £2.2bn. Meanwhile, the hidden economy and tax evasion caused further estimated losses of £6.2bn and £5.2bn, respectively.
In terms of which taxes involved the largest shortfalls, lost income tax, national insurance contributions and capital gains tax together contributed £15.5bn to the tax gap. Uncollected VAT, corporation tax and excise duty amounted to £12.7bn, £3.7bn and 2.8bn, respectively.
On Thursday it emerged that HMRC was looking into allegations, revealed in the Guardian, concerning the delivery firm Hermes. Some of its drivers said they believed they had been wrongly classed as self-employed workers and so were not getting the same rights as employees.
“If we find that companies have misclassified individuals as self-employed, we will take all necessary steps to make sure they pay the appropriate tax, national insurance contributions, interest and penalties,” HMRC’s executive chairman, Edward Troup, said in a letter to Frank Field, chair of the Commons’ work and pensions select committee.
