Are we now obliged to pay as much tax as we possibly can, in any circumstances? Should we deliberately not claim expenses or tax reliefs to which we are legitimately entitled, to help shore up the country's ailing finances?

It would seem so, according to the Chancellor Mr. Osborne, who roundly criticised Labour for avoiding tax and bizarrely, according to the Telegraph and several other sources, asked them to settle the supposed liability of one of its main donors, in a letter which was publicised yesterday. This evinces a complete misunderstanding of the fundamental principles of how personal tax is assessed and charged - unfortunate, given Mr. Osborne's role as Chancellor.

The background appears to be that In a simple transaction, a "major donor" gave some of his shares away to the Labour party. The value of the shares was very substantial but this kind of transaction is one which shareholders in family companies have undertaken countless times for very many years. The tax relief on such transactions is there for a very good reason, although it is unusual to see the beneficiary as a political party, rather than a friend or relative.

To be clear, on the facts as reported this is not some kind of contrived or artificial "scheme" with several steps and lacking in commercial substance: this was on the face of it a very real, straight forward and absolute gift which should be specifically relieved under legislation designed for that purpose. It is perhaps avoiding tax in the most literal sense but one of the major problems with using the word "avoidance" is that it is too broad a term. 

Of course Mr. Osborne might claim that his letter was intended merely to highlight Labour's "double standards" in such matters, given that they have frequently sought to chastise big business recently for failing to "pay their fair share". (Something in which he too has participated, if not quite so energetically). And of course Mr. Osborne has a far better appreciation of tax matters than this most recent correspondence might suggest; as regards both, Mr. Osborne might do well to bear in mind that the Internet, if not he, has a long memory, as this clip of Mr. Osborne publicly recommending the avoidance of Inheritance Tax demonstrates - George Osborne Advises on How to Avoid Tax. Perhaps if the Chancellor spent less time trying to score political points and more time on the economy..?

The National Audit Office (NAO) published its report Tackling Tax Credits Error and Fraud in February this year; the Public Accounts Committee (PAC) heard evidence from the Citizens’ Advice Bureau and HMRC in March and their report Tax Credits Error and Fraud was issued last week.

From a cost management viewpoint, HMRC appears to have done rather badly. It didn’t help its case by initially claiming to have slashed £1.4 billion from losses due to error and fraud in 2010/11, only then to revise that claim to just £480 million. Further, the NAO report warns that HMRC “recognises that its estimates for individual interventions are overstated and that these overstatements may be significant”.

In fact, the report states that HMRC estimates it lost £2.3 billion to error and fraud in 2010/11 and that one in every 5 claims included a loss due to error or fraud. In the PAC hearing, HMRC estimated that error accounted for about 70% of the total loss, and fraud the balance – but note that the figure for losses, etc., of £2.3 billion excludes any losses attributable to organised crime! The fact that HMRC so readily lumps simple misunderstanding together with intentional dishonesty is cause for concern.

HMRC deployed 400 more staff to deal with checking claims, (from 1,100 to 1,500 in the ‘front line’) and increased its ‘interventions’ or checks from 120,000 to nearly 2 million in 2010/11 (although the number has reduced since) but this more than tenfold increase in checks only doubled the estimated savings made.  

HMRC has started to use credit-referencing agents (and the omnipresent, if not omniscient “Connect” database) in order to check if claimants are in fact single parents, or are living as a couple and are therefore potentially entitled to less credit. While the PAC was dismissive of the short term benefit of RTI, one of the key fields for the new monthly RTI submissions is the employee’s current address – presumably HMRC will soon be able to cross-check live PAYE records to flag up multiple adult occupants at an address.