Tax chat: talking sense about the tax gap?

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It's been a few months since we blogged about the furore over corporates operating in the UK paying the ‘fair share' of tax. Recent discussions at the G20 summit on international action may have taken a little of the heat out of the debate over tax avoidance, but the issue hasn't gone away entirely (as seen in last's week's second reading of a private member's bill on Corporate and Individual tax and financial transparency).

I attended an event this morning on this subject and a lot of the debate was considerably better informed than some previous media and parliamentary commentary.

My top five take-ways:

HMRC estimate of the tax gap

There is no shortage of calculations on the size of the UK's tax gap – the difference between what should be paid to HMRC and what is (mainly as a result of error, fraud, non-payment and artificial avoidance schemes). HMRC reckon it's over £30bn per year.

The two buckets with the biggest estimated gap are Income Tax, NICs, CGT and VAT. It's important to have a good understanding of the components of the gap so that action can be deployed accordingly.

Adequate and properly targeted action from HMRC is making a difference

Before arguing about the rules and what's fair, there was a strong message that the right resources for enforcement can make a difference.

The size of the ‘perception gap'

The public has legitimate concerns about who's paying what tax and where, and concern has inevitably grown as spending cuts have kicked in. The job of spelling out how HMRC operates, where the shortfall is and why the situation has become more complex in this digital era has not always been done particularly well. Politicians have a duty to acknowledge concerns; but there's the side of this story which shows that a competitive tax system and action to reduce the tax gap are not necessarily contradictory that needs better airing too.

It's the rules

International rules haven't kept pace with the way business operates across borders. The UK is – as it should be - playing a role in international work to address, what the OCED catchily terms, base erosion and profit shifting. There are also calls for greater efforts on simplification, which could help, but along with many other suggestions, isn't a silver bullet.

More and better debate

It's good for this debate to get some airing and many of the views were similar to the recommendations that EEF made on improving the tax avoidance debate. The right balance needs to be struck between enforcement and legislative change. Importantly sending out the right message to businesses about stability and certainty in both of these areas is essential if they are to have the confidence to invest and grow in the UK.

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Chief Economist

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