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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What does it mean for Ukip if it loses in Stoke-on-Trent Central?

The party’s prospects are in question if it fails to win over the “Brexit capital” in Thursday's by-election.

“The Only Way Is Up!” blasted through a hall in Stoke-on-Trent Central on a damp Monday evening earlier this month. It was the end of a public Ukip meeting, in which Nigel Farage and his successor and by-election candidate Paul Nuttall made their rallying cries to an audience of around 650 supporters.

But even then, a fortnight ago, the note of triumph in the dance classic was tinged with uncertainty. “We’ve won the war, but we’ve yet to win the peace,” Farage admitted to the sympathetic crowd. And while this message is supposed to make Ukip’s fight relevant even in the context of Brexit-bound Britain, it betrays the party’s problem: the battle that was its raison d'être is over.

Failing fortunes

Since then, the party has had more to contend with. Its candidate in the Labour seat has been caught lying about having “close personal friends” killed at the Hillsborough disaster. This comes on top of a number of other false claims, and an investigation into whether he falsely registered his home address as being in the constituency.

After these scandals – and a campaign seemingly unable to turn out apathetic voters (which I covered a couple of weeks ago) – Ukip’s chances in the West Midlands seat look worse than expected.

Initially the main challenger to Labour, Ukip is now being predicted for third or even fourth place in the seat, behind a Tory party that essentially stood aside to give Nuttall room, and to focus on a concurrent by-election campaign in Copeland.

It’s in Labour’s interest for the campaign to continue looking like a close Labour-Ukip fight, in order to keep hold of tactical voters. But both the Conservative and Lib Dem campaigns are feeling more buoyant.

“We are relatively confident that Ukip are not going to win, and that is quite a change,” the Lib Dem campaign coordinator Ed Fordham told me. “That has actually relieved lots of voters of the emotional risk of letting in what they perceive to be an unpleasant, far-right option . . . and voting for who they would like to represent them.”

One local activist chirped: “It will hopefully be a terrible result for Ukip.”

So what will it mean for Ukip if it loses?

Great expectations

Ukip has a lot riding on this seat. Farage called the by-election “absolutely fundamental” to Ukip’s future. Its new leader, Nuttall, took the risk of running as the party’s candidate there – riding his reputation on the by-election.

This created a lot of hype about Ukip’s chances, which the party has privately been trying to play down ever since. Even before the scandal surrounding Nuttall, he was emphasising that the seat had only been Ukip’s 72nd target, and told me he had taken a gamble by running for it. “The way it’s being written up as if this is the one – it wasn’t,” he insisted.

But Stoke-on-Trent, where 69 per cent voted Leave, has been labelled the “Brexit capital”. According to political scientist Rob Ford, the author of Revolt on the Right who has been studying Labour’s most Ukip-vulnerable seats: “It should be a pretty favourable seat for them, pretty favourable demographics, pretty favourable [negative] attitudes about the EU, very high Brexit vote there and so on.”

In other words, if Ukip can’t win here, against a weak Labour party, where can it win?

Struggle for seats

Brexit is central to Ukip’s by-election campaign. The party has highlighted Labour’s splits over Europe, pointed out the Labour candidate Gareth Snell’s Remainer credentials, and warned that the government needs to be held to account when negotiating Britain’s exit.

But Ford believes this rhetoric is unlikely to work, since the Tories are already pursuing a “hard” Brexit focused on immigration control. “A difficulty for Paul Nuttall and Ukip is that people are going to say: why would we vote for you when we’re getting what we want from the government? What’s the point right now?” he said. “I can have all the Brexity stuff, all the immigration control stuff, but with none of the incompetence and serial lying about Hillsborough – I think I’ll take that!”

So if rerunning the EU referendum doesn’t work, even in such a Brexit-heavy seat, this means trouble for Ukip elsewhere in the country. A Ukip councillor in a top Ukip target seat with similar demographics to Stoke believes it’s “crisis time” for the party.

“It is very sad to say, but Ukip has lost its way,” they told me. “It’s still a strong party, but after losing Nigel, it’s lost a little of its oomph. The new gentleman [Nuttall] has been silly with the comments he’s made. That’s a big worry in some regards. You need to be a people person. It’s a serious situation at the minute.”

If Ukip can’t prove it can win parliamentary seats – even in favourable by-elections – then it will be difficult to prove its authority as a political party come the general election.

Leadership lament

Should Nuttall lose, Ukip’s leadership will come into question. Again. During a tumultuous time late last year, when the favourite Steven Woolfe left the party after a physical altercation, and Diane James quit the leadership after 18 days, commentators asked if Ukip was anything without Farage.

When Nuttall eventually took over, the same voices warned of his threat to Labour – citing his northern and working-class roots. It’s likely this narrative will change, and Farage’s golden touch pondered again, if Nuttall fails to win.

But rather than panic about its national leader, Ukip must look carefully at those who commit to the party in local campaigns. On the ground in Stoke, running Nuttall as a candidate instead of a local Ukipper is seen as a mistake.

“I don’t know why they did that,” one local activist for an opposing party commented. “If they’d run Mick Harold, they would’ve won. He’s a Stokie.”

Harold, the deputy chair of Staffordshire County Committee, and chair of Ukip’s Stoke-on-Trent Central/North branch, won 22.7 per cent of the vote for Ukip in the constituency in 2015. He insists that he stands by his decision to step aside for Nuttall, but does highlight that Ukip should increase its vote share.

“If we’re increasing our percentage share of the vote, we’re still moving forward and that’s how we’ve got to look at it,” he told me. “I got 22.7 per cent in 2015. I would think this time we’re going to certainly get somewhere around the 30 per cent mark.”

Would it have been more likely to achieve this with Harold as candidate? “Whatever happens, happens, we’ve just got to move forward,” he replied. “If you’ve made a mistake, you move on from it.”

I have heard similar misgivings from local activists in other parts of the country – people who have achieved impressive results in local elections and the general election, but haven’t had much thanks from the national party. “We need to get professionalised now,” one such campaigner said. “Because we’ve got grassroots people who are not career politicians [doing all the hard work].” They say their local party is fed up with leadership being dictated by “personal grudges” at the top of the party.

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As I’ve written before, I don’t think this is the end of Ukip. Once Brexit starts to bite, and it’s clear immigrants are still needed to fill jobs, there will be resentment enough to make space for them again. But losing Stoke will highlight the challenges – of purpose, leadership and local organisation – that the party will need to overcome for its next stand.

Anoosh Chakelian is senior writer at the New Statesman.