Alternatives: Close the £120bn Tax Gap

This post is another in our series exploring the alternatives to the cuts and austerity agenda of the ConDem coalition. In this post I will look at the tax gap, which costs the treasury an estimated £120bn every year, and what we can do to close this gap.

My expert witness for this is Richard Murphy of Tax Research UK. His Tax Justice Manifesto (PDF) outlines the scale of the problem and some ways in which this problem could be dealt with.

The tax gap comprises of three parts – tax avoidance (£25bn), tax evasion (£70bn) and uncollected tax (£25bn).

Tax avoidance is legal. It is defined as a scheme that has been setup purely for the purposes of shifting profit from one country to another, in order to pay lower rates of tax.

Tax evasion is illegal. This includes tax fraud, undeclared earnings and the purchase of smuggled tobacco or alcohol amongst other things.

Uncollected Tax is tax that has not been collected due to error or inefficiency on the part of HMRC.

UK Uncut activists in Birmingham protest at Vodafone's £6bn tax dodge

Of the three, it is tax avoidance that has come under the most scrutiny, thanks to the actions of UK Uncut, who have taken direct action by occupying high street stores around the UK to highlight the tax dodging of multinational corporations and wealthy individuals such as Vodafone and Philip Green.
Vodafone’s tax avoidance scheme is simple. When Vodafone UK purchased Mannesman (a German mobile network), it did so through a Luxembourg subsidiary. The effect of this is that profit that should be declared in the UK is in fact declared in Luxembourg. HMRC said that this was not a legal scheme, but instead of pursuing Vodafone for the full amount (£6bn according to Private Eye), they settled for just £1.2bn, thus allowing Vodafone to cheat nearly £5bn out of the UK taxpayer (the scheme ran for around 8 years).
Philip Green is one of the richest men in Britain. He runs the Arcadia group which owns high street names including Topshop/Topman, BHS, Dorothy Perkins, Miss Selfridge and Burtons. In 2005, having transferred ownership of the company to his wife, who lives in Monaco, Philip generously paid her a £1.2bn dividend, thus avoiding paying £285m in income tax. Mrs Green has never done a minutes work for the company that Philip runs. Had this been a small company, HMRC would look at prosecutions for revenue splitting, but not in this case.Just to make it clear what this means, Birmingham City Council is cutting £212m from its budget this year, at the cost of around 7,000 jobs, pay cuts for tens of thousands of workers and the closure of many services which support vulnerable people in this city. In just one year, Philip Green avoided more than that. Had he paid the tax, he would still have earnt around £900,000,000 that year.

Overall the level of tax avoidance, at around £25bn, could replace a years worth of cuts. In practice of course it would not be possible to get all of this money back (not least because you’d have to spend some money with HMRC to do so), but we could look at a net increase in income of at least £10bn if we genuinely sought to close the tax loopholes that allow this avoidance to occur.
Combined with increased money to tackle tax evasion, and to eliminate errors to reclaim that £25bn of tax that goes uncollected each year, we could seriously reduce the need for cuts to our services. The impact on the economy of effective tax rises would be less than that of spending cuts, and those people who rely on services would not see them disappear.

So, what is our government doing? They are cutting HMRCs budget. So much for that then.

You can find out more about the alternatives to the cuts by looking through our posts on the subject, or on the False Economy website.