The “tax gap” and unpaid tax

Labour’s latest campaign is to close the tax gap. With the help of Richard Murphy they reckon there is £120 billion of unpaid tax, tax evasion and tax avoidance. The last Labour government put the figure at a more modest £40 billion but was never able to close the gap.

This morning I wish to concentrate on unpaid tax. That is tax that has been identified and claimed by Customs and Revenue but not yet paid. In May 2010 this stood at more than £23 billion. Substantial sums were written off during the preceeding year as the Revenue came to recognise that some of this money could not be collected.

Before the election the last government was keen to avoid the Revenue and Customs going in and pushing more companies into administration when they were unable to pay their taxes. It is often the government that institutes bankruptcy proceedings when a company is running out of cash and credit.

Mr Murphy estaimates that 160,000 companies owing £4.8 billion are taking advantage of the last government’s “Time to pay” deferral scheme. This poses a nice problem for the new government. Should they carry on with this scheme and allow more revenue to await collection? Should they accelerate demands for payment and try to wean business off the easy terms scheme? How much of the outstanding tax is truly recoverable?

The Labour MPs who are making a noise about the tax gap should remember that the one bit of it where we can all agree the tax is owing and the gap exists is in the category of late payments and delayed payments of tax. They should also recognise that this is difficult terrain. Their government allowed delay for good reason. They did not want more closures and job losses as the Revenue drove more businesses into bankruptcy. Labour in office had a policy of deliberately widening the tax gap. It is only in opposition they see narrowing it as a good soundbite to try to avoid confronting the need to close the budget deficit in other ways.

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23 Comments

  1. @JohnnyNorfolk
    Posted July 16, 2010 at 7:07 am | Permalink

    Thanks for pointing this out. You can be sure that the BBC will not in its support for anything Labour.

  2. Stuart Fairney
    Posted July 16, 2010 at 7:20 am | Permalink

    Truly there is nothing new in politics, the last adminstration (I suspect quite unknowingly and inconsciously) rather reminded me of self-styled philospher kings from book seven of 'the Republic' these oligarchical collectivists seem quite unable to see that such a criticism is in fact a denounciation of their own failure (as measured in their own terms) as well as being the obvious result of an overtaxed society.

    Yet they sit on the opposition benches bleating and braying and opposing 'cuts' and I honestly think some of them don't see their own absurdity or irrelevance.

  3. Mark M
    Posted July 16, 2010 at 8:33 am | Permalink

    Unpaid tax and tax evasion – yes, crack down on that. However tax avoidance is a different matter. It is entirely legal and if there are loopholes that can be exploited, the government should not complain when people do so. Should people not take advantage of bad government law?

    Tax avoidance should only ever be reduced by making better and simpler tax law. Fewer loop holes, favourable arrangements and exceptions for the lobbyists and the vested interests.

    However the idea that it is a bad thing is wrong. Anything that forces government to write better laws is a good thing. If ministers are too lazy to contemplate all consequences to their decisions then that is their fault, and their fault only.

  4. Alan Jutson
    Posted July 16, 2010 at 9:10 am | Permalink

    John

    If tax is owed then it should be collected, but not at any cost, and the closure of businesses, unless of course the situation is hopeless.

    Whilst it may increase overheads for the Revenue, why not have those Companies who claim not to be able to pay, submit their Audited Accounts to the Revenue for inspection.

    Any sensible accountant could quickly run through these and give a verdict.

    Handing out State subsidies (non payment or delayed payment is exactly that) to Companies who could pay (even if it was on a stage payment percentage payment scheme) but do not is really unfair competition on those who do.

    The Revenue are not too quick themselves to repay overpaid Tax, so they need to get their act in order as well.

    It works both ways.

  5. Norman
    Posted July 16, 2010 at 9:33 am | Permalink

    Regarding the deferred tax and what the government should do about it. I remember hearing about this when it was introduced and I immediately thought 'I wonder if I should simply not pay Corporation Tax this year, invest the money and trust in the future' – only for about 5 seconds though and then sanity returned.

    I don't know the in's and out's of how the scheme operates but if it is possible for people to simply spend their tax instead of utilising other methods to increase revenue and / or decrease costs then I think the government should be looking to phase this out as soon as possible.

    It goes back to the old maxim – the more you subsidise something the less you get of it. Subsidise private companies to make losses and they will do that. I don't doubt this scheme has had it share of successes but I worry that we have subsidised failing businesses that will fail anyway at some point.

  6. waramess
    Posted July 16, 2010 at 9:49 am | Permalink

    Why should deferring tax prevent a failed company from going bust? It can only be a temporary solution and puts the collection of the tax further at risk.

    Maybe the opposition when in power thought the lack of bank facilities would put companies under pressure but such an action cannot be justified over a long period.

    Seems to me that there is no good reason to continue with this policy unless the socialist inclinations of this government are more profound than previously thought.

    Companies will go bust in a recession and jobs will be lost and there is nothing that can be done about it in the medium term.

    The bubble has burst and the excessive production at the height of the bubble will need to reduce before the economy can find its level again. Deferring tax payments will do nothing.

  7. Brian Tomkinson
    Posted July 16, 2010 at 10:00 am | Permalink

    Narrow the "tax gap" and cut spending! I'm already tired of hearing about the dreadful effects of the spending cuts and they haven't really begun yet. In the meantime we are clocking up more and more debt which will mean more and more interest to be paid. Labour will always appeal to the "something for nothing brigade". When the time comes, they will encourage their paymasters in the unions to strike in order to "protect our vital services from these unnecessary savage cuts". They are preparing the background through the media from which to launch their attack.

  8. English Pensioner
    Posted July 16, 2010 at 10:01 am | Permalink

    Whilst one does not like the idea of unpaid tax bills, we have a situation similar to that of the old debtors' prisons. The debtor went to prison until he had paid his debts but, even if he was willing, couldn't earn money to pay those debts until he was released. Meanwhile, any of his dependants were being supported by the parish,so overall no-one gained from the situation. (I know because my researches show that I had an ancestor in that position back in the 1800's ! )
    Where the money is owing from businesses, surely it would be better to offer expert help to assess whether the business is viable and advise if improvements can be made to increase profitability. I thought governments were keen on supporting small businesses – surely some effort with such companies might pay off.

  9. Javelin
    Posted July 16, 2010 at 10:04 am | Permalink

    Simple tax rules mean less loop holes. Tax should be set at two flat rates. One to tax income the other consumption. The public should get used to the idea that this rate changes.

    The only complexity should be that Tax reflects risk for business.

  10. Max Van Horn
    Posted July 16, 2010 at 12:02 pm | Permalink

    Some one should point out that the money belongs to the companies earning it.There is no divine right to tax; extortion by another name.

    • Jilly
      Posted July 16, 2010 at 1:33 pm | Permalink

      I can't agree that tax is extortion. You need some sort of tax collection process for the good of everyone otherwise how are the police, NHS staff etc to be paid? I'm sure you make use of public services so why shouldn't you pay for them?

      As regards JR's blog post – I think more of the unpaid tax should be collected but I also think more effort should be put into tackling tax evasion which is probably much more wide spread than anyone thinks.

      • Lola
        Posted July 16, 2010 at 3:12 pm | Permalink

        Interesting. I agree that tax is extortion. So how do we pay the police etc. Well, it cost each of us about £6/week for the current police 'service'. Fine I'll set up a DD. How about education? There are 1.4m people on the state eduicatioon payroll out of which about 600,000 are teacers. Same rules – work out how much per teacher and I'll set up a DD for that. And so it goes on. Tax is extortion to fund a self serving and self peprpetuation bureaucratic overhead.

        Unions are allowed to strike whilst employers are disbarred by law from sacking striking workers. Fair enough, I'll have a tax strike until you, the goverment sort this mess out.

      • Stuart Fairney
        Posted July 16, 2010 at 7:40 pm | Permalink

        Well the NHS could of course be fully privatised, as it was pre the 1947 disaster. But I think the poster was wondering why governments think they have a divine right to help themselves to your cash. For me, a modest sales tax would do it and everything, (yes everything) else would be abolished. Needless to say, the size, scope and indeed relevance of government would shrink away to just law and order, enforcement of contract and a bit of national defence. So don't see any politicos doing it anytime soon…

  11. APL
    Posted July 16, 2010 at 12:12 pm | Permalink

    Off topic I recognise, but I hardly think you will post an article on the issue.
    http://www.telegraph.co.uk/news/worldnews/europe/

    According to John Redwood, both David Cameron and William Hague are 'Eurosceptics', yet practically the first thing their government does is support a European Union initiative to gain a seat for the EU in the general assembly of the United Nations.

    Really, how can one describe British politicans without resorting invective? In your support of the repulsive European Union, you certanly are not patriotic! Neither are any of you honest or 'honorable'.

    Reply: I do not recall calling Mr Hague a Eurosceptic. I do recall pointing out that there is no Eurosceptic majority in the present Commons, and the Coalition government is of course different from a Eurosceptic Conservative government. I will return to this issue in due course, as there are big problems ahead with EU measures.

  12. christina sarginson
    Posted July 16, 2010 at 12:59 pm | Permalink

    As a director of a small social enterprise I can honestly say I am all in favour of not pushng a business into bankrupcy due to them owing corporation tax it is not about avoiding paying it, it is juggling the cash flow which is the difficulty. The question I would ask is what is the point of closing a buisiness down when they are employing people who are paying tax, those other people could be claiming benefits.

  13. john smith
    Posted July 16, 2010 at 1:49 pm | Permalink

    When the taxman owes me money it routinely takes more than 12 months for them to payup

  14. JimF
    Posted July 16, 2010 at 3:02 pm | Permalink

    Well my customers take "Time to pay" too.
    In my experience, small businesses are more often in cashflow deficit with the revenue on their VAT payments than owing the revenue money. If asked, businesses would deny themselves the aggravation of tax collecting VAT rather than take the small occasional window of possible positive cashflow which might accrue through customers having paid before VAT payments are made. It would be ineteresting to know the actual VAT flow position between businesses and HMRC- my bet is that it is in favour of HMRC despite this whinging.

  15. FaustiesBlog
    Posted July 16, 2010 at 7:30 pm | Permalink

    Why doesn't the government do a deal with the banks and building societies?

    This could take many forms – for example:

    * instead of deferring tax, the company could get a bank loan slightly larger than the value of the deferred tax, at a preferential rate, subject to due diligence on the part of the lending companies. The company would be able to pay it off as quickly as it deems fit. Thus, it would not be faced with a hefty tax bill in the next financial year.

    * banks could take a small stake in the company for a given period, and the company would benefit from free business advice from the banks, who would have an active interest in the company's success.

  16. Alan Douglas
    Posted July 16, 2010 at 10:55 pm | Permalink

    As an avid reader of Timothy Worsthall, I always dismiss the claims of Richard Murphy, who conflates evasion with avoidance in all his major figures. A wholly UNreliable source for accurate information.

    Alan Douglas

  17. manicbeancounter
    Posted July 16, 2010 at 11:55 pm | Permalink

    This £120 billion (or £40 billion) of unpaid tax includes what used to be termed the "black" economy. The part of the economy that remains hidden. Assume a fantastic push reduces this area by £40 billion – half in increased tax revenues and the other half by stopping this underground economy of small traders failing to declare, closure of grey areas in the tax system. If these small traders are basic rate taxpayers, averaging 25% tax and NI and VAT, the treasury "gains" £20 billion. at the expense of £80 billion (5% + of GDP) being lost. So bang goes the fragile recovery, whilst making life still harder for those who the honest who pay their onerous taxes in full.

  18. Mike
    Posted July 17, 2010 at 8:05 am | Permalink

    I agree with Alan.

    There appears clear wording in Missing Billions to suggest that Murphy has included legitimate tax planning in his calculations. I. His exact sentence (2nd last paragraph on page 29):

    “Much may be due to legitimate tax planning, but by no means all is. Some, undoubtedly, is due to tax avoidance.”

    See here: http://www.tuc.org.uk/touchstone/Missingbillions/

    He has been brought to task regularly by Tim Worstall on this, and apparently again in Parliament on the issue. Murphy dismisses it as rhetoric, splitting hairs etc. He just won’t respond on this important question about his methodology in producing numbers which appear wildly exaggerated.

    If he did include legitimate tax planning in his figures, then his figures are useless, and the whole exercise is a huge publicity stunt.

    If he didn’t include legitimate tax planning in his figures, why did he write that sentence?

    Try asking him on his blog, even politely and you will get treated rudely or banned.

    I assume this Missing Billions is now dead and buried.

  19. Conrad Jones
    Posted July 18, 2010 at 7:38 pm | Permalink

    The arrogance that such characters such as Ed Balls and the aggressive incompetence (•lack of physical or intellectual ability or qualifications ) of David Milliband – with their Gold fish like memory cells when confronted with the appalling debt and commitment to illegal Wars is beyond belief. Ed Balls – when interviewed seems to enjoy the "Game" of politics. Someone who is so closely alligned with a failed Government can put himself up for the Leadership of a now (partly at least) failed ideology suggests someone who is not fit to run for public office – let alone Leadership of a political party.

  20. Conrad Jones
    Posted July 18, 2010 at 7:50 pm | Permalink

    As to unpaid "Tax" – does this mean that if £23 billion pounds of unpaid taxes were paid, the public sector would not be paying the price – as well as all other honest tax payers – for the greed and incompetence of the Banking fraternity? As Gordon Brown – in his wisdom – handed over £200 billion of free money. Did the Banks then increase loans to the Private Sector to enhance Businesses? – NO, they gave it to themselves as increased salaries and bonuses as well as to morrtgage debt to inflate the Housing Market . If we – as a Country – really want a true recovery and a farer society, then we need to rid ourselves of paper money which is backed by nothing except promises. A real form of money – such as one backed by tangible assets (Gold and Silver) will prevent a money supply allowing Governments from waging unecessary Wars; such as Iraq. How much has Iraq cost – how many parents of dead and injured soldiers will have to live with the emotional costs for the rest of their lives.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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