As I always tell everyone, the fastest way to learn is by arguing with smart people. So I particularly enjoyed arguing with old chum Ian Grigg about the relationship between cash use and tax evasion. I decided to take the time to go and research some up-to-date figures.
The average bank spends £40m a year on KYC Compliance, according to a recent Thomson Reuters Survey, which also revealed that some banks spend up to £300M annually on KYC (Know Your Customer) Compliance and Customer Due Diligence (CDD).
So let’s say a £1 billion for the big four and another £1 billion for the rest. So £2 billion in KYC. And that doesn’t include (obviously) the £5 billion that the UK Treasury estimates that UK banks spend on "financial crime compliance" (which I assume means AML, CTF and PEP). So… that’s something like £7 billion on compliance and presumably tax evasion is one of the main crimes that it is supposed to be tackling.
How does that compliance spend compare with the tax gap? The what? Well, the difference between what Her Majesties Revenue and Customs (HMRC) thinks it’s owed in theory and what it actually collects is called the ‘tax gap’. The tax gap is currently estimated to be £34 billion in the UK.
It includes a number of things as well as evasion and avoidance. HMRC estimates that in 2013/14, differences in legal interpretation cost it £4.9 billion; unregistered paid work cost it £6.2 billion; organised criminal attacks cost it £5.1 billion; non-payment cost it £4.1 billion; the failure of people to take reasonable care with their tax returns cost it £3.9 billion; and honest errors cost it £2.6 billion.
By far the single biggest contribution to the tax gap is the underreporting of income by SMEs, especially those who take payments in cash. Everyone from your builder to your taxi driver contributes to this, which is why the scale of the evasion is so vast. Here are the HMRC figures broken down by source rather than type.
SMEs £16.5 billion.
Large businesses £9.5 billion.
Criminals £5.1 billion.
Individuals £3 billion.
That’s a lot of schools and hospitals. Everyone goes on about big companies like Apple and Facebook engaging in perfectly legal tax avoidance (blame the government not Google) but that’s not the biggest chunk of cash missing from the books. Now, no-one would be so dumb as to imagine that reducing cash would eradicate the tax gap. But it would raise the costs of tax evasion as well as the risks and therefore, I would think, at least reduce it. And given the dominance of SME cash under-reporting (it’s half of the tax gap) that would seem to be low hanging fruit, as they say. Maybe instead of spending all of this money on compliance, we should spend it on migrating away from cash?