Tuesday, July 18, 2006

Whole Lotta Tax Fraud

Here too

With the alarming increase in VAT fraud, it's time to think about our total losses to fraud and evasion.

HM Revenue and Customs don't publish any estimate of the total loss. They claim that's because it involves the Black Economy and they don't know what they don't know etc. More likely they figure if we found out its true extent we might get the idea that paying taxes is a mug's game.

Still, under pressure from the National Audit office, they have started to publish estimates of some losses:

  • VAT- they reckon their overall loss is running at 13.5% of the theoretical liability, which on current projections implies about £12bn this financial year
  • Tobacco duty- annual loss recently put at £2.9bn from commercial smuggling and "personal" imports
  • Other duties - 4% estimated loss on oil duty, equals £800m, plus 7% estimated loss on spirits, equals £200m, say £1bn pa overall
  • Tax credits- technically "tax expenditure" rather than tax per se, but administered by HMRC and reckoned to be losing up to 10.6% to fraud, equals £1.3bn

That lot alone totals £17.2bn pa. And it takes no account of the recent ballooning in missing trader VAT fraud- add another £3-8bn, equals £20-25bn pa.

But of course those losses cover just a handful of the hundreds of different taxes collected by HMRC: in terms of revenue, we've covered taxes raising just £120bn of the total £424bn they expect to collect this year, less than 30%.

Income Tax, Corporation Tax, National Insurance, CGT, Landfill Tax...you name it, it's been hit by fraudsters and large scale evasion.

It's clearly difficult to get a handle on this, but we know the Black Economy is big and getting bigger. Changes in our economic structure- such the increasing importance of contracting rather than big company employment, illegal immigration, and the growth of ebay etc- are making it much harder for the tax authorities to keep up.

In the US, the Black Economy is estimated to comprise around a tenth of the total, and in our EU partners known as the PIGS (work it out) it's thought to be around a quarter. Here in the UK, a recent estimate published in the Economic Journal put it at 10.6% of GDP, reckoning that among the self-employed:

  • Households whose heads are in blue-collar occupations on average report only 46% of their income
  • Households whose heads are in white-collar occupations on average report only 61% of their income

Which is a pretty stark commentary on our attitude to taxation.

So if 10.6% of the UK economy is underground, we might crudely say 10.6% of taxes are missing: about £50bn pa. Which is one sighting shot.

But there's also the whole business of offshore evasion: we already referred to estimates from Tax Research UK, which suggest the UK might be losing £5-10bn from offshore evasion just by private individuals, let alone companies. So we probably need to increase our £50bn estimate.

An alternative approach is to scale up the estimated losses on VAT etc we do know about. That suggests a total of £65-85bn pa, 5-7% of GDP.

Sounds too high? Well, it's broadly in line with US estimates, which suggest losses of $600bn on a GDP of about £12 trn, 5% of GDP.

So albeit with a broad brush, our guess is that Britain's losses to tax fraud and evasion are currently running in the range £60-80bn pa.

For that kind of money we could abolish Stamp Duty, CGT, and IHT outright, and still have enough left over to cut the standard rate of income tax to 8p.

PS For the avoidance of doubt, of course we want people to pay less tax. But for honest/dumb schmuck citizens like me and Major Frobisher, if there's one thing worse than paying tax, it's finding out that others are breaking the rules and getting away scot free. Having watched that Panorama programme featuring VAT fraudster Riviera Ray, the Major's already talking about visiting B&Q for some more lengths of rope.


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