Ritchie on the tax gap: Oh dear, he\’s wrong!

Well, we all know about the wonderful little spat going on between Richard Murphy and HMRC over the tax gap, don\’t we?

Well, here\’s one reason why Ritchie keeps getting such different results from everyone else. He\’s got tripped up by his own definitions of tax avoidance, tax planning and tax evasion.

Just to remind you. Murphy says that tax planning is paying what everyone meant you to pay when they passed the law saying that you had to pay the tax. The spirit of the law if you like. Tax avoidance is when you look at the letter of the law, do what that says and thus breach what the spirit of the law said. Anything and everything from, say, using a limited company with the £10,000 no tax allowance on profits then paying that to yourself as a dividend so that there\’s no income tax either, nor NI.

You know, like he did with his own company.

To, say, counting the carried interest as a venture capitalist as a capital gain and thus paying capital gains tax on it, not income tax.

These are, to Ritchie, tax avoidance, for while they are currently legal that\’s not what Parliament meant and dang nammit you shouldn\’t do that!

Tax evasion is the illegal stuff.

To give an example here. Ritchie says that this is tax avoidance:

That tax avoidance of income tax, Capital Gains Tax, and national insurance combined is just £1.4 billion when George Osborne admitted that avoidance of CGT alone was more than £1 billion in his June budget speech? So there’s almost no income tax avoidance at all then?

Well, in Ritchie\’s definition of tax avoidance, yes it is:

Some of the richest people in this country have been able to pay less tax than the people who clean for them.

That is not fair – and it stems from the avoidance activity that has exploited the wider gap between the rate of capital gains tax and the top rates of income tax.

These practices are costing other taxpayers over £1 billion every year.

However, let\’s go and look at what HMRC defines as the tax gap:

Tax gap overview
1.1 This section discusses the tax gap across HMRC–administered taxes2.
The tax gap is defined as the difference between tax collected and the
tax that should be collected (the theoretical liability). The theoretical
tax liability represents the tax that would be paid if all individuals and
companies complied with both the letter of the law and HMRC’s
interpretation of the intention of Parliament in setting law (referred to
as the spirit of the law). The tax gap estimate is net of the
Department’s compliance activities.

D\’ye see the difference yet?

Yes, HMRC defines people obeying the letter of the law as not indulging in tax avoidance!

Avoidance is, rather, those people doing what HMRC thinks is not either the letter of the law nor what HMRC regards as the spirit of the law.

And, as I hope you won\’t need reminding, HMRC hasn\’t challenged any of these peeps paying CGT on carried interest. They might not like it, they might think that the law should be changed. Indeed, Osborne doesn\’t seem to like it and seems to be thinking about changing the law.

Both of which are really admissions that these people are in fact obeying the law as it stands. Thus HMRC regards this £1 billion not as tax avoidance at all but as tax planning: however undesirable they think such tax planning is, however much they think that the law should be changed to make such tax planning into tax avoidance (or even evasion).

So here\’s at least part of the reason that Ritchie keeps coming up with such different answers. He\’s fallen flat on his face over his own definitions.

His definition of tax avoidance is different from that of HMRC. So, of course, he gets different numbers using his different definitions.

How could it be otherwise?

As one R. Murphy opines:

I could (and will – I have no doubt) go on but for now let me draw the obvious conclusion – that this data is ridiculous. Those putting them out are either incompetent or deliberately mis-stating the truth. I know that’s harsh, but I have to be. The issue is too important to say anything else.

Well, quite.

6 thoughts on “Ritchie on the tax gap: Oh dear, he\’s wrong!”

  1. I came to the conclusion a while back that the only plausible explanation for Murphy’s unrelenting stream of idiocies is that he possesses a profoundly meagre intellect. Sure, he is capable of constructing vestigially-correct English sentences, but other than that his brainpower is so limited as to deny him access to those cognitive realms where genuinely insightful analysis can be performed. You can be smart and profoundly wrong, but Murphy’s legendary ability to unerringly misidentify the end of a stick, while woeful to behold, is also rather sadly pedestrian. Most of the time he’s not even wrong. To be wrong in an interesting way requires error rather than misapprehension. If his IQ were found to be greater than 110 or thereabouts, I’d be shocked.

    He’s just a very dull-witted provincial accountant with pretensions of grandeur. He’s the pub bore that everyone runs a mile from, albeit with an inexplicable level of access to Leftist policy circles.

  2. That Richard Murphy is getting it wrong is clear.

    However, HMRC could be less ambiguous themselves in their definition. My reading is that avoidance is the gap (that d*mn word again) between the letter of the law and HMRC’s view of the spirit (in practice, that’s whatever is in the HMRC manuals, which can and have been challenged in the past, e.g. at the Tax Tribunals and their predecessors).

    Whatever, using the old 0% CT band is neither – it’s plain good old planning (and it *was* good); Brown knew exactly what he was doing when he introduced it and was happy to do so, I suspect, because it got more businesses firmly onto HMRC’s radar.

  3. Pingback: The Tax Gap: More Socialist Cobblers? « Neil Reddin … No G

  4. Brian, follower of Deornoth

    Surely by now we know better than to attach any credence to any statement or assertion from HMRC.

  5. The ‘tax gap’ is roughly the same as what Brown was borrowing from about 2002-2008 isn’t it?

    Once he left Tory spending plans behind He annually claimed that the deficit would be reduced to almost nothing five years but it never was. Perhaps He was spending what the Treasury said they were due rather than what they were actually collecting. What followed was plan after wheeze after complication cooked up by the Treasury to close that ‘gap’ and none of it (assuming the gap is real and justified) has worked.

    At what point is someone in authority going to tell the Treasury that they are shit and that even more centralisation and complexity is not the solution?

  6. ‘Bout time said this about Spud Murphy:

    He’s an accountant who knows a tad about tax.
    If he was any good at it he’d be making a fortune doing it.
    He tried writing tax advice articles & got a few into print. Not much dosh in that. Tax experts writing articles on how to reduce tax exposure aren’t exactly thin on the ground & he hasn’t got anything particularly rivetting to say on the subject.
    Not much point in penning articles on how we’re all paying too much tax either. There’s plenty of angry people who’ll do that for free.

    So like any good capitalist he’s looked for a gap in the market that wasn’t being filled. Plenty of red fanged socialists about demanding more government spending on pretty well anything you care to name but when it comes to raising the dosh they can’t get much past waving banners saying “Tax the (fill in group of choice)”

    So there’s his niche.

    There’s his Tax Research UK & his New Economics whatever & of course his tidy little Ford Foundation grant.

    Don’t suppose he believes one word of what he writes. Doesn’t even have to be accurate.

    The people he’s writing for aren’t interested if any of his wittering makes sense or is true. They’re not an evidence based culture. They’re not even interested in understanding what he’s on about. To them its incomprehensibility is a feature not a bug. Just look at the comments under his CiF pieces if you doubt that.

    Three cheers for Spud Murphy!!!

    In true capitalist manner he’s created a monopoly in left wing accountancy bullshit.

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