Ritchie\’s tax gap estimations. Just how wrong are they?
As we know, he\’s said that £12 billion is avoided by companies playing dodgy games.
He measures this by looking at the headline rate of tax, subtracting the tax rate actually paid and calls the difference the tax gap.
As I\’ve been saying for some years now, this has a fault in it. That it does not take account of the allowances that Parliament deliberately puts into the tax code to get companies to do what Parliament wants companies to do.
Clearly, one of these is the R&D tax credit. Which, in2010-11 was, according to HMRC, a tax expenditure of £860 million. So there\’s 7% of the tax gap in just that one allowance. For absolutely no one is going to say that using the R&D allowance as the R&D allowance is in fact tax avoidance.
There are other allowances of course. And this is where I need the help, not being expert in these figures. An obvious allowance is capital allowances.
The cost of capital allowances in 2009-10 was £19 billion (of which the annual investment allowance accounted for £1.5 billion.)
Now what does that actually mean? That capital allowances against corporation tax were £19 billion, meaning that we\’ve no tax gap at all as against Ritchie\’s £12 billion?
Or is only that £1.5 billion from corporation tax? Or some other number entirely, somewhere in the middle?
The real question being, we know there are allowances which reduce Ritchie\’s estimation. For his method of estimation did not include such allowances. But how big is that allowances number and thus how small is the tax gap?