To explain the tax gap to Richard J Murphy

The UK loses 20% of total corporate profits to tax havens but HMRC are in denial about the missing £7 billion


Gabriel Zucman has estimated the loss of corporate tax revenue due to artificial profit-shifting.

The UK is losing over 20% of all corporate profits that should be subject to tax before they ever get near the tax system if this data is right (and Zucman tends to understate things in my opinion).

The question is, what is the definition of “artificial”?

Zucman would say that Google selling advertising into the UK from Ireland is artificial profit shifting. The EU would say that’s an inevitable part and parcel of the Single Market rules, where one single company, in any one EU country, can sell into each and every other EU country while paying corporation tax in just the one – absent the existence of a permanent establishment.

HMRC also says that a corporation selling across borders, into a state in which the selling organisation does not have a permanent establishment (and yes, HMRC does indeed distinguish between the actual legal entity doing the selling and other parts of the same group which might have such an establishment – for that’s what the law actually says) is not tax avoidance. They state, as they should for that is what the law is, that this is just the way the law works.

That is the summary of the latest HMRC tax gap data. I have highlighted the large business line in blue: they’re the ones who, by definition will be shifting profits out of the country.

HMRC say the gap by these businesses is 5%. So, you could argue that using the Zucman data HMRC are 15% short. But I would argue that the 5% is based on the profits stated after the shifting Zucman has recorded has taken place. HMRC do not recognise profit shifting as tax avoidance: they have persistently said so. In that case extrapolating their data, if the 5% loss is stated out of 80% of the total (i.e. the sum net of Zucman’s 20%) then it’s 4% of the real total, meaning that the tax gap Zucman might be identifying is worth at least five times as much, or £7 billion a year on top of the £1.4 billion HMRC already recognise.

Some obvious thoughts follow. The first is why is HMRC in denial on this?

The second is that if one tax gap is wrong by a factor of five how much are the others out by?

Third, if they’re out by anything like the same amount why isn’t this creating more of an issue?

And why, in that case, isn’t HMRC’s failure to get something so basic right the cause for censure in its own right?

And why isn’t action to recover this sum resulting?

The difference, dear Senior Lecturer, is that you are using a different definition of the tax that is due. HMRC is using the law. You are using the definition of “how much tax Richard J Murphy thinks the bastards should be paying.” Amazing, I know, possibly even a little ego deflating, but the definition used in law is the one laid down in law, not something dreamed up by a retired accountant from Wandsworth.

Google Eire is entirely, absolutely and completely, obeying the law by selling advertising into the UK from Dublin. You want to claim that’s tax avoidance and no one else at all does. There’s the difference.

Gabriel Zucman also makes a large mistake. He’s not grasping that in order for those Google profits to be paid out to shareholders they must first enter the US corporate income tax net. And pay that tax. The entire structure delays a tax bill, to be sure, but that’s all it does. And that’s also how the corporate taxation system works – tax should be paid where economic value is created. Which in the case of an American company employing Americans in America to write a search engine is going to be, at least in part, in America. Under whatever American tax rules are.

20 thoughts on “To explain the tax gap to Richard J Murphy”

  1. The only possible way to explain this to Murphy is to beat him repeatedly on the head with the Stupid Stick, in the hope that it might drive some small amount of intelligence into his thick pustulent skull

  2. If I make up a number, say £50m, and that is a conservative estimate which I should therefore double before making assumptions that I then extrapolate in random and illogical ways it is clear that the tax gap is £500 trillion pounds and 62p. Or any number you’ll pay me to say.

  3. “HMRC do not recognise profit shifting as tax avoidance: they have persistently said so”

    That will be a great surprise to anybody following HMRC’s actual public statements as opposed to Murphy’s imagined HMRC statements. Anybody who has ever tried to shift profits will have probably death with various transfer pricing rules, unallowable purpose rules, possibly diverted profits tax, worldwide debt cap rules.

    I could go on, tax advisors will feel the rules certainly do.

  4. @ironman

    You lack Spud’s analytical flexibility.

    HMRC do not think that staying within the law on transfer pricing and so on is “profit shifting”. Spud does. Because profits he’d like to tax – which is all of them – have been shifted.

    Profits he says have been “shifted” are profits he deems to have been shifted regardless of the law.

  5. He’s never going to be happy because people who are able to think for themselves and read will come up with different figures than him.
    Which in his mind makes him a CRUSADER.

    Picked upon, bullied, put down, reviled, laughed at – all these things he will see others doing to him (whether they are doing so or merely correcting someone who has got it all wrong is another matter).
    So he can feel martyred and suffer for the CAUSE.

  6. The first thing that strikes me is that the report takes the average profitability of all businesses as a baseline to compare the profitability of businesses which are successful enough and mobile enough to be flexible about where they run their activities from.

    That is, they take the profitability of software companies with fixed costs and open-ended revenue streams, compare it to a baseline profitability derived from widget manufacturers, and argue that because it’s higher then clearly profit has been artificially shifted. They don’t even *attempt* to allow for the particular characteristics of internationally-mobile businesses.

  7. @Pellinor

    You can be damned sure they would have made such an allowance if for some reason it inflated their figures.

    Only the juiciest cherries get picked to go into these wankers’ reports.

  8. The UK spunks 7bn a year on subsidies to owners of qualifying farm land. The OECD estimate that subsidies reduce potential GDP by £6 for every £1 spent.
    So that’s a GDP potential of 42bn right there, and as government takes a 40% cut of GDP then I declare that £16.8bn of tax is being avoided by this one government policy.
    Suck on that for tax avoidance Zucman.
    Perhaps Snippa would agree with this argument.

  9. Bongo – he’d never agree as you’re using simple logic and facts to make an argument… Where’s the gut feeling? The guessing? The correcting of the figures?

    Should be more like £6 but I think it’s too conservative so let’s say £9. £7bn is the published figure but we all know the government can’t add up honestly so let’s say £10bn. This gives £90bn and 40% of that is £40.5bn…that’s more like it, feels right in my gut…

  10. You’re just looking at what you’re getting Jim. There’s about £3bn here in the UK, £4bn to the rest of the EU out of that net EU contribution, and I’ve overlooked a cut of the DfID spunkage.

  11. In a reply to a Steve Bristow, at 6.44pm yesterday, the spud-u-don’t-like says: “If that is the best you can do you owe me an apology for making things up. That’s not something a professional should do”.

    The lack of self-awareness is incredible.

  12. I’m please I managed to sneak this one past him;

    John Peterson says:
    November 8 2017 at 11:57 pm
    Hi Richard,

    I think the problem with this is initially that, you objectively understand and realistically evaluate aggressive multinationals arrangements systematically, Steve is vaguely estimating tax without any thought.

    Thanks for you analysis and insight



  14. @ FT, TTG

    Thanks, I wanted to end it with something along the lines of, continually underestimating necessary tax, but it couldn’t quite find the words to make it sound right

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