Ritchie says that HMRC is playing fast and loose with statistics when it claims that it has reduced the tax gap by £7bn.

Extraordinarily HMRC have claimed that the tax gap has improved by £7bn in a year. But that’s not true. The tax gap has only improved by £4bn at best (£39bn to £35bn) – their own table say so. Candidly to claim that because they put their own prior calculation errors right means the tax gap closed by £7bn – as their own press release seems to imply by subtle use of language – is as a result blatantly untrue.

OK, so they found that they made some mistakes last year and they corrected last year's figures as a prior year adjustment. As you're supposed to. But in order to maintain continuity with what they reported last year, they've included last year's reported figures too.

Anyway, Ritchie still tells us that his estimate of the tax gap is £120bn, so really the improvement from that to HMRC's current estimate is £81bn.

But that’s not the limit of the gall of HMRC senior management. Read the detail and you realise that the reason why the VAT gap went down is in no small part due to the fall in the VAT rate matched by a fall in GDP.

VAT is paid a quarter late. Allowing for that the GDP fall in 2009/10 was 2.9%. And the VAT rate was 15% for must of that period for VAT payment to HMRC purposes. So given that the VAT gap is the difference between expected VAT paid and actual VAT paid we’d expect this gap to fall in cash terms by up to 14% for the falling VAT rate (but I’ll allow for timing differences and only use 11%, generously) and by another near 3% for GDP fall. In combination taking the revised 2008/09 VAT gap estimate of £14.6bn as the base we’d expect a fall to near enough £12.6bn (you can argue a decimal point either way – the above is my generous estimate, i.e. favouring caution). So £2bn or more of the fall is due directly to Alistair Darling’s VAT cut or declining GDP.

In that case the real fall is £2bn (£4bn real fall less this £2bn adjustment) at most.

Except, of course, the fall in GDP did not only apply to VAT – it applied to all other income as well. There was £24.4bn of gap relating to that in 2008/09. So a fall of at least £0.7bn of the resulting fall would result from the decline in GDP alone. Now we’re down to an improvement in the gap using HMRC methodology of £1.3bn at best – and candidly that’s in the range of statistical error.

This is amusing. Ritchie is learning what sensible economic commentators and accountants have been saying for some time: if you reduce tax rates then the tax gap will come down. Conversely, Ritchie's policy of ever increasing tax rates is the single biggest contributor to the size of the tax gap!

But, having just said that it's totally improper for HMRC to claim the effect of reducing rates on the tax gap, what does Ritchie go and do? He only uses announced increased rates to predict how the tax gap will increase and excoriates HMRC for it!

But this year the VAT rate is 20%. So right now the VAT gap will have automatically risen on the basis of the same rate of crime by not less than £3.8bn. That follows like night does day as the VAt rate has risen from 15% in most of 2009/10 to 20% now.

So Ritchie wants to argue that HMRC are to blame for the increased tax gap when rates go up, but cannot take credit for the reduced tax gap when rates go down. The man truly is legendarily and incoherently insane.

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Filed under: Current issues, Other blogs, Taxation with tags hmrc, hypocrisy, idiots, richard murphy, tax gap, vat