“The super-rich and big corporations dodge £90 billion in tax every year, but we're told to get angry at asylum seekers who have to live on just £37.75 a week?”
Zarah Sultana MP, 12 August 2020
The Labour MP Zarah Sultana recently claimed that the super-rich and large corporations dodge £90 billion in tax every year, while asylum seekers have to live on just £37.75 per week.
There are a number of very different estimates of the tax gap and this is based on one much higher than HMRC’s official figure.
It also doesn’t just cover tax dodging by the super-rich and big corporations, but the entire tax gap, which is the difference between how much tax the government should theoretically be getting versus what it actually gets.
People seeking asylum and who are homeless or unable to buy food typically receive £37.75 per week in addition to housing and most utilities which are provided at no cost.
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What is the tax gap?
HMRC says: “The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid.”
Various things are included in the tax gap, and it isn’t just what you might consider tax dodging.
HMRC estimates that the tax gap is around £31 billion, of which around £4.6 billion is evasion, which is illegally omitting concealing or misrepresenting information to reduce tax, and £1.7 billion is avoidance, which is reducing your tax liability by acting within the letter but not the spirit of the law.
But the biggest contributors to the tax gap are shortfalls which result from people not taking reasonable care filling out their tax returns, and losses incurred where the customer’s and HMRC’s interpretation of the law result in a different tax outcome. These account for over £10 billion and aren’t necessarily always what you might consider tax dodging.
And some elements of the tax gap definitely aren’t tax dodging. For example, £3.1 billion is put down to human error, despite people taking reasonable care.
Also it shouldn’t be assumed that if HMRC managed to get the tax gap down from £31 billion to £0, that the government would automatically receive £31 billion more in income.
For example, a business owner may evade £1,000 of VAT payments, but with that £1,000 may buy a television which they otherwise would not have. This purchase would generate VAT, and also, indirectly, other taxes paid by the company selling the television.
How big is the tax gap?
Ms Sultana’s figure appears to refer to an unofficial estimate of the total “tax gap” calculated by Richard Murphy who runs the website Tax Research UK.
Again, this is an estimate of the entire tax gap, not just the portion that is “dodged”, and not just the portion that relates to large businesses and the super-rich.
We’ve written about Mr Murphy’s estimate before and why it varies so much from HMRC’s official figure.
The biggest component of the difference is how each calculates the value of the hidden economy or shadow economy.
HMRC uses a “bottom up” approach, by surveying “moonlighters” (people who have a declared income but also an undeclared income on the side) and “ghosts” (people who do not declare any income to HMRC) to estimate the tax gap from the hidden economy. This comes to £2.6 billion.
Mr Murphy instead applies a “top down” approach, applying the tax yield as a proportion of GDP (which he works out to be around 33%) to the estimated total value of the hidden economy to work out the tax gap. His figure comes to between £60 billion and £67 billion.
Both figures have their limitations.
Mr Murphy’s calculation is somewhat simplistic in assuming that the 33% figure which represents tax as a proportion of GDP can be applied to the hidden economy. For example there will be parts of the hidden economy (such as the trade in illegal drugs) which by their very nature cannot be taxed and so there is no tax gap.
Meanwhile, HMRC acknowledges that the coverage of its data isn’t comprehensive and so the “estimate should be interpreted broadly as a lower limit for the true scale of the tax gap relating to this group of taxpayers.”
More generally the International Monetary Fund (IMF) reviewed HMRC’s analysis back in 2013.
The National Audit Office summarized the IMF’s findings, saying it “concluded that HMRC produced one of the most comprehensive studies of the tax gap available internationally. It concluded that in general the methodologies HMRC used to estimate the tax gap were sound”.
However, the IMF “also recommended that HMRC improve its estimates of undetected non-compliance”, according to the NAO.
Ultimately, the NAO notes that “The tax gap is inherently difficult to estimate and HMRC acknowledges that no estimate of the tax gap can be definitive and that its estimates carry a degree of uncertainty”.
People seeking asylum
The second part of Ms Sultana’s tweet says that people seeking asylum have to live on just £37.75 per week.
This is the level of cash support for each person in a household who is seeking asylum if they are homeless or do not have money to buy food. The government says this is to help pay for things like food, clothing and toiletries.
Pregnant mothers and young children are given slightly more to buy healthy food (between £3 and £5 a week), and women who are heavily pregnant or have a child under six weeks of age can apply for a one-off £300 payment.
In addition, housing is provided to people seeking asylum if they need it at no cost. Housing is expected to come with fittings, furniture, kitchen equipment and linen. Utilities are paid for. Housing providers do not need to provide a telephone line, internet connection or a television.