Would publishing corporate tax returns close a £36 billion tax gap?

16Apr17

Yesterday the Guardian reported that Labour plans clampdown on ‘sweetheart deals’ to close £36bn tax gap

“Shadow chancellor John McDonnell said if Labour wins the next general election it would “close the loopholes through which large corporations swindle the public”. He said the “tax gap” between what companies should be paying and what is actually received by the exchequer amounts to some £36bn.”

Sounds credible, right?  Big companies. Big issue… £36 billion is a fairly big number (around a third of the NHS budget). No one wants to be swindled by loophole jumping tax dodgers making sweetheart deals.

But hold up. Corporation tax raises around £44 billion in the UK (some 7% of overall government revenues). Is John McDonnell really saying companies are dodging almost half of what they should be paying?

Screen Shot 2017-04-16 at 09.57.09

[Chart adapted from IFS, also see national statistics]

Well no. Describing £36bn as “the difference between what companies should be paying and what is actually received” is the Guardian’s mistake.

If you look at the original press release the £36 billion figure does appear but the wording is somewhat more careful: “The “tax gap” between the tax is collected and the tax expected is estimated by HMRC to stand at £36bn.”

This is true. £36 billion is HMRC’s ‘tax gap’ estimate. But just like corporation tax only makes up a small proportion of overall UK tax revenues, corporate tax avoidance only makes up a small proportion of the enforcement gap. Around £3.7 billion relates to corporation tax, suggesting that companies overall are paying 8% less than they should.

It can be argued that this official tax gap estimate does not include the forms of corporate tax avoidance that McDonnell’s policy is concerned with. As HMRC explains it “does not include international tax arrangements that cannot be challenged under the UK law, including some forms of base erosion and profit shifting (BEPS).” But then why does McDonnell attach this particular number to his policy proposals at all?

Is it a good idea to make big companies publish their tax returns in the name of the disinfectant of sunlight? I don’t think so. (Even some members of the tax justice movement who are much more bullish on public tax disclosure think its a bad idea).

If a newspaper can make such a mess of understanding one basic number, just imagine the mess they could make of thousands of pages of tax returns.

Describing arrangements that cannot be challenged by UK law as swindling, loopholes, scams and a chronic lack of enforcement is Kafkaesque. If we don’t think the current laws give good outcomes we should change the law, not conflate compliance with fraud, or attach big random numbers to it.

The potential damage is not just to the reputation of big corporations, who may not demand much sympathy, but to confidence and trust in the tax system and to the quality of public understanding and debate about public policy.

[With thanks to Dan Neidle and Iain Campbell ]



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