Ritchie makes the same damn mistake he always makes

He tells us that the Oxford report on corporation tax proves that his estimate of the tax gap is correct:

Now let’s pull this data together. 90% of companies paying 90% of all corporation tax do not pay at the expected rate of 28% but instead probably pay at a rate less than 21%. Of course that’s an extrapolation of what Oxford say, but it seems a fair one based on what they say. So, currently £32.4bn of corporation tax paid is the result of tax charged on large companies at a rate of less than 21% (let’s call it 20.5% – we don’t want to over-egg this) when as Oxford note (and they would not note this unless they thought it reasonable to surmise this) a rate of 28% was expected, irrespective of allowances and reliefs.

So let’s gross up £32.4 billion and see how much tax would have been paid if settlement had been at 28% and not 20.5%, and the answer is £44.3billion. Take off the sum we first thought of – i.e. £32.4 billion – and the difference is £11.9 billion. Which give or take is near enough £12 billion. In fact if I’d assumed the rate was 20% and not 20.5% the gap  would have been £13 billion.

In the Missing Billions I said the expectation gap – the difference between the sum we’d expect large companies to pay and the amount they actually pay – was £12 billion a year at the time. And now it’s near enough almost exactly £12 billion.

The fact is the Missing Billions was right all along.

See what he\’s done there?

Yup. He\’s entirely ignored the existence of allowances.

And there are a number of such allowances. Capital allowances, R&D tax credits, for all I know there\’s a sucking up to Ed Balls tax allowance.

So, he\’s made here exactly the same mistake he made those years ago in The Missing Billions. He is comparing headline tax rates with paid tax rates and then calling the difference the tax gap. When some (how much is of course still at issue) is the result not of tax avoidance, tax abuse, but is the entirely righteous practice of tax compliance. Using the reliefs mandated by Parliament as Parliament intended those allowances to be used.

And that really cannot be part of any \”tax gap\”, can it?

Do read through the comments over there as he gets a right going over on this point.

And now, for my party trick, I shall show that UK companies are actually paying too much in corporation tax. Far from there being a tax gap, there is in fact a very large overpayment of tax.

So, using Ritchie\’s numbers above, there should be £44 billion paid in corporation tax. But only £32 billion is. That\’s the source of his £12 billion.

But, as we\’ve already noted, no allowance has been made for allowances. Those bits that Parliament deliberately puts into the tax law to get companies to do what Parliament wants companies to do.

As an example, let us take capital allowances. How much, for example, do capital allowances cost the Treasury?

We can take our answer from Hansard.

Matthew Hancock: To ask the Chancellor of the Exchequer what estimate he has made of the annual cost to the Exchequer of maintaining company capital allowances at May 2010 levels. [15222]

Mr Gauke: The annual cost to the Exchequer of maintaining capital allowances at May 2010 levels is currently around £20 billion around 85% of which relates to companies.

My word, that is interesting, eh?

£17 billion in capital allowances to companies.

So, back to our sums. At 28% there should be £44 billion righteously paid in corporation tax. But we\’ve also got £17 billion in capital allowances. The cost to the Treasury is, I assume, at least similar to if not equal to (and please do correct me if I\’m wrong here) the reduction that companies get on their tax bills.

So, we would expect there to be £27 billion paid in corporation tax. Yet, as Ritchie notes, actual tax paid is £32 billion.

Thus companies are over paying tax by £5 billion.

There is no corporate tax gap in short.

Now, please note, not even I actually believe this result in detail, I mean it just as an example of why that £12 billion estimate is entirely Ritchiebollocks.

Just to hammer it home. The Murphmeister tells us that the gap between the headline rate and the rate paid shows that there is a tax gap. Yet he does not adjust for the allowances that are there in the law which reduce the amounts that are righteously and legally owed. And we seem to be able to show that those allowances are larger than his purported tax gap.

That is, that there is no tax gap at all.

Now, given that I am not an expert in tax there may well be some problem with this numerical example. The logic is sound but the numbers may not be: in which case please do correct me.

5 thoughts on “Ritchie makes the same damn mistake he always makes”

  1. Oh alright Tim. I don’t want to but I’ll go and read the shafting they give him.

    You need a more difficult target. I saw it yesterday, and 10 secs into it I realised what he’d done.

    I cannot believe it. But truth has always been stranger than fiction

  2. Argh!!

    He’s threatening another report in a few days!!!

    by the way my kids are going to suffer. I am incorporating his reasoning technique:

    YOU ARE WRONG.

    Love it, gets you out of any situation.

  3. I’m not sure that’s right. I think the Oxford ETR figures are calculated as (deferred + current tax charge) / (earnings before interest and tax). Deferred tax is an accounting oddity that’s hard for even most accountants to get their heads around, but what it basically does is eliminate the timing effect of any items that get taxed the same as the accounting deductions but at a different time. So, we have depreciation of fixed assets in the accounts, which is disallowed for tax but usually there are capital allowances. If these provide 100% writing down allowance in the first year, the tax bill in that year will come down. But we stick a balancing figure in deferred tax to remove the timing effect.

    To cut a long story short, only items that never get taxed adjust the total tax charge. Items that only differ as to timing, ie most of them, don’t affect total tax because what you lose/gain on current tax you will usually gain/lose on deferred tax.

    Now there are a few tweaks to this Sometimes you don’t recognise deferred tax because you don’t think you’ll make sufficient profits in the right time or place to get the benefit of them. This increases the ETR. If you get group relief then you can utilise the losses of one group company to reduce the tax bill of another. That other company is effectively utilising losses that were not previously recognised as a deferred tax asset in its own books, so it gets a lower ETR. And so on.

    And, as I observed in my own blog post on his article, the use of EBIT means you don’t capture the tax effect of financial flows. So, as Devereux cautions, you should be wary of reading too much into the ETR figures.

  4. Not sure if people have had the chance to read all the Oxford Report. It says they had access to CT600 Tax Return data. App A.1 is a summary of the entries in a CT600.
    The Oxford p51 shows there are Box entries on the CT600 for “charges and allowances included in the calculation of trading profits/losses”. To me this suggests that the figures of tax paid will have already taken account of capital allowances.
    And on p50 there is a section on Tax reconciliation that includes things like R&D credits.
    But what is probably more relavant to discussions on the Tax Gap is what the Oxford study says on p20. Having noted the limitations on the data they say “Among other things, the lack of any other data makes it impossible to make an assessment of a tax gap”. As they wrote it, maybe they can judge what they do and don’t know?

  5. Early on I tried to follow Murphy’s reports.

    Having been referred to a 5th report of his to get to the bottom of a source for a figure and finding yet another referral to another of his docs I gave up.

    I assume thats what he wants so people don’t figure out the sums are wrong as we see with this article.

    He’s sold his ideals to himself so well he’s overlooking errors in his maths.

    The shame of it is he’s infecting UK uncut followers who see him as a tax guru, providing them with the cure to the cuts andd their ema/fees etc.

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