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Is there a tax avoidance magic money tree?

All three political parties say they can raise £5bn or more from cracking down on tax avoidance and evasion. How plausible is this?

UPDATED with the June 2024 tax gap figures

James Cleverly said on 26 May that the Conservatives would raise £6bn by clamping down on tax avoidance, £1bn of which will fund their national service proposal:

And here’s Rachel Reeves in April, saying Labour would raise £6bn:

So how plausible are these claims?

What is the tax gap?

The “tax gap” is HMRC’s estimate of the difference between the tax it should collect, if all taxpayers behaved perfectly, and the amount HMRC actually collect.1Estimating the tax gap is a very difficult exercise, with numerous sources of error and uncertainty. HMRC does an impressive job to rigorous standards, generally believed to be the best in the world (most tax authorities only produce tax gap figures for VAT, which is a far simpler job given that it can be estimated with reasonable accuracy “top-down” from national accounts data). About ten years ago, HMRC’s homework was favourably reviewed by the IMF, who made various recommendations, most of which have been followed. More recently it was also reviewed by the Office for National Statistics. HMRC’s total tax gap estimate is £36bn.2Other figures are sometimes quoted, but they are statistically naive. Richard Murphy produced a figure of £90bn back in 2019, but he did this by adopting a “top-down” methodology which, as HMRC and the IMF (page 46 here) have explained, requires a series of significant adjustments which Murphy does not make. Murphy’s estimate also fails the “smell test”. It requires us to believe HMRC are missing more than 95% of all tax evasion – that does not seem plausible given that HMRC conduct random audits of businesses (absent HMRC being corrupt, which is Murphy’s view). We’re unaware of any tax expert who believes Murphy’s approach is credible, and no country has adopted it.

The obvious first question is: who causes the tax gap? And the answer is not quite what we’d expect:3These figures are all from HMRC’s 2024 tax gap report, covering tax years up to 2022/23.

The next question: what kind of behaviour causes the tax gap? Again, it’s a bit surprising:

So most of the tax gap isn’t the wealthy, or multinationals… it’s us. Most of it is small businesses receiving payment in cash and not filing properly (accidentally or deliberately). This is not a very politically convenient answer, but it is nevertheless the truth.

Now these figures are estimates, subject to numerous uncertainties, and shouldn’t be taken as absolutes; but they are also unlikely to be very far off the mark.4It’s sometimes said that the estimates ignore offshore avoidance. This is not quite right, and there are two separate points here.

First, our work identified that HMRC does not systematically match up offshore account reporting with self assessment data. But that is different from saying that offshore is not included in HMRC’s tax evasion estimates. At most, HMRC’s estimate may be missing some evasion that would be identified by cross-checking HMRC’s sources of data. If so, the amounts are likely modest.

Second, HMRC’s tax gap does not include areas where something we might describe of as “avoidance” is actually permitted under the rules – for example the “double Irish” structure Google used prior to 2015. So in 2015 it was a very valid criticism to say that the tax gap estimates ignore multinational tax avoidance. However, things have changed since 2015. The many antiavoidance rules implemented post-2015 make it much harder to see what “avoidance” remains permissible. Even the Tax Justice Network estimates (of which we’ve been very critical) show multinational avoidance costing the UK less than £2bn. This second criticism therefore feels of limited relevance today.
5Also note that the definition of “avoidance” doesn’t encompass planning that’s clearly permitted by the rules (even if many people wish it wasn’t). So, for example, the big tax advantages for non-doms aren’t a result of tax avoidance – they’re how the rules work. Ditto carried interest, avoiding SDLT on commercial property using enveloping, etc.

So we can say with some confidence that neither Labour or the Conservatives can raise £6bn from clamping down on tax avoidance, because there probably isn’t £6bn of tax avoidance. But that’s not the end of the story.

So how can the tax gap be reduced?

Here’s a short agenda for closing the tax gap:

More resourcing

  • There is now a widespread view, amongst individual taxpayers, business6See page 31 of the CBI report and the tax profession, that HMRC is seriously under-resourced. That is highly inconvenient for taxpayers (and sometimes much more serious than that). But it also means that some tax is not being paid: taxpayers are making mistakes, and HMRC is not helping them.
  • It’s not merely that HMRC funding has failed to keep pace with inflation; its most experienced personnel have been moved onto other projects, particularly Brexit and the pandemic.7See paragraph 1.8 onwards in this National Audit Office report. This was probably sensible, but is having long term consequences.
  • It is therefore in our view, and that of most other professionals we’ve spoken to (inside and outside HMRC) that providing more resources to HMRC is very likely to yield more8We are sceptical of the Association of Revenue and Customs’ claim that £910m of additional expenditure would result in £11.3bn of additional revenues. They reach this figure by looking at historic targeted budget increases, all at least an order of magnitude smaller than what the ARC is proposing (see page 49). The obvious response is – why stop there? Why not £2bn? The obvious answer is: diminishing returns. than it costs, provided the funds are employed with care. So, for example, expanding helpline teams, compliance teams and creating special investigation units would seem likely to result in a positive return. Expanding internal and bureaucratic functions, less so. And, as in all organisations, it is likely that there would be pressure from internal stakeholders to expand internal and bureaucratic functions. Considerable care and skill may be necessary to avoid this trap.
  • There will also be important benefits to individuals and businesses.9The Association of Revenue and Customs (the trade union for HMRC personnel) estimated a £1bn per annum saving for business if HMRC response times could be improved; although the ARC has an obvious vested interest. This is not a zero sum game.

Treating “tax avoidance” as criminality

  • There is an increasing amount of “tax avoidance” that is marketed to small businesses and individuals of relatively modest means, but that isn’t really avoidance at all. It’s a sorry mixture of incompetence and criminality.
  • Attacking tax avoidance, broadly defined, could bring down those “failure to take reasonable care” and “evasion” figures.
  • The vast majority of this “avoidance” isn’t promoted by the Big Four – it’s sold by dodgy outfits, some onshore, some offshore (particularly the Isle of Man). Their response to an HMRC challenge is often to walk away, leaving HMRC with nothing.
  • The answer in our view is new powers enabling HMRC to pursue directors and shareholders of tax avoidance scheme promoters.
  • We’ll be writing more about this soon.

Investigating tax avoidance and evasion more proactively

  • Giving HMRC additional powers isn’t enough – HMRC need to be smarter and more proactive investigating tax avoidance and evasion.
  • HMRC appears to be constantly playing catch-up with tax avoidance, only belatedly attacking structures that have been well publicised for years. HMRC once had special investigation teams that proactively uncovered and investigated avoidance; it no longer does. We receive many reports of avoidance schemes and tax scams from tax professionals across the country; we can investigate some, but sadly only a small proportion. This is something HMRC could do much more systematically and effectively.
  • And, when HMRC does begin an enquiry/investigation, it does so in what often looks like slow motion, taking months to send out correspondence. This is, once more, highly inconvenient for taxpayers, but also risks losses for HMRC (both because limitation periods can run out, and because changes of personnel over time mean HMRC can, and does, drop the ball).
  • In our view the loan scheme/loan charge affair was greatly exacerbated, and perhaps even caused, by HMRC not realising how prevalent loan avoidance schemes had become. By the time they realised, the situation was out of control. The same may be happening now with other forms of remuneration avoidance.

Closing “loopholes”

  • The tax avoidance tax gap figure excludes arrangements that many people would call “tax avoidance” but isn’t strictly that at all, because it reflects intentional Government policy rather than a “loophole”.
  • One example is the ease of avoiding stamp duty when you buy commercial real estate, another the simplicity of avoiding inheritance tax if you have a portfolio of AIM shares.
  • It remains unclear why these “loopholes”10Given they’re envisaged and permitted by Parliament, “loophole” is not really the right word, but we have been unable to think of a better one. Any suggestions gratefully received. continue.

Simplification

  • Many of the “errors” and “failures to take reasonable care” reflect the complexity of the tax system, and the difficulties that ordinary taxpayers and small businesses can encounter from reasonably straightforward arrangements. Some of this complexity is inevitable, but some is not. We have entire taxes that have no reason to exist.
  • £4bn lost to “legal interpretation” is an admission of policy failure. If there are areas where the law is unclear, those areas should be clarified (one way or another). £4bn of technically disputed tax each year represents a grotesque waste of HMRC and taxpayer resources.
  • These measures would, we believe, reduce the tax gap, but probably not result in increased revenue (or decreased revenue). They would, however, benefit both the tax system and the country as a whole. Again, tax change is not a zero-sum game.

So are the claims that large sums could be raised plausible?

Yes – the claim is credible… but with the big caveat that simply increasing HMRC’s budget is unlikely to be effective to raise these sums. Careful targeting and management is required.

How do the Parties claims compare?

The three main parties have provided three very different sets of claims for how much revenue they could raise:

The Labour Party plan is in their “Plan to Close the Tax Gap” document. The Conservatives included a plan as part of their National Service press release. This doesn’t appear to be publicly available; we’re publishing it here. The Conservative figures weren’t in that press release, but are in their manifesto costings document.

The origin of the £6bn figure common to Labour and the Conservatives appears to be the head of the National Audit Office, who said earlier this year that £6bn could be raised by cracking down on avoidance and evasion. But he didn’t say how, or how much it would cost.

The Lib Dems just present the £7.2bn figure as 2028/29 funding in their manifesto costings document. They don’t give figures for earlier years. There is no published plan. I asked them about this, and their press office told me:

“We will invest an additional £1 billion a year in HMRC to tackle tax avoidance and evasion – more than Labour or the Conservatives. We are confident that this would enable us to raise an extra £8.23 billion a year by 2028-29 – an achievable and realistic figure. Jim Harra, Managing Director of HMRC, told the Public Accounts Committee that every £1 invested in cracking down on tax avoidance and evasion raises between £9 and £18. That would mean net revenue of £7.23 billion a year in 2028-29.”

Both Labour and the Conservatives also cite figures for historic ninefold returns from compliance expenditure (and, as above, the Lib Dems cite even higher numbers). However these figures are derived from historic targeted compliance measures which were relatively small. We are a little sceptical that they can be extrapolated to very significant billion pound measures, as is now proposed.

Comparing the Labour and Conservative plans: the Conservatives’ in large part reflects current Government initiatives (unsurprisingly). Labour’s plans are more detailed (as you’d expect, from an opposition with something to prove).

It is the Lib Dems who stand out: for having no plan, for claiming the largest revenues, and for assuming the revenues ramp up faster than others.


Many thanks to R, P and K for their input on this, and to C for help with the statistical elements.

Images from the BBC interview © British Broadcasting Corporation, and from Good Morning Britain © ITV, both reproduced here for the purposes of criticism/review.

  • 1
    Estimating the tax gap is a very difficult exercise, with numerous sources of error and uncertainty. HMRC does an impressive job to rigorous standards, generally believed to be the best in the world (most tax authorities only produce tax gap figures for VAT, which is a far simpler job given that it can be estimated with reasonable accuracy “top-down” from national accounts data). About ten years ago, HMRC’s homework was favourably reviewed by the IMF, who made various recommendations, most of which have been followed. More recently it was also reviewed by the Office for National Statistics.
  • 2
    Other figures are sometimes quoted, but they are statistically naive. Richard Murphy produced a figure of £90bn back in 2019, but he did this by adopting a “top-down” methodology which, as HMRC and the IMF (page 46 here) have explained, requires a series of significant adjustments which Murphy does not make. Murphy’s estimate also fails the “smell test”. It requires us to believe HMRC are missing more than 95% of all tax evasion – that does not seem plausible given that HMRC conduct random audits of businesses (absent HMRC being corrupt, which is Murphy’s view). We’re unaware of any tax expert who believes Murphy’s approach is credible, and no country has adopted it.
  • 3
    These figures are all from HMRC’s 2024 tax gap report, covering tax years up to 2022/23.
  • 4
    It’s sometimes said that the estimates ignore offshore avoidance. This is not quite right, and there are two separate points here.

    First, our work identified that HMRC does not systematically match up offshore account reporting with self assessment data. But that is different from saying that offshore is not included in HMRC’s tax evasion estimates. At most, HMRC’s estimate may be missing some evasion that would be identified by cross-checking HMRC’s sources of data. If so, the amounts are likely modest.

    Second, HMRC’s tax gap does not include areas where something we might describe of as “avoidance” is actually permitted under the rules – for example the “double Irish” structure Google used prior to 2015. So in 2015 it was a very valid criticism to say that the tax gap estimates ignore multinational tax avoidance. However, things have changed since 2015. The many antiavoidance rules implemented post-2015 make it much harder to see what “avoidance” remains permissible. Even the Tax Justice Network estimates (of which we’ve been very critical) show multinational avoidance costing the UK less than £2bn. This second criticism therefore feels of limited relevance today.
  • 5
    Also note that the definition of “avoidance” doesn’t encompass planning that’s clearly permitted by the rules (even if many people wish it wasn’t). So, for example, the big tax advantages for non-doms aren’t a result of tax avoidance – they’re how the rules work. Ditto carried interest, avoiding SDLT on commercial property using enveloping, etc.
  • 6
    See page 31 of the CBI report
  • 7
    See paragraph 1.8 onwards in this National Audit Office report.
  • 8
    We are sceptical of the Association of Revenue and Customs’ claim that £910m of additional expenditure would result in £11.3bn of additional revenues. They reach this figure by looking at historic targeted budget increases, all at least an order of magnitude smaller than what the ARC is proposing (see page 49). The obvious response is – why stop there? Why not £2bn? The obvious answer is: diminishing returns.
  • 9
    The Association of Revenue and Customs (the trade union for HMRC personnel) estimated a £1bn per annum saving for business if HMRC response times could be improved; although the ARC has an obvious vested interest.
  • 10
    Given they’re envisaged and permitted by Parliament, “loophole” is not really the right word, but we have been unable to think of a better one. Any suggestions gratefully received.

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26 responses to “Is there a tax avoidance magic money tree?”

  1. The Tax Gap is largely an adverse variance in Treasury estimates. As Dan has pointed out in relation to the LibDems’ plan to make savings from an increase in CGT, legitimate taxpayer behaviour is likely to eliminate them. The Treasury would input these savings into the expected yield and then treat the shortfall as tax avoidance. The lost revenue from tax evasion is necessarily pure guesswork but probably bigger than many believe it to be. I would have thought it in the interests of HMRC to talk it down to make their KPIs more attainable and HMG also as politically they cannot realistically shift all the blame to HMRC.The bulk of projected savings under these headings is a mirage and and potential pratfall for any party basing their spending plans on them.

  2. There is another NAO report relevant to this:

    https://www.nao.org.uk/reports/tackling-the-tax-gap/

    Relevant para includes:

    HMRC’s measure of compliance yield remains the best indicator of its performance because it calculates the direct return from its work to tackle the tax gap. Performance against this measure suggests that HMRC’s work to tackle non-compliance offers good value for money, with rates of return ranging from 7:1 to 44:1.

  3. How about “anomalies” rather than [parliament sanctioned] “loopholes”? It ties in with tax simplification as well.

  4. As a PI lawyer who is regularly asked to calculate loss of earnings for “self-employed” people I cannot say I am surprised that most of the issue is with small businesses. Anecdotally it has always felt like self assessment was an invitation to underpay tax.

    You’d be amazed how many taxi drivers earn exactly £12,570 and the rest of their yearly 40k take is eaten by expenses. (or you wouldn’t).

    Construction seems particularly bad, with the employment structures effectively built to encourage and facilitate evasion. EVERYONE is self-employed. No one can tell you how much they earn. Barely anyone seems to pay any tax. But when you tell one of these workers that their loss for 6 months off work is something like £1,000 (based on the documents you can scrounge together) they insist that they are actually earing £200 (net) a day – but oddly these people who should be higher band tax payers don’t have accountants…

    A significant amount of tax would likely be recovered if a strong stance was taken on the nonsense “self-employed-worker” parts of the economy. Get everyone on PAYE. The government would make more money and the employees would suddenly have actual rights.

  5. So very depressingly accurate. I was an HMRC inspector investigating small and medium accounts . My whole career spent in HMRC. The rot started in around 1999. It went downhill slowly and very badly from then. We watched as it got worse and worse. Not sure what the way back is for it as considerable investment required in staff numbers, staff training and especially management preferably by “tax” people who understand the job as well as top level management equally by people familiar with taxation. Yield needs investment. Neither party seem likely to provide this. I can only see a further downhill slope. Your list of objectives is spot on. New management role for you perhaps.
    Always enjoy your articles, thanks.

  6. I would suggest that training HMRC staff properly and giving them more responsibility to make their own decisions would also help (effectively part of the resourcing issue that you mention). Too much of my work over the last few years has got bogged down in HMRC’s staff not knowing tax law or not being able to make a decision without referring not a higher power 😊! I was a tax inspector for ten years in the Inland Revenue and I had a very thorough training course over three years. As an Inspector of Taxes I had autonomy to make most decisions, and I was trusted to confer with colleagues and senior officer when I felt it necessary.

  7. If ‘failure to take reasonable care’ is one of the largest causes of the tax gap, surely one relatively easy change would be to legally regulate the accounting/tax profession and ensure that only professionally qualified and insured individuals are permitted to call themselves accountants or tax advisors and/or submit to HMRC on behalf of third parties.

    • I don’t think so, because (1) much of this is people without an adviser, (2) a bit of this (much less) is dodgy advisers – some of whom we’ve written about.

  8. I suspect (but have no evidence for) tighter controls at Companies House would also net a substantial return. Lots of the tax fraud seems to rely on the lack of effective identify verification or other screening at Companies House, meaning that when tax fraud is committed it’s very hard to pursue anyone.

  9. Dan, really good work as always and thank you. There are so many comments to make here. First, yes I agree the £6bn figures are pie in the sky. But I also agree that so much “avoidance” is actually evasion. I worry that the current HMRC cannot distinguish the two, and are under resourced (and under trained) to recognise the latter.

    The return of specialist investigation teams cannot come soon enough.

    The cowboy “remuneration schemes” need to be stopped at first base, not years after the event. HMRC could do this if it were funded and sufficiently on the ball

  10. I’m just about to retire after 25 years as a small business accountant. Experience of Hmrc is that they were poor 10 years ago and now are utterly useless. The ones I speak to are not trained clearly work from home and have no direction or leadership. I doubt and field work takes place as every ethnic restaurant doesn’t bother with vat or paye. Some many people just don’t understand that employment isn’t a choice.
    More money won’t improve this better education might. I don’t think politicians of any party really understand tax anyway.

  11. HMRC’Stax gap is itself a qustionable figure.it is the only estimate that I have ever seen that after the event does not reveal an estimation error.

    And, of course, the “legal interpretation” figure covers everything where HMRC’s interpretation of the law is that tax is due but the Tax Tribunals (or even a tax officer where the HMRC interpretation is unsustainable) interpret the legislation differently, ie. The tax lost to legal interpretation is money that the law says is not payable because HMRC have misread the legislation. Itis hard to see how that “tax loss” can ever be collected unless the law is changed to say whatever the legislation says, HMRC is always right. If in fact they were always right taxpayers would never win before the tribunals, and we all .know that is not the case.

    • There is detail on errors/uncertainty in the methodological annex, although I would certainly prefer the figures to be presented with explicit error bars.

      Incidentally, I love your blog, and wish you would write more.

  12. The fact the vast majority comes from small businesses and the self employed might come as a surprise to the wider population but not to anyone who follows you! I bet some of the chartered accountants have some stories to tell.

    I think the easiest way to get some low hanging fruit would be to have a whistleblowing hotline/email that is well publicised and callers can be confident of anonymity. It’s amazing how careless people are, asking for payment in cash etc. Often I’ve heard people genuinely believing that the don’t have to pay tax on cash earnings.

    • I agree – I’ve heard much frustration from small accounting firms that there’s nowhere for them to report some of the really bad behaviour they see.

  13. I find this figure interesting as in Richard Brooks – The Great Tax Robbery, he puts this figure much higher ( both evasion and avoidance) and attributes it mainly to “fat cats and business”. ( it’s worth a read). So is he completely wrong?

    • He is I think using the Richard Murphy figure, which no tax expert to my knowledge accepts (for the reasons I mention in the footnote above). The “fat cats and business” element however contradicts Murphy, who has most of his figure coming from tax evasion. I’m not aware of any evidence that would support it.

  14. I think that the delay by HMRC in processing cases doesn’t help. Speeding up things helps get tax quicker (if it is due) and likely reduces time and costs for everyone.

    A one-month delay in HMRC replying to a letter sounds a long time in the real world. But it is incredibly quick compared with the delays of more than a year that I used to see. Resources would help here.

    There also seems to be delays in the HMRC governance process before permission is given for HMRC to take a case further (e.g. FTT, GAAR, drop it, etc). I have no idea if extra resources will help here or whether it is a process/attitude thing. It may be that tweeks to legislation are needed as well (e.g. as to the thresholds/process for raising an enablers penalty).

    The process for the FTT seems to be quite slow. As well as governance, some of that is in getting a date at the tribunal. But there can also be long delays before a decision is published.

    I also hear of more judicial reviews happening (e.g. in relation as to whether HMRC can publish their suspicions about a scheme) and these seem to delay things even more and this is bound to take up a lot of resources.

    I think someone like you helps as a catalyst for getting things done by HMRC but I don’t suggest that the government throws resources at you. I can see, however, it being helpful to get more openess to what is happening so that the ‘open source community’ can get involved in identifying issues earlier.

    I prefer the term ‘shortcoming’ to ‘loophole’, though your examples are more related to asymmetry. There is a big imbalance in reactions — only a tiny few want to get rid an exemption and they are quite quiet about it. But there is a massive outcry about the disastrous consequences for the entire planet from the few affected.

    One way of dealing with this would be to have some sort of department or office that sets out ideas for tax simplification. That way old exemptions that no longer have a clear purpose are highlighted and dealt with.

  15. Is an important part of the puzzle much larger financial penalties and/or stronger sentences when avoidance involves a criminal element?

    Obviously we don’t want to criminalise honest mistakes, but thinking more about the worst offenders promoting tax avoidance schemes. Would stronger penalties not discourage the more flagrant attempts to game the system? and if not, larger financial penalties would increase the yield when a better resourced HMRC challenges such schemes

    • I agree – the threat of criminal sanctions would be a game-changer. It’s just important that any new legislation is designed to not impact “normal” tax advice, even when wrong (and even when badly wrong).

    • Surely the easiest way forward is to say that a fee cannot be charged by firm or an individual without a recognised qualification.

      It works perfectly well for gas fitters. It does not prevent someone competent at DIY from installing their own hob and would not prevent someone willing and able to help a relative/neighbour fill out a form.

      There is a register and if your name is not on there you may not charge a fee. Without fees there is no incentive for bad players to offer their advice. If they want to charge fees they may get a qualification and be bound by codes of conduct.

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