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Checking the stats behind the tax gap

21st Jun 2019
Gap

Wendy Bradley investigates what the Office for Statistics Regulation had to say about HMRC’s calculation of the tax gap figures.

It is reassuring to learn that, on the whole, the Office for Statistics Regulation gives HMRC's tax gap figures a relatively clean bill of health, but that is definitively not the full story.

As regular readers will know, the calculation of the tax gap – the difference between the amount of tax collected and the amount theoretically collectable – is not without controversy so it is interesting to look at the results of the Office for Statistics Regulation's work with HMRC to validate their figures.

Good in parts

On the whole they seem to be saying the figures are okay, but then they carefully list the elements about which they are not so happy. Is this an unfortunate communication style or a coded message that, yes, there is a problem?

The statistics checker’s letter, published as Compliance Check of Measuring Tax Gaps statistics, includes at point three a polite suggestion that HMRC should take a hard look at "outcomes of the review of its continued use of US Internal Revenue Service research for multipliers". This is the issue I identified last July of extrapolating UK figures using US results when the tax administrations of the two countries are so widely different.

Underlying research

At point five, it is also suggested that HMRC should consider publishing links between its data and resulting research, specifically mentioning the work of the Institute for Fiscal Studies (IFS) and its use of HMRC's datalab.

The IFS report (briefing note BN218) is a much easier read than the statistics authority's, and is a fascinating paper on the results of random and targeted tax investigations (which it refers to as "audits").

It puts forward once again what seems to be an unarguable case that, as random audits are revenue neutral, and targeted audits bring in roughly four times what they cost to carry out, HMRC should be staffed and funded to do a shedload more of the targeted audits.

Worth their weight

I seem to recall the Association of Revenue and Customs Union making this case about ten years ago, and it looks as though the figures haven't changed much.  The only one that has, is the shocking figure (in table 1) that the number of targeted tax audits has declined from about four per cent of the taxpaying population to around one per cent.

It is clear the evidence shows that tax professionals on audit and investigation work pay for themselves. Those tax inspectors bring in a significant multiple of their salaries plus other costs when working on appropriately targeted cases. It is also a fact that the numbers of these tax professionals inside HMRC, and therefore the yield they bring in, has slumped.

To put it in the crudest possible tabloid headline terms; if you fiddle your taxes there's only a one in a hundred chance of getting caught!

Conclusion

The uses of statistics are many and varied. Setting up an authority that regulates and validates them is a good thing and helps you avoid the "lies, damned lies and statistics" accusation. But it's no use to anyone if you have good evidence, clear statistics, an obvious course of action, and yet no one puts the plan into practice!

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By Vaughan Blake1
24th Jun 2019 15:00

I do wonder how much time, effort and £s are wasted measuring the 'tax gap'. It's huge OK, so just get on and carry out more targeted audits since they run at a profit, and stop worrying whether it's £100bn, £200bn or £1,000bn! (I can't be bothered to read the 92 page report issued on 20 June 2019 setting out the 'actual' figures.)

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