Ritchie and the tax gap

It has for some time been sport amongst the big accounting firms, libertarian groups and certain parts of the Treasury to say I got that report wrong, claiming the gap I identified was just down to ‘legitimate’ tax avoidance. In itself that is an odd claim. By definition all tax avoidance is legitimate. That does not, as George Osborne put it, prevent it being “morally repugnant”.

But the claim those groups have made is also wrong. What they suggest is that what I did was count such things as capital allowances on the purchase of equipment as being a tax avoidance activity. Well, in part, I might have done,

Yes, yes, you did, and the argument was first put forward here, on this very blog. It\’s taken a few years but glad to see that you agree with me now.

The very method that you used, looking to headline rates and paid rates, means that you are ignoring all of those allowances which Parliament deliberately and with forethought put into the tax code. You are therefore not measuring tax avoidance, you are measuring tax compliance.

In 2010 just five companies paid just £19.3 million in tax compared to a reasonable estimate of £685 million that might have been owing. That means that the tax gap with regard to these companies, on my basis of calculation, would be some £666 million. It is quite possible that on HMRCs’ basis of calculation it would be zero.

Now you can see how we came up with such different estimates.

Now I think you can also see who is, very obviously, and very logically, right.

Yes, the Treasury.

Because European Union law, which supercedes UK law recall, is deliberately set up so that a company operating in the EU need have only one company to do so. They\’ve deliberately fixed the system so that you can have one office, one bureaucracy to deal with, one taxman to answer to, and then sell anywhere you like in hte 27 countries. It\’s all part of the Single Market thing.

This isn\’t tax avoidance, it\’s tax compliance: the companies are doing exactly as the EU wishes they would do.

5 comments on “Ritchie and the tax gap

  1. Good lord, he just doesn’t stop does he. As for logic, I see there’s no room in his for the idea that, given our attitude to justice, the tax gap can only be measured in one way, and that is the amount of money that has been proven, in court, to have been evaded by specific companies.

    Anything else is speculation and ponies.

  2. a continuous streaqm of dribble flows from the Murph-meister. Over at Lib Con, he is claiming that the recent cut in the Corporation Tax rate will mean that companies will hoard cash, and he implies that the government should confiscate this cash to pay down the deficit.

    Just when you thought he could not really be that stupid, he comes along and proves it again.

  3. Diogenes,

    Not quite. He’s claiming that companies ALREADY hoard the cash, so there is no point in cutting corporation tax. And he says that the companies have lent that cash to the government already, i.e. invested in gilts. If this were true then confiscating the cash would make no difference whatsoever to the deficit, although it would reduce debt as the gilts held by those companies would be cancelled. But it isn’t true. That cash is sitting in bank accounts.

  4. Frances – surely you agree that it is drivel! Does he really mean what he seems to be saying? Can you really make a sensible assumption that you know what he is trying to express?

  5. Diogenes

    I didn’t say that what he was saying was SENSIBLE, did I? But companies do have high cash balances at the moment. As a short-term economic stimulus the corporation tax cut doesn’t look very effective, therefore, but I doubt if that’s its purpose. I’d guess it is a medium-term reform to make the UK more attractive as an FDI location, and a step in the direction of eventually flattening corporation taxes. Of course all of that would be anathema to Murphy.

    Actually some of us have just taken the Lib Con post apart. The figures don’t add up.

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