The coalition's over-optimism on tax avoidance could mean more tax rises or cuts

Ministers have pledged to fund policies like the extension of free school meals and the freeze in fuel duty through extra revenue from reducing avoidance. But HMRC is struggling.

Sometimes it seems that clamping down on tax avoidance is the gift that keeps on giving - because no one really knows the scale of the problem, politicians can be very optimistic about the amount of extra revenue that can be generated. Danny Alexander claimed at this year’s Liberal Democrat conference that a clamp down would provide as much as an extra £10bn a year for the Exchequer by 2015. This is more than rhetoric; the government has been spending some of this additional money already. The commitments in the Autumn Statement to fund policies like the extension of free school meals and the freeze in fuel duty are balanced out by increased tax revenues from reducing avoidance. If those revenues can’t be found, then  the government will have to borrow more, raise taxes or make spending cuts elsewhere.

Today’s Public Accounts Committee report puts the Treasury’s claims on reducing avoidance in perspective. The committee concludes that HMRC "massively over-estimated" how much unpaid tax it would collect from UK holders of Swiss bank accounts. HMRC has only managed to collect £440m so far against an estimate of £3.12bn given in the 2012 Autumn Statement. In the light of these criticisms, it seems sensible to take a step back and interrogate HMRC’s figures.

HMRC makes a calculation of the 'tax gap' every year to guide its work on reducing evasion and avoidance. The gap is the difference between the amount of tax that should, in theory, be collected, set against what actually is being collected. Calculating it is very hard; by definition we don’t know exactly how much evasion or avoidance is going on, but HMRC has developed some analytical techniques by which to do so. 

What would a realistic reduction in this tax gap look like? As the chart below shows, the 'gap', as a percentage of total liabilities, declined from 8.3% in 2005 to 7% in 2012. Since 2008, the reduction has been more modest, falling from 7.6% to 7%.

Chart 1: The tax gap as a percentage of total liabilities

Source: HMRC 2012, ‘Measuring tax gaps 2013 edition: Tax gap estimates for 2011-12’, p.4

What does this mean for the future? As the UK economy begins to grow again, the likely total tax liabilities will increase, so even if HMRC does not reduce the relative size of the tax gap there will be additional revenue for the government to spend. While the size of the gap will continue to decline, it is unlikely that we will see a huge reduction. Between 2010-11 and 2011-12, the tax gap as a percentage of liabilities only came down 0.1%. If things continue at this rate, the gap will be 6.8% of the total estimated tax bill by 2014-15.

So how realistic was Alexander’s claim of "clawing back" £10bn a year to 2015? If we assume that the total tax liabilities will increase 10% per annum until 2014-15 (a very generous assumption) then to reclaim an additional £10bn a year the tax gap would have to fall to 5.2% of the total tax bill. This represents a 34% increase in the effectiveness of HMRC: implausible at the best of times, but doubly so given that HMRC is facing a further 5% cut in its budget over this period.

Chart 2: Actual size of tax gap vs. target tax gap

Source: SMF &HMRC 2012, ‘Measuring tax gaps 2013 edition: Tax gap estimates for 2011-12’, p.4

Perhaps recognising this challenge, George Osborne reduced the target from £10bn per year to £6.8bn in total over the next five years in this year’s Autumn Statement. That’s a massive reduction in ambition and it seems that Osborne expects HMRC to get less effective relative to the current trend in performance. If the current trend was kept up, HMRC would bring in an additional £13.1bn; so the Chancellor appears to now share the Public Accounts Committee’s scepticism, expecting it to do only half as well in closing the tax gap as it has been doing.

Arthur Downing is a Researcher at the Social Market Foundation

George Osborne and Danny Alexander leave the Treasury in London on December 5, 2013, before the Autumn Statement. Photograph: Getty Images.

Arthur Downing is a Researcher at the Social Market Foundation

Photo: Getty
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Emmanuel Macron can win - but so can Marine Le Pen

Macron is the frontrunner, but he remains vulnerable to an upset. 

French presidential candidate Emmanuel Macron is campaigning in the sixth largest French city aka London today. He’s feeling buoyed by polls showing not only that he is consolidating his second place but that the voters who have put him there are increasingly comfortable in their choice

But he’ll also be getting nervous that those same polls show Marine Le Pen increasing her second round performance a little against both him and François Fillon, the troubled centre-right candidate. Her slight increase, coming off the back of riots after the brutal arrest of a 22-year-old black man and Macron’s critical comments about the French empire in Algeria is a reminder of two things: firstly the potential for domestic crisis or terror attack to hand Le Pen a late and decisive advantage.  Secondly that Macron has not been doing politics all that long and the chance of a late implosion on his part cannot be ruled out either.

That many of his voters are former supporters of either Fillon or the Socialist Party “on holiday” means that he is vulnerable should Fillon discover a sense of shame – highly unlikely but not impossible either – and quit in favour of a centre-right candidate not mired in scandal. And if Benoît Hamon does a deal with Jean-Luc Mélenchon – slightly more likely that Fillon developing a sense of shame but still unlikely – then he could be shut out of the second round entirely.

What does that all mean? As far as Britain is concerned, a Macron or Fillon presidency means the same thing: a French government that will not be keen on an easy exit for the UK and one that is considerably less anti-Russian than François Hollande’s. But the real disruption may be in the PR battle as far as who gets the blame if Theresa May muffs Brexit is concerned.

As I’ve written before, the PM doesn’t like to feed the beast as far as the British news cycle and the press is concerned. She hasn’t cultivated many friends in the press and much of the traditional rightwing echo chamber, from the press to big business, is hostile to her. While Labour is led from its leftmost flank, that doesn’t much matter. But if in the blame game for Brexit, May is facing against an attractive, international centrist who shares much of the prejudices of May’s British critics, the hope that the blame for a bad deal will be placed solely on the shoulders of the EU27 may turn out to be a thin hope indeed.

Implausible? Don’t forget that people already think that Germany is led by a tough operator who gets what she wants, and think less of David Cameron for being regularly outmanoeuvered by her – at least, that’s how they see it. Don’t rule out difficulties for May if she is seen to be victim to the same thing from a resurgent France.

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.