The claim
“HMRC strongly disputes the conclusions in the Public Accounts Committee report and challenges the Committee’s selective and misleading use of figures.”
Her Majesty’s Revenue & Customs (HMRC), 19 December 2013
The background
They are usually a pretty stoic lot, but the taxmen sprang to life when FactCheck put in a call to HMRC’s HQ on Thursday morning.
They were outraged by the Public Affairs Committee (PAC)’s report on their tax collecting skills – and by the resulting headlines: “UK has lost its nerve on tackling tax avoidance, say MPs”, said The Guardian. The Times struck the same chord with “Taxman losing nerve to tackle multinationals”.
But HMRC has hit back, arguing that the PAC cherry picked their figures and used them misleadingly.
Have they got a point — and if so, which figures went amiss? FactCheck dons its grey suit.
The analysis
There were two figures put out by the PAC which were set upon. Firstly, that in real terms, tax revenues fell last year. And secondly, that the missing tax payments have risen by £1bn to £35bn.
In 2012-13 HMRC reported a record £475.6bn of revenues – up £1.4bn or 0.3 per cent in cash terms compared to the previous year.
But after adjusting this for inflation, the PAC said: “Tax revenue therefore fell in real terms in 2012/13 compared to 2011/12)”.
This is true – but it’s a bit of a pointless point.
It doesn’t prove HMRC failed to collect the amount of tax it should have done. The amount of tax collected can go up and down according to how well the economy’s doing.
Then there’s the issue of the tax gap – the gap between the tax collected and that which should be collected.
Rather like counting crime, it’s an incredibly difficult figure to measure. The PAC said HMRC’s “measure of the tax gap does not capture all the avoided tax that it should be collecting”.
But to be fair to HMRC, there’s no standard methodology for measuring the tax gap and HMRC’s way has been endorsed by the International Monetary Fund (IMF).
The PAC’s chairwoman, Labour MP Margaret Hodge, said: “The tax gap as defined by HMRC did not shrink, but in 2011/12 grew to £35bn.”
The gap for 2012/13 was £35bn, up £1bn on the previous year. But she did not mention that it was 7 per cent of total tax liabilities. By that measure, the tax gap has actually been closing, rather than growing.
In 2005-06 it was 8.3 per cent – and apart from a 0.1 per cent rise in 2007-08, it has steadily declined to 7 per cent last year.
Ms Hodge also said HMRC’s measure “does not capture all the tax government should be collecting. For instance, this figure does not include all the tax revenue lost to aggressive tax avoidance schemes.”
But a spokesman for HMRC told FactCheck: “Contrary to what the PAC report says, the published tax gap does include a measure of the tax lost from avoidance, as well as evasion, but it can only measure non-compliance with existing tax law – it cannot estimate how much tax might be due if tax laws were different.”
He also pointed out that since 2010 HMRC has collected £50bn of additional tax through its compliance work, including £23bn from large businesses.
That said, the PAC was right about one thing: the HMRC did “massively” over-estimate how much money it could collect from UK holders of Swiss bank accounts.
In autumn 2012, George Osborne said that an agreement with Swiss tax authorities – to get hold of unpaid UK tax stashed secretly in offshore accounts -would bring as much as £5.3bn over six years.
In this year’s Autumn Statement that figure was revised down to just £1.9bn.
The verdict
Using figures against the taxman? You’d think MPs might have a bit more nous.
Whatever their complaints about the HMRC’s service to taxpayers, FactCheck has to agree with the taxman that their use of figures was misleading.
HMRC collected record tax revenues last year — the MPs didn’t mention that. Instead, they adjusted the figures for inflation to show a drop on the previous year.
But that doesn’t prove that HMRC failed to crack down on tax dodgers.
Nor is this point proved by the tax gap figures themselves.
MPs quoted the headline tax gap figure of £35bn – without mentioning that the gap as a percentage of total tax liabilities has been steadily closing since 2005.
It has gone from 8.3 per cent to 7 per cent in 2012-13.
MPs also criticised the measure of the tax gap — but to be fair to HMRC, it’s endorsed by the IMF.
They were however, right about the HMRC’s embarrassing failure to collect from UK holders of Swiss bank accounts. They rightly pointed out that this year HMRC has collected just £440m of the £3.12bn predicted in the 2012 Autumn Statement.
That’s one figure that even the taxman can’t hide from.
By Emma Thelwell
