The Missing Billions: The UK Tax Gap
Technical Appendices - These technical appendices provide more detail on the calculations and analysis behind The Missing Billions pamphlet. A more detailed glossary than that which appears in the pamphlet is also included:
- Appendix 1: Tax Planning (PDF)
- Appendix 2: Income Shifting (PDF)
- Appendix 3: Domicile Rule (PDF)
- Appendix 4: Company Taxation (PDF)
- Appendix 5: Savings Calculations (PDF)
- Glossary (PDF)
Full Download of all sections (PDF) - Download The Missing Billions pamphlet and all technical appendices in one file.
This report achieves what many have claimed impossible: it calculates the tax lost to the UK Government from tax avoidance and from tax planning by the very wealthy. Tax avoidance is the process of getting round taxation law without actually breaking it. Tax planning is the use of the opportunities Parliament has provided to citizens to reduce their tax rate.
The result of the calculations set out in this report reveal that the amount of tax lost to avoidance and planning is a number bigger than most might ever imagine. It is estimated here that £25 billion annually is lost from tax avoidance. This is made up of £13 billion p.a. from tax avoidance by individuals and £12 billion p.a. from the 700 largest corporations.
Estimating these figures involved an original detailed analysis of several sets of Government data and further analysis of 344 sets of accounts published by the UK's fifty largest companies covering a seven-year period.
It is estimated that an additional £8 billion p.a. is lost to public funds from tax planning by the wealthiest members of the UK community, i.e. those earning over £100,000 p.a.
The result of this is that the UK tax system is not nearly as progressive as Parliament intended and as social justice requires. In addition, public funds are more scarce than they may otherwise be and certainly more scarce than Parliament would have intended when agreeing tax rates. It is notable that the Government is currently seeking to rein in the annual growth in public spending by 30 billion pounds through an 'efficiency programme'. Given this figure is not far in excess of the current income lost to tax avoidance and is actually less than that lost to avoidance and planning combined, this report raises serious questions about the price now being paid by public services as a result of this activity.
In the case of individuals, tax avoidance usually takes the following forms:
- shifting income from the person who should really pay tax to someone else;
- moving transactions out of the UK
- changing the nature of transactions, in particular so that income is subject to Capital Gains Tax rather than income tax
- abusing the law on limited companies.
Companies have more opportunity than individuals to avoid and plan for tax. This is, in particular, because they operate internationally, opening avenues for tax planning and avoidance between territories that no individual can exploit. This is why the rate of tax lost to corporate tax planning and avoidance is found to be greater as a proportion of tax actually paid than that for individuals. This report bases its findings on new and original research of the fifty largest companies in the UK and shows that:
- The fifty largest companies almost always pay 5% less tax on average than they declare in their accounts.
- The average tax rate paid by these companies fell by more than 0.5% a year over a seven-year period to 2006, even though the UK tax rate for these companies was constant throughout that time – as a result, the de facto corporation tax rate for UK companies in 2006 was 22.5% when the actual rate agreed by Parliament was 30%.
- This means that when the new higher corporation tax rate for smaller companies reaches 22% by 2011 (as announced in the 2007 Budget), small companies are likely to be paying a higher proportion of tax on their profits than the fifty largest companies on current trends.
- If this de facto tax rate was the official tax rate it would place the UK 16th in a table of corporation tax rates for the EU 25 with France the highest and Malta the lowest – it would also mean that the UK had the lowest corporation tax rate of the Western European economies with the exception of Ireland.
- By the end of 2006, the cumulative tax savings recorded in the accounts of the fifty largest companies was £47 billion; this actually exceeded the total tax paid by all companies in 2006 by some £2 billion.
These figures strongly suggest that the regular complaints from the business community about the burden of tax they endure in the UK should be treated with a high degree of scepticism.
The facts relating to tax avoidance and tax planning make it clear that this deliberate behaviour is imposing a substantial cost on UK society, and on those taxpayers who seek to comply with the spirit and letter of UK tax law. Knowing this is not enough though. This report offers a series of practical solutions to address the problems identified.
Fundamentally, the current Government approach of plugging loopholes in tax legislation is inadequate. The Government must assert its right to collect and expend taxation revenues in pursuit of its democratic mandate. This has been lacking and it is now time for the Government to change the terms of this debate if it is to secure the full tax revenue that Parliament expects it to secure when tax rates and arrangements are agreed by MPs and Lords.
To this end, the following actions are suggested as a spur to public debate on how the Government and Parliament should react:
- introduce a new law called a 'general anti-avoidance principle' that treats all tax avoidance as unacceptable and therefore open to challenge.
- stopping the current round of HM Revenue & Customs staff cuts so that adequate resources are available to tackle the issues this report raises.
- abolishing the domicile rule.
- abolishing unnecessary tax reliefs enjoyed primarily by the wealthiest individuals.
- making it much harder to abuse Capital Gains Tax by shifting the ownership of assets prior to their sale.
- applying income tax to all capital gains on assets held for less than a year.
- reforming the tax relief for charities to stop abuse, increase the income of charities and to cut their administrative burden.
- introducing an additional tax charge on investment income above a set limit so that it is taxed at rates similar to those applied to earned income when National Insurance is taken into account.
- the introduction of a minimum rate of tax to be paid on the income of those earning more than £100,000 a year to ensure that they do not unduly benefit from tax reliefs and allowances that society cannot afford to provide to them.
- engage more actively internationally in tackling abuse promoted through tax havens.
- redesign the way small limited companies work to reduce the risk of tax abuse.
- increase cooperation on taxation internationally to ensure companies are held to account for where and how they operate and are required to act as good corporate citizens, including in the payment of their dues to society as a whole.
These proposals could at least halve the cost of tax avoidance and tax planning to the ordinary people of the UK. And as the report shows, the potential benefits of that are significant:
- Half of the total amount lost to tax avoidance could raise the level at which the higher rate tax rate is paid by £10,000, offering significant financial relief to those on middle incomes.
- Alternatively, the same amount would pay for a 20% increase in the state pension or could reduce the basic rate of income tax by 3p in the pound or could build an extra fifty hospitals.
- As little as one quarter of the total tax income lost to avoidance activities would be enough to provide five-and-a-half million public service staff, who are currently facing the prospect of a real terms pay cut, with a pay settlement equivalent to the rise in average earnings across the economy in 2007.
Issued: 29 February, 2008