6 February 2018

There’s a lot less tax dodging than campaigners imagine


Her Majesty’s Revenue and Custom’s crack down on tax-dodging has brought in about one-third of the amount that it was predicted to raise. And HMRC’s estimate of the tax gap – the amount being dodged – is some one-third the amount that had been claimed by the more vociferous of the anti-tax dodging campaigners. It’s possible to think that there might be a connection between these two facts. Such as: perhaps the campaigners are simply wrong in their estimates?

That’s not quite the way some are playing it. The Guardian and John McDonnell – naturally, since he is an opposition politician – are claiming that HMRC don’t have the resources to chase it all, or that the Tories aren’t chasing their rich friends, or that neoliberalism has run rampant, or some such excuse. The true explanation is very much simpler – the shouting about how much tax is being dodged is misinformed.

One of the more egregious campaigners is Richard Murphy, whose estimates tend to be up at the £120 billon-a-year end of the range. Remarkably, papers written by him and funded by PCS, the taxmans’ union, argue that this is because there aren’t enough taxmen nor are they paid enough. Ho hum.

HMRC’s own estimates of the amount of dodging are about one third of that figure. And everyone agrees that the entirety of any tax gap will not be closed – indeed, that not even the majority of the gap ever will be. That is because some people will still risk dodging tax – whatever the penalties they faced or the attempts made to catch them.

That HMRC’s collection efforts should have achieved some one-third of the results that campaigners had claimed – before legal changes were introduced – would be achievable seems, therefore, about right. And there’s really not much more to it than that.

One of the particular changes is a good example. There were claims that billions upon billions of pounds could be raised in tax revenue if only we could find out who was stashing stuff in Swiss banks. So eventually a deal was struck whereby the banks would comb through their books for UK passport holders with accounts. Then there would be checks whether tax was being declared and paid upon the income from those sums. But in the end the answer given by the checks was that, by and large, yes, it was.

For the campaigners had forgotten about a couple of details. UK citizens who don’t live in Blighty (technically, are not resident) don’t owe UK tax. And there are a certain number of those people who have Swiss bank accounts. Equally, those who are resident but not domiciled (a fiddly technical bit) don’t pay UK tax on foreign earnings that they leave in foreign accounts. There are tens of thousands of such people – and they tend to be drawn from the richer members of the population.

Examination of all those Swiss bank accounts found four groups of people. Instead of some vast number of people hiding huge income streams, there turned out to be people declaring their earnings and paying the tax, people who don’t live in the UK, people who do but don’t owe tax anyway and then, as a rump, those who were truly dodging tax. That’s why the tax yield was so much lower than predicted; because the original claims insisted nearly all of those people were dodging tax, not some almost trivial proportion of them.

Much the same was true of the Panama Papers of course. There was a great deal of “shock horror” coverage of how David Cameron had money in an offshore fund. Upon which, as it emerged, he was paying his UK taxes. Far too many people did not understand one basic reason why a fund might be offshore in the first place – so that everyone could pay the correct tax. You put the fund where there’s no tax, so that the fund holders from different countries can pay the amount appropriate to the tax laws of their own country.

Other claims about tax abuse and dodging are even less founded in evidence. Starbucks really was losing money in the UK (because they were paying too much in rent). Boots was largely funded by debt, and since interest is a cost of doing business, it is deducted before the calculation of a tax upon profits. Vodafone actually won their battle through the legal system after the Cadbury ruling, the essence of which was that UK tax law violated EU tax law and so wasn’t legal.

And the Liechtenstein Disclosure Facility has always amused me immensely. The offer was that if you’d been hiding stuff in that Alpine haven then you could own up and the authorities would go easy on you. Some did so  – but only one person was publicly named: Dame Margaret Hodge, one of those who had been leading the pitchfork-wielding mob. It’s only fair to add that her use of it was entirely just and righteous, and concerned familial arrangements made before her time, without her knowledge – and which didn’t, in any case, even bring any advantage under current law. But it is still amusing.

These are just a few examples of why screaming about tax dodging isn’t very useful. The amount being dodged isn’t anywhere near as large as is claimed. Given which, all the initial claims about how much will be raised turn out to be invalid. It’s not the collection efforts which are failing but the fact that the initial estimates are all wrong. And in that case, perhaps we should stop paying quite so much attention to those making the claims?

Tim Worstall is Senior Fellow at the Adam Smith Institute.