What is behind HMRC’s unwillingness to estimate the offshore tax gap? 

Andrew Park

Andrew Park

Recent reports that HMRC has responded to freedom of information requests from Tax Policy Associates to indicate that it does not have an estimate of the extent of the tax gap relating to overseas financial accounts are perplexing at first glance, given the vast amount of offshore financial data now at HMRC’s disposal.

Most major overseas onshore and offshore jurisdictions – including most traditional offshore tax havens – now annually send HMRC information about all financial accounts held by UK residents under the common reporting standard. 

From that information alone, HMRC is aware of about £850bn held by UK residents overseas – of which about £570bn is held in participant offshore financial centres.

However, there are limitations to the CRS. Not all countries are part of the CRS, including the US. What's more, where data is obtained under the CRS, it tends not to automatically cross compare with UK returns in the way many people imagine. 

CRS data is provided in the usual international calendar year format rather than for UK tax years ending April 5. Taxpayers also often make use of various annual allowances or exemptions – such as non-domicile status – not to disclose income, which, although generally valid, are not necessarily obvious to HMRC’s computer systems, particularly if the people concerned conclude they do not need to file UK tax returns.

There is also an inherent risk that reliance on simplistic assumptions to form estimates could result in wildly inaccurate and misleading statistics. 

For example, the Tax Justice Network recently estimated the scale of the UK’s overseas tax abuse problem at £19.2bn a year, but did so by assuming all historic outward flows of capital from UK residents were leaving the UK to yield a 5 per cent annual investment return that was wrongly completely outside the UK tax net when it should all have been taxed at a flat maximum rate of tax of 45 per cent. 

It is understandable that HMRC are not prepared to indulge in such wild and easily discounted guesswork.

A lot of data

However, the fact remains that HMRC does have access to vast and unprecedented amounts of data about the offshore holdings of UK residents – not just from CRS, but also from bilateral information sharing agreements with countries like the US and from data leaks from offshore financial institutions. 

HMRC is also no stranger to complex data analysis and had a sophisticated computer system developed for it some years ago by defence contractor BAE Systems to trawl through multiple data sources to identify potential tax anomalies. Why then is HMRC so reticent about forming a view it can publicly admit to on the scale of the offshore tax gap?

Surely, the major underlying issue is a fundamental lack of resources at HMRC to confirm and quantify the scale of tax underpaid. It is one thing to identify potential anomalies, but quite another to confirm those potential anomalies as tax irregularities and to quantify the level of underpaid tax resulting.