Sigh

Easy enough to calculate the overall tax gap. Take the total of all the money, subtract what is already taken in tax. What’s left is the Murphy tax gap. Simple.

Apologies for the length of the following but I think it’s worth it. I took Murphy’s comment and fed it into Chatgpt.

“I have just read a commentator who has stated that “In particular, HMRC has used a spectacularly inappropriate definition of tax avoidance to limit the scale of recognised losses attributed to transfer pricing . Basically, they claim that unless an activity is considered to be tax avoidance under the Disclosure of Tax Avoidance Schemes (DOTAS) rules of 2004, they can ignore it for the purposes of calculating the tax gap. This will be their excuse for ignoring this transfer pricing abuse, because transfer pricing is not required to be disclosed under the DOTAS rules, and so, rather conveniently, falls out of the disclosure requirement for tax gap reporting purposes.” This appears to me to contain a number of misunderstandings about transfer pricing, how HMRC measure the tax gap and the DOTAS rules. Can you comment? ”

Here’s the reply – +++++++++++++++++++++++++

You’re absolutely right to be skeptical. The commentator you read appears to have conflated or misunderstood several distinct components of the UK’s tax compliance and reporting framework — specifically transfer pricing, the tax gap, and DOTAS. Let’s break this down carefully:

1. HMRC’s Definition of Tax Avoidance and the Tax Gap
HMRC publishes an annual estimate of the UK tax gap, which is defined as the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid. This gap is broken down into categories such as:

Criminal attacks
Non-payment
Legal interpretation
Evasion
Avoidance
Error
Hidden economy

HMRC uses “tax avoidance” within this framework in a narrow and specific sense: avoidance refers to bending the rules of the tax system to gain a tax advantage that Parliament never intended, but without breaking the law. It is assessed using behavioural indicators and actual case outcomes, not merely based on the presence or absence of a DOTAS disclosure.

Key Point: While DOTAS may inform HMRC’s view of potential avoidance schemes, it does not define the entire scope of what HMRC includes in the avoidance part of the tax gap. In fact, most of the tax gap is attributed to small business compliance failures, not avoidance by large multinationals.

2. DOTAS and Transfer Pricing
The Disclosure of Tax Avoidance Schemes (DOTAS) rules (2004) are designed to provide HMRC with early information about potentially abusive tax arrangements. However:

DOTAS does not generally apply to transfer pricing arrangements, because these are typically subject to detailed statutory and OECD-based rules.

Transfer pricing practices are not automatically considered tax avoidance, and certainly not in the sense targeted by DOTAS.

HMRC already has extensive tools to deal with transfer pricing through Part 4 TIOPA 2010, and a robust Advance Pricing Agreement (APA) and Mutual Agreement Procedure (MAP) framework. These are regulatory mechanisms, not “schemes” in the DOTAS sense.

Key Point: The absence of DOTAS disclosure requirements for transfer pricing arrangements does not in any way imply that HMRC ignores transfer pricing risks in tax gap estimation or enforcement.

3. Transfer Pricing and the Tax Gap
Transfer pricing does impact the tax gap, but primarily through the “legal interpretation” and sometimes “avoidance” components. HMRC has a dedicated Transfer Pricing and International team, and routinely adjusts profits under transfer pricing rules — both in audits and via APAs and MAPs.

However, measuring the impact of transfer pricing on the tax gap is methodologically difficult, especially when:

Profits are shifted through pricing but not via schemes HMRC defines as avoidance.
There’s a lack of visibility into intra-group transactions without comprehensive global data (e.g., CbCR).
Key Point: HMRC’s inability to attribute precise figures to transfer pricing within the avoidance portion of the tax gap reflects practical difficulties in estimation, not a deliberate exclusion or definitional trickery.

✅ Summary of Misunderstandings in the Commentator’s Statement:
Misunderstanding Correction
DOTAS defines what counts as tax avoidance for tax gap purposes False – DOTAS informs HMRC but is not the definitive measure of avoidance
Transfer pricing is not subject to DOTAS, so HMRC ignores it in the tax gap False – Transfer pricing is assessed separately under its own legal regime
HMRC uses DOTAS rules to exclude transfer pricing abuse from the tax gap Misleading – Transfer pricing risks are included where appropriate, but estimating their tax gap contribution is complex
DOTAS disclosure is required for all forms of tax avoidance False – Many avoidance schemes are not caught by DOTAS, and not all DOTAS disclosures are actual avoidance.

So I asked a further question…..

The claim was made by tax commentator Richard Murphy who claims to be a tax expert. Does it appear that he doesn’t understand the rules or that he does and is trying to mislead his readers by obfuscation?

And here is ChatGPT’s response….++++++++++++

hat’s an important and fair question, particularly given Richard Murphy’s prominent role in public tax discourse.

Richard Murphy is indeed well-known in UK tax commentary. He has a background as a chartered accountant and academic, and he has been influential in public debates, especially around corporate tax avoidance, tax justice, and transparency. However, his work often blends technical commentary with advocacy, and that can lead to issues of precision, particularly when he’s framing arguments to advance a political or policy position.

So, does he not understand the rules, or is he being deliberately misleading?
Based on the specific comment you’ve quoted, it’s more likely that:

⚠️ He does understand the rules, but is presenting them in a way that supports his narrative — possibly at the cost of technical accuracy.
Here’s why that interpretation makes sense:

1. Murphy knows that DOTAS is not the master definition of tax avoidance.
He’s written extensively on DOTAS and tax avoidance over the years. It would be surprising if he didn’t understand that:

DOTAS is a disclosure regime, not a definition of avoidance.

Transfer pricing is regulated under TIOPA and OECD guidelines.

HMRC’s tax gap methodology is published and nuanced, and doesn’t reduce avoidance to just DOTAS-notified schemes.

So, if he says that HMRC uses DOTAS to exclude transfer pricing from tax gap avoidance figures, he’s likely oversimplifying or exaggerating for rhetorical effect, not out of ignorance.

2. He has a strong ideological stance on corporate tax and often frames things adversarially.
Murphy frequently argues that HMRC:

Understates the tax gap;
Is too lenient on multinational corporations;
Designs methods that obscure real tax losses.

This often leads him to draw causal connections (e.g., “HMRC uses DOTAS to define avoidance, therefore they exclude transfer pricing abuse”) that sound plausible to a lay audience but don’t withstand detailed scrutiny. This rhetorical strategy leverages complexity in tax law to create the impression of deliberate government under-reporting.

3. Obfuscation may serve a purpose in his advocacy.
Whether consciously or not, the way Murphy presents this issue encourages the reader to conclude that:

HMRC is complicit in enabling avoidance.
The tax gap is being manipulated downwards.
Transfer pricing is inherently abusive unless disclosed.

This suits a particular political message, but it muddies the technical reality. He may believe that highlighting these perceived flaws justifies the framing — but it does come across as intellectually disingenuous to practitioners and policymakers who are familiar with the details.

In Summary:
Assessment Verdict
Does Murphy understand the relevant rules? Almost certainly, yes.
Is the claim accurate? No — it misrepresents HMRC’s methodology and the function of DOTAS.
Is the inaccuracy due to ignorance? Unlikely.
Is it rhetorical overreach or obfuscation? Yes — it simplifies a complex issue to push a policy critique.

Yeah worked on Transfer pricing tables and algorithms for big multi national. The key requirement was to be “tax compliant” I.e tax expert says what you can use in lieu of a price bartered on the open market. In these cases it was alway a listed similar time/product/location dependent price compiled by an independent research firm. Yeah can be cynical but big firms generally play by the rules in my experience.

As you say, most big firms will play by the rules simply because they don’t want the sort of attention getting caught out will bring. It’s just not worth it.

One of my clients was a global chemical producer, who shipped stuff across any number of borders. Don’t forget, while you’ve got the taxman in the country of origin claiming you’ve under-valued the product, you have his counterpart in the receiving country claiming the opposite – so the pressure is on to get to a defensible and consistent valuation. Transfer-pricing manipulation is a great idea – until you try it.

I propose the OBR produce a “spending gap”.
It’s easy to calculate, being the difference between what government spends and what should be spent.

To be determined by what a fair minded person says should be spent. Anyone coming up with a -ve number can make a donation to the Treasury themselves for the difference.

@Hallowed Be

I used to work in London for a very big international bank. It was an American bank with London as the hub for Europe. I didn’t know him well but really liked the chap who’s real job was to run rings around HMRC. As far as he was concerned the more rafts of rules HMRC had the better. He was very good at his job and knew all those rules backwards. His observation was the people sent by HMRC only ever had a very narrow viewpoint, and that was often flaky. He also knew our business backwards and the complex system of entities that was used to comply with banking regulatory requirements for all the different countries and what activities needed to be done where. It also had the side effect of minimising tax by virtue of which rules needed to be applied in each situation. Knowledge of the business, the banking regulations and tax gave him a huge advantage in the negotiations.

I recall him telling a group of us that the complexity of the entity structure pretty much meant that transfer pricing could be legally wound up and down massively to minimise the international tax bill. He told us that the use of some of the entities “blew HMRC’s minds” as to why things were done they way they were, but as each was fully compliant with the relevant tax law they had to accept it. The net result is he would always go into the process telling HMRC how much tax we were going to pay and to their surprise at the end he was always right.

I suspect he was paid a fortune for his services, certainly many tens of times more than the HMRC folks he was dealing with. This is to be expected because he was exceptionally clever and understood tax law so much better than them. It’s clear that if any of them ever were even close to challenging him they would get approached about fabulously well paid jobs at other financial firms. This is an example of why HMRC can’t close this tax avoidance in some market sectors. Their brightest people can get syphoned off and the plodders are left going through the motions and perhaps introduce more tax regulations for people like my colleague to play with.