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Tax gap: £120bn estimate is ‘way off the mark’ says HMRC

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A ‘bottom-up’ approach remains the only feasible option available to HMRC in estimating the size of the tax gap for direct taxes, HMRC has insisted. Ed Hagger, Deputy Director at HMRC, said the estimate of £120bn for all taxes, produced by Richard Murphy, Director of Tax Research UK and often cited by trade union officials and tax campaigners, was ‘way off the mark’.

Hagger defended HMRC’s estimate of £35bn for all taxes for 2009/10. Murphy’s use of an estimated VAT gap rate to arrive at an evasion figure for all direct taxes was ‘highly inappropriate’, he suggested – and it gave ‘completely the wrong answer’ for PAYE income tax.

‘This incorrect assumption accounts for £30bn of Tax Research UK’s £70bn evasion estimate,’ Hagger said.

'We believe that [ours] are the best current estimates, based on all the information presently available'

Ed Hagger, HMRC

Writing in Taxation, the weekly magazine published by LexisNexis which also publishes Tax Journal, Hagger repeated almost verbatim HMRC’s submission to the Commons Treasury Committee, published in May. That submission formed part of the government’s response to the committee’s report Closing the Tax Gap: HMRC's record at ensuring tax compliance.

HMRC told the committee that the scale of the difference between the two estimates had caused confusion and concern: ‘Part of the reason for the disparity is that the two estimates are not directly comparable – partly because the definitions used are quite different. Nevertheless we think the £120bn figure is very misleading. It confuses the tax gap with cash flow and legitimate reliefs in a number of areas.’

Estimating the tax gap

Tax Research UK

HMRC (2009/10)

Unpaid tax


Unpaid tax


Tax avoidance


Tax avoidance


Tax evasion


Hidden economy, evasion, error, failure to take reasonable care, legal interpretation and criminal attacks






Source: HMRC submission to Commons Treasury Committee: ‘Additional information about the Tax Gap’, published in May 2012

HMRC set out the ‘main points of difference’ (see the table) and told the committee that:

  • Unpaid tax of £28bn was ‘a snapshot’ of the total amounts owing to HMRC on a particular day – but most tax paid late is collected within a few days and over 90% is eventually collected.
  • For corporation tax avoidance, Tax Research UK calculated the 'expectation gap', a measure of ‘the difference between the contribution society expects business to make by way of tax paid, and what is actually paid’. This was defined as the difference between the headline or declared tax rate for companies, and the rate of tax they actually pay. ‘This means that legitimate use of specific exemptions and reliefs such as capital allowances or double taxation relief, which reduce the amount of tax payable, are badged as avoidance. Avoidance is also drawn very widely. For example it includes tax not paid by non-domiciles who choose not to remit their income to the UK. We do not consider this part of the tax gap – the remittance basis is a choice intended by parliament.’
  • HMRC's published estimates were net of compliance yield: ‘The Tax Research UK figures do not take into account direct tax compliance yield – for example £13.9bn for year 2010/11’.

‘Spectacularly high estimates’

Hagger said the scale of some tax gap estimates based on macro-economic models did not seem credible. He cited an OECD report, published in January, which noted that over recent decades it had become ‘fashionable’ for academics and others to ‘attempt to make estimates of the size of country [non-observed economies or NOEs]’.

The report of an SME compliance sub-group of the OECD’s Forum on Tax Administration said: ‘For this purpose macro-model methods ... have been most frequently used to derive an estimate of unobserved activities.

‘However, it should be noted that the OECD (and other international organisations) reject these methods as being useful in obtaining exhaustive estimates of GDP or in estimating underground production and have observed that when applied they produce for most countries spectacularly high estimates of NOE activities which have no sound scientific base but which, nevertheless, attract much attention from the media and other parties.’

This had been shown to be the case in some developed countries where relatively high estimates of NOE were produced by various academics, the report added, ‘only to be subsequently shown as being highly implausible by the national statistical agencies of the countries concerned’.

Murphy said HMRC had ignored ‘all the counter arguments I’ve ever put forward to their suggestions’.  Writing on his blog, he claimed that the department was refusing to engage in ‘real’ debate. ‘I think that’s the real motive for their misinformation – in which case I’ll more than happily continue to expose just how absurd HMRC’s politically motivated estimates are,’ he wrote.

The wrong targets?

As Tax Journal reported in May, Murphy said in response to HMRC’s criticism that his approach identified significant tax savings that, while legal, represented an outcome that ‘very few people would think appropriate and reasonable’. But HMRC clearly considers that it should have regard to existing law in assessing  whether there is avoidance.

In a recent article published on the website of the Public and Commercial Services Union (PCS), which represents many HMRC staff, Murphy said: ‘HMRC, perhaps unsurprisingly, wants only to consider something as tax avoidance if it can do something about it. Tax Research UK, on the other hand, considers something to be tax avoidance if it believes something should be done about it.’

Murphy’s critics point out that some tax outcomes that might be regarded as unjust do not involve ‘tax avoidance’. What amounts to avoidance is a matter for debate, but it is generally considered to be activity that undermines the will of parliament as reflected in current tax law.

They argue that if campaigners believe that the law is unjust they should focus their efforts on getting the law changed rather than criticising individual taxpayers or companies acting within the law.

Taxation will publish Murphy’s response to Hagger’s piece shortly.

Press watch: How big is the tax gap?

‘The [NHS] cuts were triggered by the banking crisis and deepened by Lansley as part of his plan to run down public-sector provision in health and make room for private-sector providers. They continue despite the fact that uncollected tax alone adds up to £120bn a year – six times the £20bn target for cuts by 2014.

John Lister
Morning Star, 20 July

‘HMRC's £3bn cut and 10,000 staff loss suggest it's less likely that the £18bn hidden in tax havens, or the rest of the £120bn the Tax Justice Network says is cheated from the Treasury, will be aggressively pursued.’

Polly Toynbee
The Guardian, 26 July

‘How big is the tax gap? We’re not sure. After all, not many people make explicit declarations of how much tax they are evading. But we have estimates and in 2009/10, the most recent year available, the tax gap was about £35bn.’

Tim Harford
Financial Times, 27 July