Are you cheating the taxman too?

George Osborne wouldn't need to make these benefit cuts if he tackled the biggest type of fraud in the UK that of tax evasion Richard Murphy

guardian.co.uk, Friday 10 September 2010 16.03 BST

(accessed 16/01/2012) http://www.guardian.co.uk/commentisfree/2010/sep/10/george-osborne-tax-evasion-uk-economy

George Osborne is making political capital out of seeking to save 4bn on the benefits bill, happy for those making the claims he's targeting to be called lifestyle choice fraudsters and layabouts all, supposedly, because of the need to tackle the hole in the government's deficit. But he wouldn't need to make these cuts if he tackled the biggest category of fraud in the UK economy that of tax evasion. The tax gap is real. It's the difference between the tax that should be collected from the UK economy if HM Revenue & Customs knew everything that was going on and the tax it actually collects. HMRC claims the gap is 40bn a year with well over 30bn of that being tax evasion and a much smaller part less than 5bn being tax avoidance. The difference between the two is important. Evasion is illegal it's fraud, in other words. Avoidance is the smart trickery my colleagues in the accountancy profession play. The trouble is HMRC has these estimates wrong. I estimate that tax evasion the issue I'm concerned about here costs about 70bn a year. My estimate is based on the rate of VAT evasion that HMRC admits to which I calculate to be an average of about 13.7% over the past seven years. That means more than 1 in every 8 of VAT due in the UK is evaded. Shockingly, the World Bank has recently confirmed in a study of the size of the cash economy in 162 economies that they agree almost exactly with this ratio for the UK, suggesting on average that the UK shadow economy is about 13.5% of GDP, and on an upward trend. Despite this evidence HMRC refuses to recognise that if VAT is evaded at the rate its admits then it follows that this proportion of income tax, corporation tax and national insurance is also evaded which is an untenable position on its part. No business person puts cash in their pocket to evade VAT and then declares income tax on the wages and profits paid out of that cash. Those other taxes are evaded as well, and by as much if not more than VAT, simply because VAT doesn't apply to all businesses but income tax and national insurance always do. And as a result 70bn is lost to tax evasion a year. That's enough to pay our way out of our current financial crisis. But this does not happen by chance. This cash has to get into the hands of fraudulent traders and not much of it comes from them trading with each other. Most of it comes from the

public who, when offered a deal for cash take it. Builders are the classic case everyone points too. But so too are after-school tutors these days. And nannies and domestic cleaners paid cash in hand. And those who trade through car boot sales. And even people who trade on eBay and "forget" to tell HMRC. The list of ways cash creeps out of the tax system and into the shadow economy are numerous. And the fact is that cash on this scale does not just come from those committing benefit fraud. Cash on this scale comes from the middle and upper classes Guardian readers among them, no doubt. Every time you pay cash, in these ways and more, you contribute to the tax gap. You deny the government the cash it needs to preserve public services. You facilitate fraud, even if you're not guilty of it. You undermine the NHS. And your children's education, and all those other services you value. And you help deny benefits to those who need them. The joy of tax is that it pays for all these things. Tax evasion denies them to us. If there is a "big society" not in the way Cameron describes it but in the way we believe in the society we live in and enjoy the services our state provides then the cash economy directly undermines it. That's the real consequence of the cash deal to save a bit on the cost of cramming for an A* GCSE. And that's a challenge for all who do believe in society, the rule of law, the value of government services and the democracy we enjoy. Are you willing to pay by cheque or card, to demand a receipt, to operate PAYE on your domestic staff, to clamp down on tax evasion, and say so? It's a choice you can make. You can choose to pay tax. Will you do that to keep the services you want? Ask yourself that the next time you could evade tax. And live with your conscience if you contribute to the tax gap a gap we, and those who rely on the state, can no longer afford.

COMMENT

You're right - many millions of people evade tax. However, a substantial proportion of those people don't know they are doing it. Your article reads like you're berating people for deliberately depriving HMRC of money, when they actually just didn't know that it was wrong. .

But he wouldn't need to make these cuts if he tackled the biggest category of fraud in the UK economy that of tax evasion. Tackling welfare dependency is something that needs doing regardless of the budget the 4bn in savings is just an added bonus. The trouble is HMRC has these estimates wrong. I estimate that tax evasion the issue I'm concerned about here costs about 70bn a year.

You have no evidence for that. You taken the rate of tax evasion the HMRC says happens for VAT and asserted that the same rate probably applies for all other taxes, despite the fact that VAT is one of the easiest taxes to evade and despite the fact that you view the other estimates producd by HMRC as inaccurate.

George Osborne wouldn't need to make these benefit cuts if he tackled the biggest type of fraud in the UK that of tax evasion You are absolutely right. It would be the just and fair thing to do. Of course, he won't, because the Tories would lose too many voters.

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George Osborne is nothing more than the bankers' stooge. And Gordon Brown and Alistair Darling weren't?!?
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If the government could spend 1.00 pounds to recover evaded taxes for every 1.05 pounds that it would get back into its coffers you can bet your bottom dollar that it would already be doing so! The government is up against a law of diminishing returns and catching the relatively small amount of tax evasion will cost more money than it brings in. So there is no point in wasting money doing it, even if you think that tax evasion is a wicked activity that ought to be rooted out. Benefits scroungers, however, are easy to identify. There's plenty of money to squeeze out of the system since for 1 in 5 families no-one works. Benefits are there to help people who have just lost their jobs stay on their feet until the can find a new one. They are not there to finance a family life in a council house indefinitely at the expense of the state. All benefits should be cut off after 2 years, maximum.

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Of course "cleaners" are paid cash in hand. The bureacratic nightmare of doing it "correctly" for both employer and employee would completely abolish any benefit to either. The opportunity cost for all these small sums would greatly outweigh any additional tax collected.