The National Audit Office has published another dire report, only a day after it completely missed the target with its review of NHS trusts. This time their subject is close to my heart: it is on HMRC and their work to tackle tax evasion.
The trouble with the comments they have to make starts with the opening lines of their press release, which says:
According to a report by the National Audit Office published today, HMRC estimates that losses to tax fraud amount to £16 billion each year. This is nearly half of HMRC's estimate of the tax gap (£34 billion): the difference between the amount of tax HMRC should collect each year and the amount it actually collects.
Today's report is the first in a series of reports which will evaluate how effectively HMRC tackles different aspects of tax fraud, a longstanding problem not only for HMRC but for tax administrations around the world. Reducing the amount of tax that is lost due to tax fraud is a high priority for HMRC. To do this it will need to make better use of its data and develop its analysis.
What is clearly implied by the first sentence is that HMRC's estimate of the extent of tax evasion is being accepted by the NAO. And that's what is most wrong with this report, for two reasons.
First, I think that estimate of the tax gap is wrong, and despite the fact that the NAO know of my work (I have discussed it with them) there is no hint of a reference to it in their work.
That would be forgivable if they had clearly satisfied themselves that HMRC's estimate was fair before considering whether the work done to address the issue was appropriate. Candidly, I do not see how they could do anything vaguely approaching something called an audit without doing this: the first job in any audit process is to establish that the population being considered is fairly stated. But the NAO notes of HMRC's work:
The tax gap is only an estimate, but it is the best data available on the amount of tax lost, including through tax fraud. The losses HMRC attributes to evasion, the hidden economy and criminal attacks have fluctuated from year to year but the overall trend in tax fraud is flat. HMRC estimates that losses from tax fraud accounted for 3.2% of all tax due in 2009-10 and 3.0% in 2013-14.
The NAO should have been on guard straight away: the Bank of England say that the UK shadow economy is 10.3% of GDP. This estimate is so far from the implied HMRC data that the NAO were, surely, duty bound to c0mment? But no, they just say the HMRC figure is the 'best available data'. That's the sort of audit error I would hope not even the Big 4 make.
The concern is, however, compounded when it is noted that:
HMRC has identified over 50 large and strategic risks to the collection of tax. 21 of these risks relate to tax fraud. An example of such a risk is small businesses failing to register for VAT when their turnover exceeds the threshold for registration. Of the 21 risks, 8 relate to organised crime and 9 involve medium-sized, small or micro-businesses. HMRC believes that these businesses are responsible for tax losses of £17 billion, almost half of its estimate of the total tax gap, but it does not consider its internal estimate of how much of this is the result of tax fraud robust enough for publication.
Hang on, the work is so bad they're too embarrassed to publish it but we're meant to accept it?
Then note this:
In 2010, HMRC was set a target to increase the yield from its compliance work by £7 billion by 2014-15. This target included the additional revenue HMRC could generate from tackling tax fraud and all other forms of non-compliance, such as simple error and legal but contrived arrangements to avoid tax by exploiting loopholes in tax law. It reported additional revenue of £26.6 billion in 2014-15, exceeding its target by £0.6 billion. HMRC does not record compliance yield in a way that identifies what proportion of the total yield is derived from all its activities to counter tax fraud.
In other words, as I have long argued, these numbers might as well be said to be made up. That's an opinion the NAO pretty much endorse, saying:
For example it has more complete information on the yield from its work to tackle organised crime than tax evasion. We estimate that between 30% and 40% of compliance yield may be generated by HMRC's activities to tackle tax fraud, based on HMRC's analysis of the compliance yield it can attribute to the largest tax risks. This is a crude estimate based on partial evidence, and we will look for firmer evidence of HMRC's impact.
And this:
HMRC has only partial data on how much of the total yield is derived from its work to counter tax fraud. For example it has more complete information on its work to tackle organised crime than tax evasion. We estimate that between 30% and 40% of total compliance yield is generated by HMRC's activities to tackle tax fraud, but this is an estimate based on partial evidence.
So let's be blunt, HMRC not only use a dire methodology, estimating evasion from tax returns received and not from macro-economic data, meaning that by definition they are bound to understate the scale of tax evasion, but even then the estimates they have made are so bad that they are at best 'partial evidence'. Despite this HMRC management present the tax gap data as fact, as do ministers. I think it fair to say that's as close to misrepresentation of the facts as it now gets.
This report is, when read properly, a damning indictment of the NAO's work and of HMRC's too.
The sooner we have an Office for Tax Responsibility reporting direct to parliament and a minster who is accountable for what HMRC does in the government the better. Because right now it is quite clear that it is way out of control and no one is doing anything about it.
Which leads me to suggest that this may be deliberate: after all, where would the austerity agenda be if I was right and there was ample more tax to be recovered?
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It is clearly an odd thing when the government has a much more detailed understanding of where and how it spends its money, than how much it raises. Deliberate avoidance of unwanted questions is always a good tactic for a government opposed to any form of increased taxation on its corporate sponsors. Independent non-governmental scrutiny of all financial matters is the only way forward.
Another relevant question to also consider, given that this is not exactly quantum mechanics, is the stance of the opposition (or to be accurate the stances of the two factions of the opposition) in Parliament on such matters?
Perhaps I’m going deaf in my old age because as hard as I listen I’m not hearing a great deal, particularly from the Continuity Conservative faction.
I think we can all agree that HMRC needs a much better understanding of how much tax goes unpaid, how much tax changes actually raise and how much reliefs actually cost compared to the pre-implementation estimates, and more post-implementation analysis and review to determine how things work in practice.
There are two estimates of the tax gap – yours and HMRC’S – and however good or bad they may be, it would be good to see some effort put into a more rigorous analysis. A PhD topic for someone, perhaps?
I think it should be government funded
And it needs access to HMRC data
“…this may be deliberate” And by not questioning NAO or HMRC methods,the mainstream media are complicit. Sadly this ever so important work by Richard Murphy and his very reasonable observations will be totally ignored.
You are mainly right
But it does not go wholly unnoticed
Your egotism, Richard, is astonishing. If your methodology and conclusions had any worth, the NAO would surely have followed them up. You are turning into a crank.
I accept your opinion of me: you have the right to think that if you wish
But your conclusion is coloured by prejudice, not reason
And so I do not share it
A succinct and pithy conclusion. It’s not possible to comment on the methodology as this does not appear to have been made explicit. Which is a pity because this detracts from the conclusion to the extent that it is not possible to consider the conclusion to be of any worth.
It would seem reasonable to conjecture that this is due to an overly naive and erroneous reading of how the world works which, likely as not, is based on faith rather than reason.
Hierarchical organisations, of which HMRC and NAO are but two examples, suffer a number of known fundamental weaknesses. One of which is that although the oft stated criteria of what works best is thought to be the key driver the reality is very different. If what works best is the key driver it should not matter from where that comes from. Unfortunately, in hierarchies that notion challenges the very basis of the hierarchy that the boss or the senior management knows best. This presents a choice between being right and being in charge.
Anyone with eyes and more than one working brain cell who has ever worked in a hierarchical organisation knows which of these two scenarios always wins out. A shorthand way of describing this is to be found in the concept of politics. Given that it is difficult to influence this phenomena from the inside influencing it from the outside is doubly difficult particularly when other factors such as group think and organisational ideology are at work.
A typical example of this can be found with the communications regulator OFCOM whose role involves overseeing the UK communications network. Now a reasonable observer would consider the role of this organisation to be to ensure the most effective communications network. But this is not the case. OFCOM, as a hierarchical organisation operating within an environment of hierarchical organisations and a political framework clearly considers it’s role as ensuring the most efficient communications network, for (as the late Terry ratchet often observed)a given, and therefore a political, value of efficient.
Moreover, this stance affects the methodology used to achieve their objectives. There are a number of ways and methods to do this if the criteria is effectiveness and efficacy. However, because the politics gets in the way OFCOM have cut off their choices of methods by pre judging the outcome and deciding there can only ever be one way of doing things, competition. Which has produced some less than effective outcomes. Despite having this pointed out to them over ten years ago OFCOM continue down this road because they are filled with appointees who stick to the currently dominant political discourse and narrative of free market competition being the only way to do anything and everything.
And the same process exists in other similar organisations like HMRC and NAO. Any discourse which strays from the one true way is ignored.
So I’m sorry to have to tell you this harlequin but your conclusion is worthless simply because your view of how the world operates does not match the reality.
Good argument
I like it
I agreed with every word until the last line. I think it is a very bold claim
to say additional tax raised would replace Austerity. It would help, but I don’t think you should give people false hope.