Over five years, the UK faces a loss of nearly £300bn in unpaid tax


4:24 pm - July 20th 2011

by Éoin Clarke    


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Do you know how much tax is unpaid in the UK? The graph below shows the HMRC estimates of Tax Unpaid for the most recent data available which happens to be 2008-09.

In total there is £42billion regarded as being unpaid just in one year.

This takes the midway point between the highest and lowest estimates.

Were the highest HMRC estimates to be included then the figure would be close to £57bn unpaid tax for one year.  Now this figure is regarding by experts as a gross underestimation.

Tax experts regard the figure as potentially as high as £120bn if one looks at Corporate Tax fraud per year.  Richard Murphy‘s pioneering solution is that we introduce country by country reporting for multi-nationals, so that they are obliged to report profits and losses per country.

This would prevent them hiving off their profits to tax havens throughout the world. In the absence of this mechanism there is precious little that is effective about the way the government are trying to close the gap between tax due & tax paid.

And so I am afraid the graph above is what I am left to work with until Country by Country reporting becomes available. So, working with official government estimates of unpaid tax, what can we say?

Well taking the high point of government estimates it is clear businesses are defrauding the government. They lie above sales volumes leading to underpayments in Corporation Tax as well as VAT.

This is hurting the UK economy at the very least by c.£288bn a parliament. Now why should the pubic undergo the harsh £80bn of cuts when £288bn tax is unpaid?

Why should business enjoy a Corporation tax cut when they don’t even pay what they are due?

Why should we pay 20% VAT at the till if we cannot be sure that VAT will ever reach the nation’s coffers. This system folks is rigged against the common people. And what’s more those at the top revel in that.

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About the author
Eoin is an occasional contributor. He is a founder of the Labour-Left think-tank and writes regularly at the Green Benches blog.
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Reader comments


1. Leon Wolfson

Absolute-flipping-lutely.

Let’s be plain, Labour didn’t do nearly enough on this either, but the coalition have actually REDUCED the effort put into this. We were already seeing a “tax gap” greater than most Western countries.

We could, quite literally, put several BILLION into this and see a return on every pound. We SHOULD do it, in fact.

Many people are quick to condemn Greece for not cracking down on personal tax evasion. They should be just as quick to condemn the UK for not cracking down on business tax evasion.

Umm, you do know that country by country reporting has absolutely nothing to do with Murphy’s estimations of UK tax gap, don’t you?

3. Mr S. Pill

Where are the screaming tabloid headlines about the fuckwits stealing this money? oh look another story about someone claiming disability when skydiving, that’s clearly more important. fucks sake. anyone avoiding tax on this kind of scale should have their company nationalised by the government and all shareholders who enabled the company to get away with it slung in jail. Harsh? maybe. but shit, this kind of stuff has been going along for far too long and right now we can’t afford to let them get away with it.

“anyone avoiding tax on this kind of scale should have their company nationalised by the government and all shareholders who enabled the company to get away with it slung in jail.”

Calm down just a little bit.

Eoin’s rather misread the reports. Even Murphy’s not claiming that there’s £120 billion a year of unclaimed corporate taxation.

This is all tax evasion and all tax avoidance and all unpaid tax added together.

Tax evasion is, as we know, already illegal. People are already thrown in jail for this. But there’s still some of it going on: there really are criminals out there you know.

On the tax avoidance side, well, Murphy’s definition of what is avoidance is a little different from other people’s. One of the reasons why his and HMRC’s estimate differ so much.

Finally, on hte unpaid tax: that’s not the unpaid tax or one year. That’s all the unpaid tax that eists in that one year: the accumulation of past unpaid taxes. And some portion of that (quite what, no one knows) will never be paid. Because people and companies have gone bankrupt. Some other portion of it will be paid in time: there are many, many, cases where people/companies are arguing with HMRC over whether tax is actually payable or not. And sometimes the people/companies win and sometimes HMRC does.

I know, it seems difficult that someone could *exaggerate* a Murphy finding but Eoin has managed it. Murphy himself thinks that perhaps £10-£20 billion of this might be recoverable. Everyone here already knows my opinion of Murphy and his research so won’t be surprised when I think even that’s doubtful.

But no, even Murphy isn’t saying that there’s £120 billion out there that’s legally due each year and which can be collected each year. Not even Murphy.

Taxes are not for the elites. Nor are laws. No surprise to see Tim TWAT defending the rich.

T

Country by country reporting is good idea and was proposed in Nicholas Shaxon’s book on tax havens, Treasure Islands. However, Mr Shaxon pointed out that other measures are also likely to be needed including some simple things like removing the right of foreign companies to vote in elections to the Corporation of the City of London. But certainly any move to make multi-nationals more transparent can only be a good thing.

@5 Sally,

“Taxes are not for the elites. Nor are laws.”

That’s right, which is why it is a mistake to call for more taxes and more laws – because they always fall on the ordinary people.

Small government, low taxes, this is the answer.

‘That’s right, which is why it is a mistake to call for more taxes and more laws – because they always fall on the ordinary people.

Small government, low taxes, this is the answer.’

Unconvincing fatalist argument. There were high marginal tax rates on the rich throughout the developed world until they 80s, and they just so happened to coincide with periods of great prosperity. I’m not equating correlation/causation, but at the very least it falsifies the idea that taxes on the rich hurt the poor.

http://www.youtube.com/watch?v=CnrEHFwZ9hk

9. Maltese Cross

Real idiot stuff here.

When it comes to preparing corporate tax returns ‘country by country’ returns already exist. How else do you think tax is declared? You can’t just pick an overseas country with low tax and pretend all the revenue from your UK operation happened there. And besides why would this reduce unpaid tax to nil?

10. gastro george

“You can’t just pick an overseas country with low tax and pretend all the revenue from your UK operation happened there.”

No, you massage it with “management fees”, debt financing, etc.

“Now why should the pubic undergo the harsh £80bn of cuts….?”
Hair, hair!

12. Luis enrique

What proportion of this unpaid tax is attributable to multinationals under reporting their UK profits? Hint: not much. Because thats all country by country reporting could help with, and even then it’s no silver bullet. When Nissan builds a car in Sunderland and sells it in Moscow, you tell me how much profit is attributable to the Russian arms of Nissan, how much to the Uk and how much to Japan.

13. Luis enrique

Total corporate profits were around 150 bn in 2009
http://www.statistics.gov.uk/pdfdir/prof0111.pdf
And corporation tax revenue is about, what, 30 bn?
And you think “corporate fraud” takes that 57 bn hmrc estimate up to 120bn, so thats 63 bn evaded by Corp fraud, and theres already 7 bn unpaid Corp tax in that bar chart ( which is from the 42 bn estimate so would need scaling of using the 57 bn figure) so that’s 70 bn evaded at least, by your lights.
Anyway, upshot is you think if they weren’t fraudulently dodging taxes UK corporations would be paying 100bn tax on 150 bn profit, roughly speaking.

I read a very enjoyable book called On Bullshit by Harry Frankfurt recently. He says one of the hallmarks of a bullshitter is an utter lack of interest in the factual accuracy of their claims.

Dr Eoin Clarke is the founder of a new left wing think tank.

on this subject, I think it’s wiser and better to stick to arguing on principle and mechanics – such as whether Osborne was right to choose to reduce the numvber of tax inspectors during the course of this parliament and whether Osborne was right to take a soft line on tax collection (Cameron : “well, I don’t start from the position we’re all cheats”) while taking a hard line on the relatively small amount of welfare fraud.

Any attempt at arguing on a monetary value for tax evasion and tax avoidance is always going to be highly suspect and lacking in accuracy or verification.
I suppose the govt would have to have more tax inspectors uncovering more frauds, in order to form a better picture of the size of the problem.
But a major problem it certainly is, and while it exists, it undermines the legitimacy of the govt. and undermines the legitimacy of the choice to cut public spending allegedly to reduce the deficit.

15. Bill Nighy

@5 Sally,

You always lower the tone of the debate with purile ad hominems don’t you?

My understanding is that the latest treasury figures have risen from an estimate of £120 billion uncollected tax to £160 billion. This figure might possibly rise even further with HMRC cuts under this government.

Huge efforts seem to be spent targeting benefit claimants – even though official figures suggest that 99% are genuine. Yet no one seems to be closing tax loopholes or chasing the big offenders. This seems pretty twisted to anyone who has not been brainwashed by the Daily Mail into believing that most people who claim benefits are “scroungers”.

Until I see a serious effort made to collect a substantial part of these huge sums, I will not accept that a single cut in public sector jobs, conditions or pensions is necessary. Nor will I accept that services need to be reduced, privatised or reorganised in any way.

It’s about time that those who caused this recession start paying to get us out of it.

Incidentally, HMRC reported to a parliamentary committee that for every £1 spent on their resources, a £10 return could be expected.

No doubt the law of diminishing returns would apply at some point, but there is a very strong argument that HMRC’s funding should be significantly increased.

One area that seriously needs looking at is the amount which is made available to take on companies in legal battles. At present some big companies can (without saying so explicitly) threaten to run court costs up to tens of millions if HMRC do not agree to their own (much lower) assessments of what their taxes should be. Where tax bills may run into hundreds of millions this can be an effective way of cheating the system. The supermarkets use the same trick when denied planning permission by local councils.

And yes – the £120/160 billion figure is potentially misleading as it does included taxes not collected from evasion, avoidance, failed businesses and so on – but the amount that could potentially be recovered if tax loopholes were closed and all challenges were faced down is certainly a lot more than the £10 to 20 billion that Richard Murphy suggests. The main thing that is lacking is the political will to take on the big corporations.

I totally agree that one area the Government should not be cutting is HMRC.

Another thing they could do is to greatly simplify the UK’s ridiculously over complicated tax legislation. I wass hoping the current Government would do something about this as part of their aim to cut red tape, but I am not aware they have done much on this.

19. Robin Levett

@Tim Worstall #4:

Finally, on hte unpaid tax: that’s not the unpaid tax or one year.

Actually, it is; see the section showing the VAT component in paras 2.3-2.9 and Table 2.1 in the linked document.

On the other hand, Éoin’s claim that the tax gap is entirely the result of fraud is simply untrue; his claim that “at the very least” £288bn is lost is untrue (5 * £42bn = £210bn); and MNCs do report profits by country – otherwise they wouldn’t be able to take advantage of tax havens…

I read wiith interst until the author mentioned Richard Murphy – unfortunately the man is clearly delusional.

Let’s also just point out that the author makes the logical leap that the whole 42bn of unpaid tax is being avoided by corporations…..even though his own supplied numbers show otherwise.

Trawling through HMRCs own numbers the estimate they give for AVOIDANCE (i.e. legal) is about 1.4bn for large businesses. Which means most of the tax gap for corporation taxactually comes from SMEs…not those horrible multinationals.

Actually, reading through the HMRC document, it seems that the great majority of this tax gap comes not from big evil multinationals avoiding/evading tax by sitting in tax havens, but instead from SMEs and individuals dodging taxes.

So basically the author has taken a very thorough piece of work from HMRC which says one thing, then implied totally the opposite.

Let’s also dismember the falacy of country by country reporting with a simple example.

Toyota motor company (HQ Japan) makes cars in the UK (a cost, lets say 10k). They then export their car to Europe somewhere and sell them (a revenue, lets say 15k).

In Murphy’s world, each country would report as follows:

Toyota Japan: Management costs (a loss, lets say 2k)
Toyota UK: Loss of 10k
Toyota Europe: Profit 15k

Only Toyota Europe would pay tax, roughly 20% of their “profit” (corporation tax), so 3k.

So, to sum up the numbers: 15 – 10 – 2 = 3k profit…but there is 3k tax to pay.

So Toyota make nothing in this simple example. Clearly nonsense.

This is why transfer pricing exists. It enables Toyota to net off their costs against their revenues and the leftover is a profit or a loss. If there is a profit, taxes are paid on it.

This is obviously sensible, even if it does open the door somewhat to cross-border multinationals monkeying around with the system.

Admittedly it is a simple example, but transfer pricing is a necessary system to enable cross border trade, which is a good thing right? Toyota simply can’t have a factory in every country, or produce every model in each factory. In Murphy’s world, it wouldn’t make financial sense for Toyota to sell their products in some countries….and that makes no sense.

On unpaid tax, I just got notifed that I apparently owe £100 NI for 08-09. I doubt it myself, but haven’t been over the books yet to check (basically, did I earn that little that I did not need to pay NI (before I went and got a proper job)). So, if I am right, the figures are £100 out.

Unless you believe HMRC are infallible, these figures are estimates you see…

23. Leon Wolfson

Tyler – Wow, it might not be profitable to fiddle the books to make it profitable to screw every country but one with a very low rate on tax?

Er, sigh me right up!


Reactions: Twitter, blogs
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