Vir Cantium

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The Tax Gap: More Socialist Cobblers?


Haggling: Or, two men doing something immoral over sheep

Occasionally there arises a term – or to use the correct terminology, an ‘agenda’ – that is conceived and grows within a particular professional sector or group of thinkers, and which then finds its way into public policy without the public themselves ever being consulted or made aware of it. Expensive conferences might be held to discuss ‘The xxxxxx Agenda’, and bodies – usually publicly funded – will either be formed or sprout offshoots to study, engage and develop the concepts. Some people will draw good salaries and make a living on the back of such a concept. Invariably, though, such things often result in the same outcome – a more public spending, more government and less freedom.

The ‘Tax Gap’ is one of these; it is being used cynically by many to amalgamate the practices of ‘tax evasion’ (illegal) and ‘tax avoidance’ (legal) into a single definition that attempts to turn anyone who doesn’t pay the maximum possible amount of tax with joy and celebration into a threat to democratic society. Of course, it plays on the prejudice of those who think that tax avoidance is only practised by fat rich people and if only we could just plug the loopholes all would be well, the deficit would disappear and the nation could advance into a new socialist utopia.

HM Revenue and Customs has their definition of the ‘Tax Gap’: it’s the difference between what should be paid per the spirit of the law (according to, in effect, the HMRC manuals) and what is actually paid. There’s that grey area between the letter and spirit of the law, but their view of the ‘spirit’ means that area is pretty small. So we’ll be charitable and say that for Dave Harnett’s gang the answer to the title of this post would be a “no” … but that still doesn’t make it entirely correct.

However, for our purposes today we are more concerned with the less benign twisting of the concept. To be more specific, this is Richard Murphy’s definition of the ‘Tax Gap’:

The tax gap has three parts. The first is tax avoidance, which I estimate to be about £25bn a year. This arises from the exploitation of loopholes in UK tax law and between UK tax law and that of other states – especially tax havens. The second part is tax evasion – that is breaking the law. I estimate this to be £70bn a year. HM Revenue & Customs claims it is much less, but their methodology for estimating anything but VAT evasion is very weak [no weaker than that leading to his inflated figure, but that’s for another post – NR]. Last, there is unpaid and late-paid tax – currently evaluated by HMRC to be at least £26bn **.

That may all seem fair enough, but the trouble is that Mr Murphy’s definition of the ‘spirit of the law’ goes rather beyond HMRC’s into the ever-nebulous area of social justice. This is what brings the term, as employed by Murphy, into the category described in our title. For example:

A massive source of avoidance is artificial self employment – people who set up businesses that, in practice, have just one dominant client and who should really be on the payroll of that client. National insurance and PAYE are lost as a result…

Sure, there are genuine cases of ‘disguised employment’. Yet in this catch-all statement he assumes that someone with a client generating 80% of their turnover, who has given up many of their employment rights (holiday, sickness, etc) and security of employment in return (often) for a higher income is indulging in tax avoidance.

Let’s try another. This is in response to the “Arctic Systems” case, where the income from a company which was largely generated by the husband’s effort and time, was shared between him and his wife on a 50:50 basis (the split of their shares in the company):

[He’s addressing] the way in which the owners of many small limited companies reward themselves and members of their families out of the income that their labour generates for those companies.

… many of these arrangements do constitute tax avoidance because the rewards paid do not much the underlying economic substance of the transactions that are taking place.

People allowing members of their family to share in their income? Horrendous. More to the point, especially in the Arctic case, is the concept of the independent taxation of husband and wife.

When this principle was introduced by the evil Tories back in the dark Eighties, it was known that this would allow sharing of income between the two, and this was accepted. After all, in a marriage who are the Revenue to pick apart the many non-financial ways in which one spouse supports the other, and thus facilitates their role as breadwinner? In other words, who’s to say that a 50:50 split of a business’ capital isn’t reflecting the entire substance – financial and otherwise – of their stake?

Mr. Murphy, though, clearly regards this as tax avoidance. So did the Revenue, to be fair, until the Court of Appeal and House of Lords told them otherwise. Murphy, though, sticks to his Victorian-era guns on this one. I guess life was so much easier for some, pre-1980’s, when a wife was regarded as a chattel of her husband by the tax system.

Moving on, if tax avoidance is essentially defined as seeking to reduce your tax bill (as is your legal right) by using means within the letter but not necessarily the spirit of the law according to the Left, then what would happen if we applied the same logic to other areas of economic activity?

Let’s take a classic situation of a shop. Clearly, shoplifting is illegal and would be analogous to tax evasion. Do it and you could get locked up. Fine, I have no problem with that. Similarly another element of the ‘tax gap’, uncollected debts, transfers easily into our alternative scenario.

However, under Richard Murphy’s reasoning it seems that, say, successfully haggling for a discount which ideally the seller wouldn’t want to give you, or trying out a product in the store then buying cheaper elsewhere would be akin to tax avoidance – not illegal but, in Mr. Murphy’s world, immoral and frankly in the same stable as the thief walking out the door with the overstuffed pockets and no receipt. Signing up for a promotional free period for some service, using said service, but cancelling before the free period expires would also fall within the definition of, shall we say, a ‘Sales Gap’.

Under Mr. Murphy’s logic, you see, you should pay the asking price without a quibble. If you were a bit of a rebel you might buy in bulk for a discount. What you would ideally do, of course, is recommend that others undertake the haggling and other practices above, and then claim that you are only doing so in order to make such things illegal.

Later, you would write a paper for, say, a union representing retail staff, inflating the size of the ‘Sales Gap’ to justify a call for more shop assistants.

And don’t forget you must label those who disagree with you as “autistic” and assume that they are all swivel-eyed anarchists, because it’s easier to argue against such straw men rather than actually engage in respectful debate.

* After my first drafting of this post, Tim has had a go along similar lines and cited two other examples which would comply with both the law and HMRC’s interpretation and thus be defined as tax planning.

** I could suggest that a struggling business being late with it’s taxes, say, is neither avoidance nor evasion (barring the deliberately evasive cases, such as phoenix situation),  but we’ll go with it for now.

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