Why it is time to Close the Tax Gap
We should all pay our fair share of taxes. In an age of austerity and spending cuts, tax avoidance is morally unacceptable: It effectively amounts to robbing from the poor.
What is the problem?
- The gap between rich and poor continues to widen. The UK is more unequal than at any time for at least the last 50 years. The UK generates great wealth, but distributes it unequally. This is not just or sustainable.
- Inequality makes things even worse for everyone – not just for the poorest. There comes a point at which the gap between rich and poor is so great that society starts to be run for the benefit of the rich and not for the common good. This gap is not an act of God. It can be traced to specific policies which can be challenged and changed. One aspect of this is the Tax Gap.
- The Tax Gap is officially defined as the difference between the amount of tax actually collected and the tax that should be collected, if all individuals and companies complied with Parliament’s intention in setting tax law (‘the spirit of the law’).
- According to the Government’s own official estimates, the UK Tax Gap stands at £35 billion a year (Measuring Tax Gaps 2011, HMRC, 2011). Others estimate the figure to be much higher.
- Corporate tax avoidance, mainly by big business, is estimated to be costing the tax-payer anything between £25 and 100 billion per annum. To put this amount into context, the current Government is seeking to cut public spending by an average of £30 billion per annum over the lifetime of the current parliament.
- The Churches’ task is to enable all people to enjoy life in all its fullness, to speak out and challenge unjust structures and practices which deny people this God-given opportunity. Tax avoidance is one such practice.
What is tax avoidance?
Tax avoidance is the process of getting round taxation law without actually breaking it.
A report prepared by tax specialist Richard Murphy for the TUC in 2008 (The Missing Billions: The UK Tax Gap) revealed that the amount of tax lost to avoidance and planning is a number bigger than most might ever imagine. It estimated that £25 billion annually is lost to tax avoidance. This is made up of £13 billion p.a. from tax avoidance by individuals, and £12 billion p.a. from the 700 largest corporations.
Estimating these figures involved an original detailed analysis of several sets of Government data and further analysis of 344 sets of accounts published by the UK’s 50 largest companies covering a seven-year period.
The result of this is that the UK tax system is not nearly as progressive as Parliament intended and as social justice requires.
Individual tax avoidance
If you are wealthy enough, apparently, other rules apply. With the right accountant, paying taxes (or not paying taxes) is a matter of choice. And for some, paying tax is to be avoided at all costs.
Top Premiership footballers, like Wayne Rooney and Gareth Barry, avoid millions of pounds in tax - and it's all legal. They are able to use complex tax avoidance schemes based on their ‘image rights’ that allow them to pay as little as two per cent on the earnings. According to press reports, Rooney has saved almost £600,000 over the past two years by using the tax loophole.
In the case of individuals, tax avoidance usually takes the following forms:
- shifting income from the person who should really pay tax to someone else;
- moving transactions out of the UK
- changing the nature of transactions, in particular so that income is subject to Capital Gains Tax rather than income tax
- abusing the law on limited companies.
Corporate tax avoidance
But it's big business who are the really big tax dodgers. Companies have more opportunity than individuals to avoid and plan for tax. This is, in particular, because they operate internationally, opening avenues for tax planning and avoidance between territories that no individual can exploit. This is why the rate of tax lost to corporate tax planning and avoidance is found to be greater as a proportion of tax actually paid than that for individuals.
Have you ever bought CDs or DVDs online from the likes of Tesco and Amazon and wondered why they have been shipped from Jersey? A straightforward tax avoidance scheme, helpfully described on Tesco’s own website, to avoid paying VAT. The cost to the Treasury? £140 million a year.
The Missing Billions report showed that:
- The 50 largest companies almost always pay 5% less tax on average than they declare in their accounts.
- The average tax rate paid by these companies fell by more than 0.5% a year over a seven-year period to 2006, even though the UK tax rate for these companies was constant throughout that time. As a result, the de facto corporation tax rate for UK companies in 2006 was 22.5%, when the actual rate agreed by Parliament was 30%.
- If this de facto tax rate was the official tax rate, it would place the UK 16th in a table of corporation tax rates for the EU, with France the highest and Malta the lowest. It would also mean that the UK had the lowest corporation tax rate of the Western European economies, with the exception of Ireland.
- By the end of 2006, the cumulative tax savings recorded in the accounts of the 50 largest companies were £47 billion; this actually exceeded the total tax paid by all companies in 2006 by some £2 billion.
98 of the UK’s top 100 largest corporations operate subsidiary companies in ‘offshore’ tax havens, potentially allowing the companies and their clients to avoid huge sums in tax.
Putting the numbers in context
When trying to understand the importance of tax avoidance, it is worth considering the impact of the loss of tax income on the Government’s ability to fund socially desirable activity in the UK.
- A third of the amount lost to tax avoidance by the UK’s 700 largest corporations could increase the child tax credit by enough to halve child poverty in the UK.
- Just under half of the total amount lost to tax avoidance would pay for a 20% increase in the state pension, or could reduce the basic rate of income tax by 3p in the pound, or could build an extra 50 hospitals.
Condoning tax avoidance?
On 30 June, the UK Treasury unveiled new proposals on tax avoidance, which will effectively hand out millions of pounds every year to multinational businesses.
Hidden under the bland title of ‘proposals on Controlled Foreign Companies’, the plans amount to a big relaxation of anti-tax avoidance rules. Advocates of the policies say that it will increase the UK’s ‘business competitiveness,’ but what it actually offers is big incentives for companies to shift their financial operations ‘offshore’ – to tax havens such as Jersey, Guernsey or the Cayman Islands – as a means of avoiding paying UK taxes. Even on the Treasury’s own estimates, this will cost £840 million in lost taxes a year.
What we are calling for: Fair Taxes
We can tackle the tax gap by pressing for a tax system in which businesses and individuals pay their fair share. Tackling widespread tax avoidance will reduce the need for further damaging cuts in public spending.
This can be achieved through a combination of improved transparency and stronger anti-avoidance measures:
- The European Union and the International Accounting Standards Board (IASB) should introduce country-by-country reporting: one of the main targets of Christian Aid’s current Trace the Tax campaign.
- There should be stronger International Tax Information Exchange Agreements covering tax havens.
- There needs to be increased pressure on the accountancy profession to improve professional conduct on tax.
Stronger anti-avoidance measures
- The UK Government should legislate to introduce general anti-tax-avoidance principles.
- There must be increased resources for HM Revenue and Customs to tackle large-scale corporate tax avoidance.
- There must be pressure by the UK Government to reform UK-linked tax havens (including Jersey, Guernsey, Bermuda, the Cayman Islands and the Isle of Man).
Methodist Church: Tax avoidance impoverishesthe vulnerable and is morally unacceptable
In July, the Methodist Church called on the UK government and multinational businesses to end tax avoidance schemes which impoverish the vulnerable. It claimed that as public services are being cut, the injustice of tax avoidance is becoming more acute.
‘Having a team of expensive lawyers doesn’t absolve you of the moral responsibility to pay a fair level of tax. Taxation shouldn’t be a game of strategy where you win by paying the least. Paying tax is a moral obligation – it is unacceptable to engage in complex financial arrangements in order to wriggle out of paying your fair share.’
Paul Morrision, Methodist Church Public Issues Policy Advisor