The ICAEW's Tax Faculty has produced a couple of interesting posts on its blog about the tax gap.

Firstly, they reflect on the recent estimate by HMRC. ICAEW rightly observes that it's difficult to measure something that, by definition, people are trying to hide from them.

It is inherently difficult to calculate the tax gap because you are trying to measure what is not there and quantify what potential tax liabilities people have deliberately tried to hide from the authority. HMRC’s figure is considerably smaller than the equivalent figure which the TUC published three or so years ago and the figure that civil society currently thinks is the real extent of the tax gap.

They're playing their cards quite close to their chest, but it looks to me like they're siding with HMRC over the TUC/Richard Murphy estimate. In particular, they put the boot in to the very idea that you can estimate the tax gap via a top-down approach. They support this point of view in their second post, in which they've unearthed an intriguing paper by HMRC on why it rejects the top down approach to measuring the gap.

An HMRC working paper The practicality of a top down approach to measuring the direct tax gap concludes that such an approach isn’t going to be useful in determining the overall direct tax gap but it could be helpful in assessing some of the constituent elements of that gap.

If one can produce an accurate estimate of total income, including the income that is not declared to the tax authority, then it should be possible to apply the tax rate to that income and determine what direct tax should have been paid. The tax gap is then the difference between this theoretical total and the actual tax collected.

In practice there is no ‘source’ for data on this undeclared income because by its very nature it is not declared. Another defect of the top down approach is that even if one could arrive at a figure for the overall direct tax gap it wouldn’t provide an indication of where any revenue authority should concentrate its efforts to close that gap.

Given that one of the keenest advocates of the top down approach is one Mr Richard J Murphy Esq ¹, it's a thinly veiled slapdown of his estimate. And he thought they liked his work.

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Filed under: Institutes, Taxation with tags hmrc, icaew, richard murphy, tax gap, tuc