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ITR Global Tax 50 2022: Alex Dunnagan

23rd December 2022 by Alex Dunnagan

At TaxWatch we are hugely proud to announce that our Acting Director has been listed in ITR’s Global Tax 50 2022 (paywall).

International Tax Review’s Global Tax 50 is an annual list which highlights “the most influential individuals in the world of tax policy and business, from public officials to industry leaders.”

In their article about TaxWatch ITR noted our work with the All-Party Parliamentary Group for Anti-Corruption & Responsible Tax, where we jointly published a report arguing that aggressive tax avoidance can and should be treated as criminal fraud.

ITR also noted our growing body of regulatory complaints to professional bodies about advisers and accountants engaging in tax avoidance. We’re happy to say that there will be plenty more of this in 2023.

ITR’s list previously also included organisations, which saw TaxWatch make the 2020-2021 list.

A huge thank you to all our staff, trustees, editorial committee and supporters who made this possible through their passion and dedication to raising the important issues TaxWatch covers in its work.

Opportunities Missed – Autumn Statement 2022

17th November 2022 by Alex Dunnagan
  • Minimal efforts to close the tax gap, despite HMRC producing a return on investment of up to 18:1 with compliance work.

  • DWP to receive an extra £112m a year to tackle fraud, but HMRC only to receive £15m. Once again, the government is prioritising going after benefits fraud while failing to take tax fraud seriously.

  • R&D tax relief schemes changed, but attempt to make relief less attractive to those claiming fraudulently will reduce benefits to small and medium businesses conducting genuine R&D, and will do nothing to recover previously overpaid amounts.

  • Changes in the threshold for the 45% tax rate aren’t as progressive as they seem. While someone on £150k will pay what is worth an extra 1% of their income, the change to someone on £1.5m is less than 0.1%.

 

On Thursday 17 November the Chancellor Jeremy Hunt unveiled his Autumn Statement 2022.

Hunt, the fourth UK chancellor of 2022, delivered this budget against a backdrop of financial uncertainty. The chancellor has called this a plan to tackle the cost of living crisis and to rebuild the UK economy.

While numerous news outlets have covered the major stories of the budget, at TaxWatch we are casting a forensic eye over the lesser covered tax stories.

 

Minimal efforts to close the tax gap

In an attempt to balance the governments books this budget features both cuts to public services and increases in taxes. There is a third option for the government to increase funds however, though it seems to have been overlooked – and that is reducing the tax gap.

HMRC estimates that in 2020-21, £32bn of tax went uncollected. Of this, 45% – or £14.4bn – is a result of fraud. These numbers are almost certainly an underestimate, as they don’t include profit shifting, which academic studies have found to be in the region of £20bn, nor do they include the amounts lost to fraud and error in the coronavirus support schemes, which is estimated to be around £4.5bn.

The solution to recovering significant amounts of this lost tax is through investment in compliance. Just last month during a Public Accounts Committee oral evidence session Jim Harra, the head of HMRC, said “On average, for every pound that we spend in our customer compliance group, we recover about £18 worth of additional tax revenues.” Dame Meg Hillier MP responded “that’s a helpful pitch to the treasury.” At TaxWatch, we agree.

Justin Holliday, HMRC’s Chief Finance Officer and Tax Assurance Commissioner, also stated during this session that “to get £1 billion off the tax gap, you would need between a twentieth and a tenth of £1 billion”.1 This is a ridiculously good return on investment.

Despite this, there was little in the way of investment in HMRC announced. There is to be “a further £79 million over the next 5 years” in order to tackle tax fraud. While any investment in HMRC is good news, £15.8m a year is small change. The Department of Work and Pensions is to receive an extra £280m between now and 2024-25 to tackle fraud, error, and debt in the benefits system – working out at £112m per year.

Last year TaxWatch revealed that the UK Government had given the DWP £613m to tackle pandemic related benefits fraud, while only giving HMRC £155m to tackle Covid related tax fraud. This is despite the fact that fraud and error in HMRC administered Coronavirus Support Schemes is thought to be worth billions more than the increase in Covid related benefits fraud.2

The Government have calculated that over the course of five years this £79m investment should see a return of £725m. That’s an investment gain of £646m, with a total return on investment of 818%. With such healthy returns for so little invested, it is unclear why the government is again choosing not to put more money into HMRC.

 

R&D reform (again)

Its no surprise that reforms to the R&D relief schemes were featured in the Autumn Statement. Looking at the past few years of budgets, reference is made to reforming R&D reliefs in the Spring Statement 2022,3 Autumn Budget 2021,4 Spring Budget 2021,5 Spring Budget 2020,6 and Spring Statement 20197 demonstrating the concerns around these tax reliefs. It’s likely that there will be further reform at the next budget/statement/fiscal event. Limited changes to the schemes were made in Finance Act 2022 (coming into existence in April 2023) to extend claimable expenditure to cloud computing costs and data and requiring more detailed information to be submitted with claims. These latest reforms however have been fairly substantial, and will affect claims from 2022-23.

Today’s announcement fundamentally changes the benefits in the two schemes, known as the SME scheme (Small and Medium-Sized Enterprise scheme) and the RDEC scheme (Research and Development Expenditure Credit) scheme which is mainly for large businesses but can be claimed by SMEs in some cases.

There have long been concerns about the increasing costs of R&D tax relief (from £1.1bn in 2010-11 to £6.6bn in 2020-218) and levels of error and fraud in the schemes9 . HMRC estimated fraud and error in R&D reliefs in 2021-22 was £469m but calculated that 7.3% of SME scheme claims were incorrect while only 1.1% of RDEC scheme were incorrect. t. The Chancellor referred to the high level of fraud and error in announcing a reduction in the additional corporation tax deduction for R&D expenditure in the SME scheme from 130% to 86% and the SME credit rate reducing from 14.5% to 10%. In contrast the RDEC scheme has been made more generous with the credit available increased from 13% to 20%. These adjustments have been described as a rebalancing of rates but in fact are predicted to result in a net reduction in the costs of both schemes across the next few years.

The statement describes the changes as a move towards a ‘single RDEC-like scheme for all’ with the intention of consulting on the design of a single scheme for the future alongside consideration of further support for ‘R&D intensive’ SMEs without significantly increasing the cost of the overall scheme.

The reduction in the SME scheme benefits appears to be a blunt instrument to deal with well-discussed problems with boutique R&D claims firms said to be using no win no fee arrangements to push the boundaries of R&D definitions and claimable costs10. This will likely make the scheme less attractive to those entities, as there will be a smaller amount to take their cut from, but will obviously have an immediate impact on the support given to SMEs carrying out genuine innovation in the field of science and technology. While anything intended to reduce the amount of error and fraud in the tax system is good news, this should not overshadow the significant sums already believed to have been erroneously claimed in earlier years. As mentioned above, investment in compliance work by HMRC is depressingly low compared with the potential return on that investment, and while there are suggestions that around 100 staff have now been deployed to pursue enquiries into more past R&D claims, there is a risk that significant amounts of overclaimed amounts will never be recovered.

 

Top rate of tax – not as progressive as it sounds

The 45% top rate of income tax was scrapped under Truss and Kwarteng, only for a U-turn to see it reinstated. Hunt announced today that the government will decrease the additional rate threshold from £150,000 to £125,140 in April 2023, saying “those in the highest income households will contribute more.”

Arun Advani, an Associate Professor at the Department of Economics at the University of Warwick, has conducted some analysis as to what this means in practice.11 Lowering the threshold will raise around £850m in year one, rising to just over £1bn by 2026-27, with the increase affecting the top 2% of earners. That’s not an insubstantial amount of money, but, its important to note that what it raises is not particularly progressive. A person earning £150k a year is going to pay another £1,250 in tax, almost 1% more of their income. A person earning £1.5m is also going to be paying another £1,250 in tax, less than 0.1% of their income. While it may make headlines, in reality, the very rich won’t really be affected.

 

1Public Accounts Committee, 20 October 2022, https://parliamentlive.tv/event/index/4b5df068-66e0-4d62-a65b-8a073cd65253

2Funding to fight covid related tax and benefits fraud, TaxWatch, 29 December 2021, https://www.taxwatchuk.org/covid_fraud_spending_dwp_vs_hmrc/

3Spring Statement 2022, Chancellor of the Exchequer, March 2022, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1062708/Spring_Statement_2022_Print.pdf

4Autumn Budget and Spending Review 2021, HM Treasury, 27 October 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1043688/Budget_AB2021_Print.pdf

5Budget 2021, HM Treasury, 3 March 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/966868/BUDGET_2021_-_web.pdf

6Budget 2020, HM Treasury, 12 March 2020, https://www.gov.uk/government/publications/budget-2020-documents/budget-2020

7Spring Statement 2019, Chancellor of the Exchequer, Spring 2019, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/785618/WMS_final_Commons.pdf

8Corporate tax: Research and development tax credits, Gov.uk, 29 September 2022, https://www.gov.uk/government/statistics/corporate-tax-research-and-development-tax-credit

9Huge cost to taxpayers of HMRC research & development initiative comes out in the wash, The Times, 31 October 2022, https://www.thetimes.co.uk/article/huge-cost-to-taxpayers-of-hmrc-research-development-initiative-comes-out-in-the-wash-czn9mxnhs

10Formal meeting (oral evidence session): Draft finance bill 2022-23, UK Parliament Committees, 14 November 2022, https://committees.parliament.uk/event/15744/formal-meeting-oral-evidence-session/

11Arun Advani, Twitter, 16 November 2022, https://twitter.com/arunadvaniecon/status/1592993284712173568

TaxWatch submits regulatory complaints against arms dealer’s adviser.

16th November 2022 by Alex Dunnagan

TaxWatch has lodged complaints to both the Chartered Institute of Taxation and Institute of Chartered Accountants of England and Wales about the conduct of Zaheer Dudhia, an accountant and tax adviser. This complaint centres around our assertion that Mr. Dudhia failed to act with integrity in relation to his dealings with a Hong Kong auditor when acting for an arms dealer whose overseas company he helped set up.

Dudhia is a Chartered Tax Adviser for Z. Dudhia & Company Limited, and Chartered Accountant for Dudhia Lewin Myers Associates Limited, Amdaza Ltd, London Bookkeeping Services Ltd, and Mount Road Property Ltd.

This is the third in a series of complaints we have lodged with professional bodies.

Arms Dealer

Mr. Ranger, an infamous British arms dealer who had been operating since the 1980’s1, ran Imperial Defence Services Ltd (IDS) and in early 2010 began his attempt to source surface-to-air missiles from North Korea, and to broker deals to supply the missiles and Beretta pistols from the US manufacturer to Azerbaijan. At the time there was an arms embargo prohibiting the export of military goods to Azerbaijan and the prohibitions applied to exports, trafficking and brokering activities conducted by UK persons based either in the UK or overseas.

To make these deals and to hide his involvement from the UK authorities, including HMRC, Mr. Ranger had set up a company in Hong Kong as the vehicle for his illicit trades. Unfortunately for him, Mr. Ranger was charged and subsequently convicted of two counts of being knowingly concerned in acts calculated to promote the supply or delivery of goods subject to trade controls with intent to evade the prohibition contrary to Section 34(5) of the Export Control Order 2008 following an investigation by HM Revenue & Customs.2

Evidence from the case shows that in 2009-2010 Mr. Zaheer Dudhia assisted Mr. Ranger in setting up his Hong Kong-based company Hong Kong Commercial Ltd – albeit in the name of Ranger’s Vietnamese girlfriend. On paper, she had no familial or business connections to Ranger, who was not listed as a director. Documents from the trial also reveal Mr. Dudhia designated himself a Chartered Tax Adviser and Chartered Accountant in correspondence with Mr. Ranger, was involved in setting up the Hong Kong company’s bank account, and acted as its accountant during this period.

It was the prosecution’s case that although his girlfriend was the listed director, it was Mr. Ranger who directed and controlled the company; Mr. Ranger set it up, financed it, and operated the company bank account, and conducted the company’s business. Similarly, Mr. Dudhia himself indicated the company in Hong Kong would be Mr. Ranger’s in correspondence with a prospective bank.

Hong Kong Audit

In August 2010, Mr. Dudhia was asked whether there was any relationship between Mr. Ranger’s UK-based arms business Imperial Defence Services Limited (IDS) and Hong Kong Commercial Ltd by the Hong Kong-based auditor Cheng & Cheng Limited. Despite having sent emails to Mr. Ranger at IDS, Mr. Dudhia responded “no there is no relationship”.

TaxWatch suggests that this failing to inform the Hong Kong auditor of the true relationship between IDS and Mr. Ranger’s Hong Kong Company, constituted a breach of the rules of the two professional bodies to which Mr. Dudhia belonged, and is still a member of. In terms of the Chartered Institute of Taxation’s (CIOT), Professional Rules and Practice Guidelines in place from 2006-11, Paragraph 2.2.1 stated:

“A member must be honest in all his professional work. In particular, a member must not knowingly or recklessly supply information or make any statement which is false or misleading, nor knowingly fail to provide relevant information.”

We also assert Mr. Dudhia’s answer to the auditor may have breached General Principle 2.4 which declared:

“…a CIOT advocate must not engage in conduct which is dishonest or discreditable or which might bring into disrepute the tax profession of which he is a member. He must not compromise his professional standards in order to please his client or a third party.”

Although TaxWatch has no evidence Mr. Dudhia knew the Hong Kong business he helped create would be used by Mr. Ranger to try to breach export control legislation, given the company enabled a crime, we request the CIOT investigate the possibility that Mr. Dudhia may have breached CIOT’s guideline 2.2.3 which stipulated:

“A member should not act if he considers that the fulfilment of his client’s instructions involves a risk of assisting in a criminal activity”.

As for the rules of the Institute of Chartered Accountants in England and Wales, it is suggested the provision of incorrect information to the Hong Kong auditor of the true relationship between IDS and Mr. Ranger’s Hong Kong Company, may have constituted a breach of two of the Fundamental Principles of its Code of Ethics (1 September 2006-31 December 2010), namely those on Integrity and Professional Behaviour. In detail, it appears to be contrary to Section 110.1 which stated:

“The principle of integrity imposes an obligation on all professional accountants to be straightforward and honest in professional and business relationships. Integrity also implies fair dealing and truthfulness.

It follows that a professional accountant’s* advice and work must be uncorrupted by self-interest and not be influenced by the interests of other parties.

110.2 A professional accountant should not be associated with reports, returns, communications or other information where they believe that the information:

(a) Contains a materially false or misleading statement;…”

TaxWatch posits this action may also be a breach of the Section 150.1 which declared:

“The principle of professional behaviour imposes an obligation on professional accountants to comply with relevant laws and regulations and avoid any action that may bring discredit to the profession. This includes actions which a reasonable and informed third party, having knowledge of all relevant information, would conclude negatively affects the good reputation of the profession.”

Photo by Clint Patterson on Unsplash

1His name has been featured in the media on several occasions, most notably for selling the rifle used in the Hungerford Massacre in 1987. See https://www.theguardian.com/politics/2003/apr/27/ukguns.armstrade Ranger imported the weapon before selling it to Westbury Guns, who then sold the rifle to the individual who committed the murders. https://www.vice.com/en/article/vdq4d3/mick-ranger-gun-sale-profile

2HM Revenue & Customs. ‘Arms to Azerbaijan Dealer Jailed’. 20 July 2012. https://webarchive.nationalarchives.gov.uk/ukgwa/20121016173420/http://hmrc.presscentre.com/Press-Releases/Arms-to-Azerbaijan-Dealer-Jailed-67d78.aspx.

Funding of Taxpayer Protection Taskforce raises serious issues

14th November 2022 by Alex Dunnagan
  • Taxpayer Protection Taskforce set to wrap up despite collecting less than 25% lost to fraud and error in the Coronavirus relief schemes.
  • HMRC estimates that at least £3.3bn in fraud and error will be outstanding at the end of the financial year when the taskforce shuts down.
  • Very low civil and criminal penalties pursued resulting in almost no deterrent effect.
  • More than half of returns from investigating Covid relief schemes in 2021-22 effectively came from pre-existing HMRC teams, raising questions about the benefits of creating a specialist Taskforce to deal with the problem.
  • Staff redeployed to the Taskforce could have produced significantly higher compliance returns in their original teams

 

After launching the Taxpayer Protection Taskforce to great fanfare, HMRC is set to wind down this team, despite an estimate of at least £3.3bn outstanding as a result of fraud and error in the coronavirus relief schemes. Even after a downwards revision in the estimated amount of fraud and error, it looks like only 25% of that will be recovered by the HMRC, and it seems likely that a significant proportion of the recovery will come from pre-existing teams. In addition, in order to create this team staff have been diverted away from potentially more lucrative compliance work to focus on Taskforce cases.

Fraud and error

HMRC administered three Coronavirus support schemes throughout the pandemic, the Coronavirus Job Retention Scheme (CJRS, or Furlough as its commonly known), the Self Employment Income Support Scheme (SEISS), and Eat Out to Help Out (EOHO). These schemes were rolled out at great speed, and were crucial in supporting workers as the country shut down during the pandemic. However, with great speed came an increased risk of fraud, something which should have been foreseen and mitigated. TaxWatch has reported regularly on the issue of fraud and error in the three schemes raising concerns that significant sums lost to fraud and error seem unlikely to be recovered.

In Spring 2021 the then Chancellor of the Exchequer Rishi Sunak announced additional funding of £100m to form the Taxpayer Protection Taskforce (‘the Taskforce’) starting in April 2021 with a view to recovering the billions of pounds incorrectly claimed. This Taskforce will wind down its work from March 2023 with Covid scheme cases moving to business as usual from September 20231 .

HMRC has recently issued updated reports2 reducing the estimates for total error and fraud in Covid support schemes, but also indicating that work to recover those amounts will produce lower returns than originally anticipated.

Fraud and error for the three schemes across their lifetime is now estimated to be £3.2bn–6.4bn (3.3-6.5% of scheme payments) with a best estimate of £4.5bn (4.6%) (reduced from best estimate of £5.8m for 2020/21 alone previously3).

Amounts recovered from compliance activity to Mar 2022 are as follows:4

20/21 536m
21/22 226m
Total 762m

The revised estimate for total recovery for the Taskforce by the time it winds down is £525m-625m (reduced from £800m to £1bn). Jim Harra (HMRC Chief Executive and First Permanent Secretary) identified that this will be approximately 25% of the best error of fraud and error, leaving over £3.3bn unrecovered5. While lower than the previously reported £4.3bn6, this is still a significant sum.

In addition, the National Audit Office (NAO)7 has raised concerns that the estimated returns will not be achieved, identifying that forecast yield for 22-23 is £343m but open enquiry cases at April 22 only indicate returns of £150m,8 potentially leading to greater unrecovered amounts.

Resourcing

Although additional funding was announced for HMRC to form a Taskforce of around 1,250 staff, the posts were filled by moves from elsewhere within HMRC9.. The £100m funding is in fact being provided to HMRC over a period of five years from 20-21 to 25-26 to compensate for the diversion of staff from other compliance activity10. The Treasury reported external recruitment was used to backfill vacancies created by these moves11 but, when asked, HMRC did not provide details of numbers recruited in relation to the Covid scheme funding and two and a half years later there still appear to be billions of pounds outstanding that have not been recovered.

Jim Harra stated in October 2022 that there had been 4,200 staff recruited into the compliance group12. It seems likely this includes staff funded by the Covid scheme investment, but also from other investment in compliance previously announced for HMRC13. Harra stated that training and mentoring recruits diverts trained resources from compliance work, so that overall they anticipate reduced total returns up until 2023, with returns recovering from 2024 onwards14. The suggestion is that these lost amounts will be recovered when new staff are fully functional in later years. However, legislative time limits in relation to opening enquiries and raising assessments will mean it is not possible to pursue all older cases, and investigation and recovery becomes harder as time passes because people move on, spend money and businesses cease.

This all raise concerns about the success of the Taskforce and whether the creation of a separate compliance team was the most efficient way to tackle Covid scheme fraud and error, particularly given that Covid scheme compliance activity is planned to continue in 2023 but within ordinary compliance teams.

The NAO reported that, within returns from individual enquiry cases for 2021-22, £122m arose from Fraud Investigation Services (FIS). FIS are a pre-existing team of specially trained investigators that tackle the most serious cases of tax fraud and avoidance across all taxes and reliefs. It seems likely that they would have investigated the largest and most complex Covid relief scheme cases regardless of the additional investment (though per the NAO their staff working on these cases are included in Taskforce numbers). The FIS returns suggest that the specific Taskforce resources only brought in £104m in that year, less than half of the total returns. In addition, a single case worked within FIS brought in £83m. This one case worked outside the Taskforce will have distorted the return on investment (ROI), suggesting that in fact, excluding that case, it is significantly lower than the reported 4:1 in 2021/22, though it should be noted that return on investment is expected to be higher in 22-23.

More importantly, the Public Accounts Committee previously reported a ROI on compliance activity across the board for HMRC at 17:115 suggesting that diverting limited staff for this work may have actually resulted in lower returns for HMRC There will be permanent opportunity costs in terms of non-Covid relief cases that cannot be pursued with subsequently increased resources. HMRC themselves recognised in late 2020 that reallocating staff to deal with error and fraud in the schemes would reduce overall compliance returns for the department, but that there was no other option as there would be an 18-month lag to recruit and train additional staff16.

An HMRC spokesperson said “We remain dedicated to tackling error and fraud in the COVID-19 support schemes. The Taxpayer Protection Taskforce was the appropriate response to the fraud risk faced at the time, and it will recover £625m across its lifecycle. Looking ahead, moving this work into business-as-usual compliance activity is the most efficient way to ensure we protect and recover taxpayers’ money from those trying to cheat the system.”

Civil and criminal penalties

Another area of concern is the lack of more serious consequences for the vast majority of cases identified so far. Where a civil investigation has taken place, HMRC are able to charge a penalty up to 100% of amounts incorrectly claimed but only where there was deliberate behaviour by the taxpayer in not reporting those amounts within certain deadlines. The burden of proof is on HMRC to demonstrate such behaviour which is difficult in many circumstances.

By March 2022, the only civil penalties charged were as follows17:

Scheme CJRS SEIS
Amount £1.1m £3.5m
Percentage of total recovered 0.5% 7%

This indicates that only a tiny proportion of civil investigations resulted in financial penalties being charged, meaning that the majority of those that did fraudulently claim on the schemes received no financial penalties.

In addition to this, at March 2022 there were 24 criminal investigations ongoing into suspected fraudulent claims of £13m, including 23 arrests in relation to nine cases18. HMRC updated this to 29 criminal investigations into claims totalling around £15m in October 2022.

Conclusions

Even with concerns about return on investment and design of compliance teams, all evidence indicates that properly investing in HMRC compliance resources produces a net positive return to the exchequer. It is therefore not clear why more resources could not be put into recovery of incorrect amounts claimed from the Covid schemes and compliance more generally. HMRC has previously said that they have not formally written off these amounts19 but effectively they will not be actively pursuing them so there is little likelihood of significant recovery. The failure to pursue these, along with very limited punishment for incorrectly claiming support, creates little deterrent effect against taxpayers behaving in a similar way in the future.

This also puts a focus on problems with one-off funding pots for specific HMRC compliance activity which potentially results in less efficient deployment of limited resources. While it is welcome news that HMRC have recently recruited significant numbers of compliance staff, as identified at the PAC, investment in new trained resources takes time and has opportunity costs in terms of diversion of trained resources. This all points towards the benefit of long-term, consistent funding of HMRC compliance efforts being the most efficient way to tackle fraud and error rather than piecemeal allocations of funding.

This research was featured in The Times among others.

 

1Tackling error and fraud in the Covid-19 support schemes, Gov.uk, 13 October 2022, https://www.gov.uk/government/publications/hmrc-issue-briefing-tackling-error-and-fraud-in-the-covid-19-support-schemes/tackling-error-and-fraud-in-the-covid-19-support-schemes

2Tackling error and fraud in the Covid-19 support schemes, Gov.uk, 13 October 2022, https://www.gov.uk/government/publications/hmrc-issue-briefing-tackling-error-and-fraud-in-the-covid-19-support-schemes/tackling-error-and-fraud-in-the-covid-19-support-schemes

3HMRC Annual Report and Accounts 2021 to 2022, Gov.uk, 18 July 2022, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1091379/HMRC_Annual_Report_and_Accounts_2021_to_2022_Print.pdf

4Tackling error and fraud in the Covid-19 support schemes, Gov.uk, 13 October 2022, https://www.gov.uk/government/publications/hmrc-issue-briefing-tackling-error-and-fraud-in-the-covid-19-support-schemes/tackling-error-and-fraud-in-the-covid-19-support-schemes

5 Including the figures for 2020/21 (ie. pre-Taskforce) of £536m, HMRC estimates a total recovery of £1,061m – £1,161m

6HMRC’s record on Covid support and tax fraud under the microscope, TaxWatch, 14 February 2022, https://www.taxwatchuk.org/hmrc_record_covid_support_fraud/

7Delivery of employment support schemes in response to the Covid-19 pandemic, National Audit Office, 13 October 2022, https://www.nao.org.uk/wp-content/uploads/2022/10/NAO-report-Delivery-of-employment-support-schemes-in-response-to-the-COVID-19-pandemic.pdf

8Delivery of employment support schemes in response to the Covid-19 pandemic, National Audit Office, 13 October 2022, https://www.nao.org.uk/wp-content/uploads/2022/10/NAO-report-Delivery-of-employment-support-schemes-in-response-to-the-COVID-19-pandemic.pdf

9Funding to fight covid related tax and benefits fraud, TaxWatch, 29 December 2021, https://www.taxwatchuk.org/covid_fraud_spending_dwp_vs_hmrc/

10Delivery of employment support schemes in response to the Covid-19 pandemic, National Audit Office, 13 October 2022, https://www.nao.org.uk/wp-content/uploads/2022/10/NAO-report-Delivery-of-employment-support-schemes-in-response-to-the-COVID-19-pandemic.pdf

11Rishi Sunak’s Covid fraud unit staffed with novices, The Times, 29 April 2022, https://www.thetimes.co.uk/article/rishi-sunaks-covid-fraud-unit-staffed-with-novices-h2vztwhm8

12Oral evidence: HMRC Annual Report and Accounts 21-22, HC 686, Public Accounts Committee, 20 October 2022, https://committees.parliament.uk/oralevidence/11385/default/

13((Autumn Budget and Spending Review 2021, Her Majesty’s Treasury, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1043688/Budget_AB2021_Print.pdf

14Oral evidence: HMRC Annual Report and Accounts 21-22, HC 686, Public Accounts Committee, 20 October 2022, https://committees.parliament.uk/oralevidence/11385/default/

15HMRC Performance in 2020-21, Public Accounts Committee, 11 February 2022, https://committees.parliament.uk/publications/8862/documents/89198/default/ 

16Implementing employment support schemes in response to the Covid-19 pandemic, National Audit Office, 23 October 2020, https://www.nao.org.uk/wp-content/uploads/2020/07/Implementing-employment-support-schemes-in-response-to-the-COVID-19-pandemic.pdf 

17Delivery of employment support schemes in response to the Covid-19 pandemic, National Audit Office, 13 October 2022, https://www.nao.org.uk/wp-content/uploads/2022/10/NAO-report-Delivery-of-employment-support-schemes-in-response-to-the-COVID-19-pandemic.pdf

18Delivery of employment support schemes in response to the Covid-19 pandemic, National Audit Office, 13 October 2022, https://www.nao.org.uk/wp-content/uploads/2022/10/NAO-report-Delivery-of-employment-support-schemes-in-response-to-the-COVID-19-pandemic.pdf

19HMRC’s record on Covid support and tax fraud under the microscope, TaxWatch, 14 February 2022, https://www.taxwatchuk.org/hmrc_record_covid_support_fraud/

Cross-party MPs call time on feeble approach to tax avoidance and urge HMRC to prosecute tax fraudsters

27th October 2022 by Alex Dunnagan

The All-Party Parliamentary Group for Anti-Corruption & Responsible Tax and TaxWatch have published a joint report outlining how supposedly ‘legal’ tax avoidance could actually be prosecuted as tax fraud. The report explains that there exists a serious enforcement gap in HMRC’s approach to tackling tax fraud, whereby criminal tax behaviour is systematically dealt with through civil channels provided that it complies with the “rules of the game” i.e. it has the superficial appearance of “legal” tax avoidance.

This means that, even if the tax is recovered, the underlying criminal behaviour goes unpunished. The deterrent effect of the criminal offence of “cheating the public revenue” is therefore disapplied in this context by HMRC policy, with the consequence that unscrupulous advisers, promoters and enablers face no serious downside risk in selling this kind of behaviour to taxpayers. This leads to substantial revenue losses. We argue that HMRC should enforce the law of the land rather than merely the “rules of the game”.

Dame Margaret Hodge MP, Chair of the APPG on Anti-Corruption & Responsible Tax, said:

The myth that tax avoidance is legal and tax evasion is illegal is a false distinction which is reinforced by the tax industry and HMRC’s feeble approach to enforcement. Our bold new paper attempts to explode these myths and recommends that HMRC should be enforcing existing criminal law by prosecuting the enablers of the most aggressive tax avoidance. HMRC should be enforcing the laws of the land, not the rules of the “tax fraud game” that let tax avoiders and their enablers off the hook. We need a real deterrent to stop bad behaviour or these tax cheats will continue to flout the rules while most taxpayers struggle with the cost of living crisis.

At a launch event in Parliament on 25th October  for the new report, Putting a Stop to the Tax Fraud Game, senior Parliamentarians, a Shadow Minister, academics and practitioners called on government to urgently close loopholes which allow egregious tax fraud to go unpunished. The paper argues the following:

  •  Much that is claimed to be “legal” tax avoidance is actually criminal tax fraud. The relevant criminal offence – ‘cheating the public revenue’ – is extremely wide and could include tax avoiders and the advisers that devise, market and enable tax avoidance schemes.
  • HMRC prioritises cases where there is clear “active deception”, like hiding information or falsifying documents.
  • Because of this, tax advisers know they can recommend ineffective tax avoidance schemes with impunity, provided they comply with the notional “rules of the game” by making a cursory effort to present it as legal, with no “active” deception or concealment.
  • Lack of fear of criminal sanction removes any real deterrent to this behaviour and so tax fraud, including supposedly “legal” tax avoidance, goes largely unpunished.
  • HMRC cannot keep up with better-resourced lawyers and accountants concocting potentially fraudulent avoidance schemes for their clients, and so many succeed without so much as a second glance, leading to major revenue losses and the undercutting of our public services, like the NHS and police.
  • The focus of a change in policy in this area should be on the unscrupulous promoters and advisers who are the root cause of the problem by bringing forward more criminal prosecutions against these enablers.

Dame Margaret continued:

For me, tax lies at the heart of the social contract. During this time of crisis after crisis, it has seldom been more important for our country to come together and pull in the same direction – toward security and prosperity for all. We must all pay into the common pot, for the common good, in order to fund the public services and infrastructure that we all rely on, including our NHS, our schools, and our roads. Any person or company that attempts to dodge paying their fair share – the tax avoiders and evaders – should be met with the full force of the law.

Alex Dunnagan, Acting Director of TaxWatch said:

The idea that tax avoidance is legal, and that tax evasion is illegal, has done untold damage to the state of taxation in the UK. Pursuing tax avoidance as a civil matter when there has clearly been fraudulent behaviour, does not act as a deterrent. Put simply, HMRC should pursue tax fraud for what it is – a crime. Laws already exist to prosecute those committing tax fraud. HMRC should use them.

The report can be found as a webpage here, and as a PDF here.

Photo by niu niu on Unsplash

Tax Gap Op-Ed in HMRC Magazine

25th August 2022 by Alex Dunnagan

We have recently had an op-ed published in the magazine HMRC Enquiries, Investigations and Powers. Below is the text in full.

The Tax Fraud Gap

The pressure on HMRC to tackle tax fraud is immense. After rolling out multiple coronavirus support schemes in a fast and efficient manner, the organisation now has to deal with a staggering amount of fraud and error in claims for furlough, eat out to help out, and the self employed income support scheme – all this against the backdrop of potential cuts to an already stretched headcount. It’s more important than ever to make the argument that HMRC’s compliance work is good value for money, and that the tax gap is being successfully tackled.

The UK Tax Gap

The annual estimate of the amount of tax lost each year in the UK, known as the Tax Gap, is a matter of significant public interest. HMRC has been making estimates since the early 2000s, and has published them every year since 2008. While other countries perform similar exercises, HMRC is the only tax authority in the world that publishes an annual estimate of losses for all forms of taxation. It is frequently stated that the UK has one of the lowest Tax Gaps in the world – but this is misleading, as it suggests there are a number of countries that measure Tax Gaps in a broadly comparable way.
The UK Tax Gap is a net figure, and takes into account ‘compliance yield’ – which is the amount of tax collected though enforcement activity. The difference between the net and gross Tax Gap is substantial. In previous years, the compliance yield figure is equivalent to one third of the net Tax Gap. The most recent Tax Gap, covering the 2020-2021 financial year, stands at £32bn (2019-2020 £34.4bn), or 5.1% of tax liabilities (2019-2020 5.1%).
Unlike the Department of Work and Pensions which analyses benefits payments in terms of fraud, claimant error, and official error, HMRC does not provide any estimate of tax lost to fraud. Instead, HMRC identify several behaviours leading to non-compliance – some of which clearly arise from fraudulent or dishonest behaviour. Of these behaviours “Criminal Attacks” accounts for £5.2bn, “Evasion” £4.8bn, “Hidden Economy” £3.2bn and “Avoidance” £1.2bn. Taken together, these behaviours are worth £14.4bn in tax losses, 45% of the entire Tax Gap. This is a small increase on previous years.

£bn 2021 2020 2019 2018 2017
Criminal Attacks 5.2 5.2 4.5 4.9 5.4
Evasion 4.8 5.5 4.6 5.3 5.3
Hidden Economy 3.2 3 2.6 3 3.2
Avoidance 1.2 1.5 1.7 1.8 1.7
Tax Fraud Gap 14.4 15.2 13.4 15 15.6
Total Tax Gap 32 34.8 31 35 33
% of Tax Gap resultant from fraud 45.00% 43.68% 43.23% 42.86% 47.27%

1It should be noted that these figures are taken from the reports published at the time, and do not reflect future revisions in the Tax Gap, which can lead to fluctuations in the total Tax Gap.

Avoidance is included given the way in which HMRC’s define avoidance. This excludes tax planning and is limited to non-compliance arising from tax schemes that attempt to “exploit” the tax system through “contrived or artificial” transactions. These schemes usually involve fraudulent behaviour at some stage of their execution.

Some categories of behaviour which HMRC use to define the Tax Gap will contain a mixture of honest and dishonest behaviour. For example, Legal Interpretation (£3.7bn) – can include disputes that arise from either honest or dishonest interpretations of tax law on the part of tax lawyers. As a result of this lack of clarity in the data, the £14.4bn figure for tax fraud will actually be an underestimate.

The Tax Gap also explicitly does not measure the impact of profit shifting, meaning that these figures cannot really be considered to be a comprehensive or reliable estimate of tax avoidance in the UK – it is certainly not a measure that the public would recognise.

Profit shifting is the most high profile form of tax avoidance, the type of avoidance employed by large global businesses like Google, Starbucks, Apple and Nike. Although it is notoriously difficult to develop an accurate estimate for the impact of profit shifting on the tax take, academic studies found that losses to the UK Treasury due to profit shifting could by up to £20bn a year. HMRC’s figure for non-compliance of all forms by large companies is £0.6bn.

Another area of concern is the payment of corporate subsidies via the tax system. There is no mention in the Tax Gap of non-compliance in the area of tax reliefs, such as R&D tax credits. Under HMRC’s own estimates, the Treasury lost £336m to fraud and error in the R&D tax credit system. HMRC should clearly state how it deals with corporate benefit payments in its Tax Gap, and whether fraud and error in these programmes are included in their Tax Gap estimate.

The Impact of Covid-19

The latest Tax Gap is also the first impacted by Covid-19. During the pandemic, HMRC paused a large amount of its compliance work. Because the Tax Gap is a net figure which includes compliance yield, then this should have led to a significant increase in the Tax Gap figures. However, HMRC made an adjustment to their methodology to change how they accounted for compliance yield. This apportioned the drop in compliance yield to previous years and reduced this year’s Tax Gap by £700m or 0.1% of total tax liabilities.2 This is significant because had this adjustment not been made, the Tax Gap will have increased as a per cent of total tax liabilities for two years in a row.

The 2020-2021 figures also do not include estimates of fraud and error arising from the three coronavirus support schemes which HMRC administered; Coronavirus Job Retention Scheme (CJRS, more commonly known as furlough), Self-Employment Income Support Scheme (SEISS), and Eat Out to Help Out (EOHO). Recent HMRC estimates put the total of fraud and error in these schemes at £4.5bn.
If the Tax Gap were to include the drop in compliance yield in line with previously published figures, and the losses to the Covid relief schemes, then the total Tax Gap would see a significant increase on the previous year’s figures.

HMRC’s interpretation of tax law

The term, “what should be collected” is also problematic as the word “should” is of course open to interpretation. HMRC defines what “should” be collected as – “the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting the law (referred to as the spirit of the law)”. This is in effect a measure based on how HMRC chooses to apply the law.

The difficulty with this is that it suggests that HMRC can easily reduce the Tax Gap by simply being more lenient in the way it interprets the law. This puts HMRC in a difficult position with regards to the Tax Gap – if there was demand for HMRC to take a tougher stance on tax avoidance, that in itself would cause an increase in the Tax Gap, leading to a perception that the agency was performing poorly, even if more tax was collected.
The future of tax compliance

The Public Accounts Committee has recommended that HMRC should set specific targets for reducing the tax gap, a recommendation HMRC does not agree with given that several factors are outside the scope of the departments control. This is a difficult situation as there is understandably scepticism that if targets are set then missed, this could lead to the perception that the department is underperforming.

With staffing numbers down almost 40 per cent since the department was created, HMRC has its work cut out in administering the tax system, coping with the backlog from the pandemic, along with the extra complexities resulting from the UK’s departure from the European Union. Publishing the tax gap is just one part in explaining the work HMRC does, but more can be done to communicate the importance of compliance work.

The Spring 2022 Budget announced that HMRC was set to receive an additional £161m of funding for its compliance work, which is expected to generate more than £3bn in additional revenues over the next five years. This is a return on investment of £18 in additional tax revenues for every £1 invested in compliance. Arguments can be made about the strategy to tackle tax fraud, or the methodology behind the tax gap, but ultimately everything the department does comes down to resources available. The bottom line is that government investment in HMRC compliance results in greater tax revenues – and in turn a smaller tax gap.

We are hiring!

28th July 2022 by Alex Dunnagan

We are looking for two people to join our small team at TaxWatch. These positions are remote (with an allowance for hiring a co-working space), with monthly in person meet ups in either Berkshire or Scotland.

We are an investigative think tank, and the UK’s only charity dedicated to compliance and sound administration of the law in the field of taxation. We’re a small organisation with a big reach. Since our inception a little over three years ago we have been featured in the media hundreds of times, from broadcast news to national and international newspapers. Our work has been cited in Parliament on numerous occassions, and is helping shape the debate on tax. We are independent of any political party.

The positions we have available are Researcher (job advert here), and Tax Crime Fellow/Senior Researcher (job advert here).

These positions are advertised as full time, though we are open to discussion regarding job sharing or part time work. If you think you’re right for TaxWatch, please get in touch!

Update – the application process is now closed.

We need to talk about Corporation Tax

26th July 2022 by Alex Dunnagan

Corporation Tax (CT) has been in the headlines again after several candidates in the Conservative Party leadership race promised to cut the rate. Liz Truss has promised to reverse the planned increase to 25 per cent, while Jeremy Hunt and Sajid Javid, set out plans to cut the rate to 15 per cent before they were eliminated from the contest. [1]15 per cent is the lowest permitted under Pillar Two of the Global Anti-Base Erosion (GloBE) rules

This note sets out what the UK’s current plans regarding CT are, who the tax affects, how much it contributes to the treasury, and how the UK compares internationally.

Changes in the Corporation Tax rate

UK Corporation Tax rates over time

When the Coalition government came to power in 2010 the headline rate of CT stood at 28 per cent. Since then it has been gradually cut to an all time low of 19 per cent. It was initially planned that the rate would be reduced to 17 per cent from April 2020, but that was reversed, and in 2021 the then Chancellor Rishi Sunak announced that it would be increased to 25 per cent from April 2023. Should Sunak become the next Conservative Party leader, and with that the UK’s next Prime Minister, there are no indications that the proposed rate increase would change.

It should be noted that the planned rate increase affects companies differently dependent on how much profit they make. Companies with profits under £50,000 will continue to pay 19 per cent in what’s known as the “small profits rate”. Businesses with profits between £50,000 and £250,000 will pay a “marginal rate” somewhere between 19 and 25 per cent. [2]Corporation Tax Rates, HMRC, 01 April 2022, https://www.gov.uk/government/publications/rates-and-allowances-corporation-tax/rates-and-allowances-corporation-tax

Who pays Corporation Tax?

The key thing to remember when looking at CT is that it is a tax on profits, not on revenues. There is also a difference between the statutory tax rate, be it 19% or 25%, and the effective tax rate, which is the amount of corporate tax a company actually pays on its pre-tax profits. There are various reasons for this difference. Companies are able to claim various tax reliefs, for example if they invest in Research and Development. There is an Annual Investment Allowance which allows businesses to claim tax relief on certain assets. A “super-deduction” on purchases of capital goods was introduced in the 2021 Spring Budget, allowing companies to deduct 130 per cent of the cost of “main rate assets” – more than the cost of the equipment itself – from their taxable profits in the year they purchase it. These are just a few of the reasons why companies often pay an effective rate lower than the statutory rate.

Of the three main legal forms of businesses in the private sector (sole proprietorships, ordinary partnerships, and companies) only companies are liable to Corporation Tax. There were 2 million actively trading companies at the start of 2021, almost half of which had no employees. [3]Business population estimates for the UK and the regions 2021, Department for Business, Energy & Industrial Strategy, 07 October 2021, … Continue reading

Over two thirds of the companies that paid CT in 2019-20, approximately 1.1 million companies, had liabilities of less than £10,000. A further 27 per cent of companies had liabilities between £10,000 and £49,999. While it is not clear from the data exactly how much profits these companies turned in order to have these liabilities, it would be reasonable to assume the vast majority of these companies – some 94 per cent of those with liabilities – would have profits of under £250,000, and thus would not be subject to the increased 25 per cent CT rate.

Number of companies and their CT liabilities by liability band, 2019-20 [4]Corporation Tax statistics commentary 2021, HMRC, 23 September 2021, https://www.gov.uk/government/statistics/corporation-tax-statistics-2021/corporation-tax-statistics-commentary-2021

How much does Corporation Tax contribute to the Treasury?

Total revenues reported by HM Revenue & Customs (HMRC) from 2017-18 to 2021-22 [5]‘Other’ includes, for example, Stamp Taxes, Inheritance Tax, alcohol and tobacco duties, Insurance Premium Tax, Capital Gains Tax, student loan recoveries, environmental taxes, customs duties and … Continue reading [6]HMRC Annual Report 2021 to 2022,Corporation tax is the fourth largest contributor to HMRC’s revenues, yielding £68.3bn in 2020-21. This is compared to £233.4bn for income tax, £158.3bn for … Continue reading

How does the UK Corporation Tax rate compare internationally?

Average Corporate Tax Rate by Region or Group 2021 [7]https://files.taxfoundation.org/20211207171421/Corporate-Tax-Rates-around-the-World-2021.pdf

The European average rate is 19.84 per cent, but this includes a number of very small economies with very low rates. The average European rate when weighted by GDP is 23.97 per cent. The G7 average rate is 26.69 per cent (26.41 per cent weighted by GDP). The OECD average rate is 23.04 per cent (25.81 per cent weighted by GDP) [8]https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1091378/HMRC_Annual_Report_and_Accounts_2021_to_2022_Web.pdf

Jeremy Hunt, who is no longer in the race, stated recently that “We’re scheduled to increase corporation tax to be higher than Japan, America, France or Germany.” This is half true at best. [9]Conservative leadership contest: four early claims fact checked, Full Fact, 11 July 2022, https://fullfact.org/news/conservative-leadership-2022-fact-checked/

The countries listed charge CT at both a central and a sub-central level, i.e. at a state, regional, or municipal level. The UK only charges a central CT. While the UK’s central rate may be higher than some of these countries when it increases to 25%, the total rate will not.

Take Japan for example. In 2021 Japan’s central CT rate was 23.2 per cent. However, Japan also has a sub-central rate that averages 7.4 per cent. Once deductions are factored in, the total CT rate in Japan is 29.7 per cent. Germany’s total rate is 29.9 per cent, the US is 25.8 per cent. France does not levy a sub-central CT, but the CT rate alone is 28.4 per cent. The OECD provides a useful dataset that show the central, sub-central, and combined CT rates for countries. [10]Statutory Corporate Income Tax Rates, https://stats.oecd.org/Index.aspx?DataSetCode=CTS_CIT

Conclusions

In discussing CT it is important to remember that raising the UK’s rate to 25 per cent as planned will not affect the vast majority of businesses, nor will it turn the UK into a high-tax outlier. In fact, the only companies set to pay 25 per cent will be those that are turning profits of over £250,000, and even then, they will likely pay a lower effective rate as a result of various reliefs. An increase from 19 per cent will move the UK to a rate closer to that of other large developed economies, and will still be lower than the rate the UK had in 2010.

TaxWatch discussed some of these issues recently with the New Statesman.

References[+]

References
↑1 15 per cent is the lowest permitted under Pillar Two of the Global Anti-Base Erosion (GloBE) rules
↑2 Corporation Tax Rates, HMRC, 01 April 2022, https://www.gov.uk/government/publications/rates-and-allowances-corporation-tax/rates-and-allowances-corporation-tax
↑3 Business population estimates for the UK and the regions 2021, Department for Business, Energy & Industrial Strategy, 07 October 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1019907/2021_Business_Population_Estimates_for_the_UK_and_regions_Statistical_Release.pdf
↑4 Corporation Tax statistics commentary 2021, HMRC, 23 September 2021, https://www.gov.uk/government/statistics/corporation-tax-statistics-2021/corporation-tax-statistics-commentary-2021
↑5 ‘Other’ includes, for example, Stamp Taxes, Inheritance Tax, alcohol and tobacco duties, Insurance Premium Tax, Capital Gains Tax, student loan recoveries, environmental taxes, customs duties and fines and penalties.
↑6 HMRC Annual Report 2021 to 2022,Corporation tax is the fourth largest contributor to HMRC’s revenues, yielding £68.3bn in 2020-21. This is compared to £233.4bn for income tax, £158.3bn for National Insurance Contributions, and £148.8bn for VAT.
↑7 https://files.taxfoundation.org/20211207171421/Corporate-Tax-Rates-around-the-World-2021.pdf
↑8 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1091378/HMRC_Annual_Report_and_Accounts_2021_to_2022_Web.pdf
↑9 Conservative leadership contest: four early claims fact checked, Full Fact, 11 July 2022, https://fullfact.org/news/conservative-leadership-2022-fact-checked/
↑10 Statutory Corporate Income Tax Rates, https://stats.oecd.org/Index.aspx?DataSetCode=CTS_CIT

HMRC publishes its latest Tax Gap – TaxWatch analysis

27th June 2022 by Alex Dunnagan

HMRC’s Tax Gap has increased for the second year in a row on a like-for-like basis.

The latest HMRC estimates of non-compliance are £32bn for 2020-2021, or 5.1% of total tax revenues. This is the same gap as a percentage as seen in last year’s publication covering 2019-2020.

However, this year’s figure includes a £0.7bn revision downwards to compensate for lower compliance activity during Covid. This means that on a like-for-like basis HMRC’s Tax Gap increased.

Of the £32bn total tax gap, at least £14.4bn, or 45%, of it is attributable to fraud. Fraud as a percentage of the total tax gap hasn’t been this high since 2016-2017. This is based on the limited data available, and the actual figure for tax lost to fraud will be much higher. [1]TaxWatch’s methodology explaining how we arrived at this figure is explained in full detail in our assessment of the 2019-2020 figures, see our report  The Tax Fraud Gap – 2021 edition, … Continue reading

As TaxWatch has previously highlighted, HMRC’s tax gap publication significantly underestimates the true scale of non-compliance with the tax system. Profit shifting by multinationals appears not to be counted at all.

Estimates of error and fraud in the HMRC-administered Covid-19 support schemes are also not included in the figures and reported on separately. These run into the billions of pounds.

Our full analysis is available in a briefing here. HMRC’s publication is available here.

References[+]

References
↑1 TaxWatch’s methodology explaining how we arrived at this figure is explained in full detail in our assessment of the 2019-2020 figures, see our report  The Tax Fraud Gap – 2021 edition, here https://www.taxwatchuk.org/tax_fraud_gap_2021/

Committing to a world of good? Etsy’s tax affairs

20th June 2022 by Alex Dunnagan

Online marketplace Etsy paid just £128,000 in UK Corporation Tax in 2020, whilst booking huge amounts of UK revenue in Ireland, new research from TaxWatch has found.

As traditional bricks and mortar shops were hit by successive lockdowns as a result of the pandemic, Etsy saw a huge increase in turnover, with the value of goods sold via Etsy increasing exponentially. The UK accounts for over 10% of the company’s takings, making it the most important market outside of the US, where the company is headquartered.

This importance isn’t however reflected in Etsy’s UK company accounts. Etsy’s UK company, Etsy UK Limited, declared revenues of just £12.5m in 2020, a profit of £7.5m, with a tax bill of just £128,000 – after deductions for share-based compensation.

Instead, Etsy’s UK sales, which run in to hundreds of millions of pounds, are booked with an Irish Unlimited Company, where profits were subject to a tax rate of 3%.

The full report is available here.

This story was featured in The Guardian and City AM, amongst others.

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