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

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The Manchester attack will define this election: Broadcasters have a careful line to tread

It's right that the government should be given a chance to respond, but they must not be allowed to use it to campaign.

Every election campaign has its story, its place in the political history of this country. 2017 will forever be known for Manchester and the horror of the attack on Britain's young; and fighting terrorism will be a theme, overt or underlying, of what we see and hear between now and polling day.

The broadcasters have covered the events comprehensively yet sensitively. But they are aware that we're in an election campaign too; and when other news drives aside the carefully-balanced campaign formats, ministerial appearances give them a dilemma.

The fact is that what the Prime Minister and Home Secretary are doing in response to Manchester is newsworthy. It was Theresa May's duty to implement the recommendations of her security advisers on the elevation of the terror alert, and it would have been unthinkable for the news channels not to broadcast her various statements.

But it is also true that, if the bomb hadn't been detonated, Tuesday would have been a day in which the PM would have been under relentless damaging scrutiny for her u-turn on social care. All the opposition parties would have been in full cry across the airwaves. Yet in the tragic circumstances we found ourselves, nobody could argue that Downing Street appearances on the terror attack should prompt equal airtime for everyone from Labour to Plaid Cymru.

There are precedents for ministers needing to step out of their party roles during a campaign, and not be counted against the stopwatch balance of coverage. Irish terrorism was a factor in previous elections and the PM or Northern Ireland secretary were able to speak on behalf of the UK government. It applied to the foot and mouth epidemic that was occupying ministers' time in 2001. Prime ministers have gone to foreign meetings before, too. Mrs Thatcher went to an economic summit in photogenic Venice with her soulmate Ronald Reagan three days before the 1987 election, to the irritation of Neil Kinnock.

There are plenty of critics who will be vigilant about any quest for party advantage in the way that Theresa May and Amber Rudd now make their TV and radio appearances; and it’s inevitable that a party arguing that it offers strength and stability will not object to being judged against these criteria in extreme and distressing times.

So it's necessary for both broadcasters and politicians to be careful, and there are some fine judgements to be made. For instance, it was completely justifiable to interview Amber Rudd about the latest information from Manchester and her annoyance with American intelligence leaks. I was less comfortable with her being asked in the same interview about the Prevent strategy, and with her response that actions would follow "after June", which edges into party territory and would be a legitimate area to seek an opposition response.

When the campaigning resumes, these challenges become even greater. Deciding when the Prime Minister is speaking for the government and nation, or when she is leader of the Conservative Party, will never be black and white. But I would expect to see the broadcast bulletins trying to draw clearer lines about what is a political report and what is the latest from Manchester or from G7. They must also resist any efforts to time ministerial pronouncements with what's convenient for the party strategists' campaign grid.

There might also usefully be more effort to report straight what the parties are saying in the final days, with less spin and tactical analysis from the correspondents. The narrative of this election has been changed by tragedy, and the best response is to let the politicians and the public engage as directly as possible in deciding what direction the nation should now take.

Roger Mosey is the Master of Selwyn College, Cambridge. He was formerly editorial director and the director of London 2012 at the BBC.

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