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Tax gaps

October 30, 2015

Last week we had publication of the 2015 iteration of the HMRC Tax Gaps figures with accompanying methodology.  Note the plural: HMRC Tax Gaps, plural, and not a singular “tax gap”.  We’ll come back to that.

Let’s start with the methodological annexe.  In it there are five methods described.  They are:

  • Data matching
  • Top down methods
  • Management information
  • Random enquiries
  • Illustrative

Now let me start by saying I’m not a statistician nor an economist.  I’m a retired tax inspector with reasonable numeracy but that’s it: no superpowers, sorry, just a large pinch of salt which I can’t help applying to anything anyone tells me.  I have been vaguely aware for some time of the various controversies about the size of the tax gaps so these five methods interest me.  Let’s take a closer look.

“Top down methods” seem to be a method useful for indirect tax (what we might call the ex-Customs taxes).  It seems reasonable to use external data sources to work out how much of a given taxable product is consumed.  Working out what the VAT/excise duty etc would be on that level of consumption is just arithmetic, and then looking at how much is actually collected gives you the gap.  The tax gap is then the difference between how much VAT you’d collect if it was properly calculated and paid over on all the (say) beer sold in the year and the amount actually collected.

“Random enquiries” is a phrase used in tax investigations.  While most HMRC enquiries are based either on intelligence or else on the statistical information and other anomalous data ground out of the department’s giant number crunching machines, there are a few which are based on, well, pot luck.  What better way is there to check the integrity of your target selection and the results of those targeted investigations than to check a few cases at random and see how they compare?  Personally I think there’s a strong case to be made for far more random enquiries (takes the heat out of the transaction, levels the playing field by making sure the hard cases don’t get screened out) but I think the data from random enquiries is a useful contribution to measuring the direct tax gap – if x% of the random cases have errors producing amount £y, you could extrapolate what that amount of tax you were missing across the entire population, all things being equal.

“Management information” is information taken from HMRC’s internal systems.  Now, this is where I throw my first pinch of salt into this.  I have worked in HMRC.  I have contributed at the grass roots level to the management information available in HMRC.  I have argued with managers over the years about the management information collected in HMRC, in particular when detailed data is required from busy people where no benefit accrues to them from its collection, such as in the old fashioned ways HMRC used to collect data about the use of time of its inspectors.  I am sure HMRC’s internal systems are operated with integrity and provide the best data they can provide.  But I also suspect they may sometimes produce the same kind of data as you get from opinion polling or question setting in Pointless.  In other words, without a great deal more information about what “management information” this refers to and how it is compiled, I’d take it with a large pinch of salt.

“Data matching” is described as “comparisons between related datasets” and I’m making that “whoosh” gesture with your hand over your head, to indicate that’s where this feels like it gets me.  Maybe it’ll become clearer further into the document?  Watch this space!

Finally there’s the category of “illustrative”, which is described as “where limited data is available, estimates are produced using assumptions made in collaboration with HMRC’s operational experts.”

Now, is it just me, or is that a polite way of saying that sometimes, where we don’t know, we just have to make a good guess?

Clearly calculation of tax gaps is going to be an…” interesting” topic: I plan to come back to it next week.

In the meantime, I’ll be at the launch of the Women in Tax network on Monday, “What do we mean by a fair tax system” and looking forward to it enormously!  If you’re there, come say hello.

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