Latest HMRC figures show an estimated £33bn tax gap in the UK in 2016-17, amounting to 5.7% of total theoretical tax liabilities and the same level as the previous year, with small businesses responsible for 41% of the tax not collected
Of the total tax gap, which is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid, £13.5bn is down to income tax, National Insurance and capital gains tax owing, and £11.7bn to VAT.
Avoidance accounts for £1.7bn of loss, compared to £5.9bn due to failure to take reasonable care, £5.4bn due to criminal attacks, and £5.3bn because of legal interpretations. There has been a long-term reduction in the overall tax gap, from 7.3% in 2005-06 to 5.7% in 2016-17.
Lucy Brennan, partner at Saffery Champness, said: ‘Clearly, a large part of the tax gap problem remains a worrying lack of understanding amongst taxpayers about their obligations, and the tax system.
‘This year, failure to take reasonable care, together with plain and simple error, has taken almost £10bn from the public purse. HMRC believes everyone should get their tax return right, and we are no longer seeing them accept that innocent errors have no penalty. If one has been careless the penalty for unprompted disclosure is 0% to 30% of the tax due, while prompted disclosure is 15% to 30%.’
With only 5% of the tax HMRC thinks is being underpaid is due to tax avoidance, law firm Pinsent Masons says HMRC is increasingly shifting the focus of its inquiries away from tax avoidance schemes towards more technical disputes over businesses’ interpretation of the law.
Catherine Robbins, partner at Pinsent Masons, said: ‘Very few businesses are engaged in tax avoidance schemes now and as HMRC hunts for new sources of revenue, it is increasingly coming down hard on basic, almost routine errors.
‘HMRC is increasingly challenging companies' interpretation of the UK's extremely complex tax rules.
‘HMRC is putting significant resource into areas like employer tax compliance, where it is very easy for businesses to make mistakes.’
There are also predictions that HMRC is likely to come after SMEs and individuals to boost their tax take, as HMRC’s figures show that small businesses and individuals are thought to have underpaid a combined £17.1bn of tax in 2016-17, half of the total.
In addition, the underpayment of personal taxes has increased by 17% in the last year, up from £2.9bn in 2015-16 to £3.4bn in 2016-17.
Kevin Igoe, managing director at specialist insurer PfP, said: ‘There is a danger that HMRC may form a low opinion of tax returns from small businesses, which means that around a fifth of SMEs are at immediate risk of tax investigations.’
HMRC Measuring the Tax Gap is here.
Report by Pat Sweet