Tax gap falls to record low at £36bn

The UK tax gap fell to 6.5% representing £36bn of lost tax in 2014-2015, heralded by HMRC as its lowest-ever level, below the newly revised figure for the previous year which is now put at £37bn

According to the latest official statistics, the UK tax gap, which measures the difference between the amount of tax due and the amount collected, stood at 6.9% in 2013-2014. 

At the time those figures were first released, HMRC said the figure was 6.4%. It now says the adjustment in the tax gap figures for 2013-2014, from £34bn to £37bn, largely results from two factors: projected information which has been replaced by actual data, and improved data analysis arising from an upgrade in the way HMRC identifies risk in the self assessment system.

This revision means the tax gap measure rose in both 2013-2014 and in 2012-2013, having stood at 6.6% in 2011-2012.

However, HMRC says that the long term trend is downwards, arguing that if the tax gap had remained at its 2005-2006 level of 8.3%, it would have grown to £47bn by now.

HMRC’s breakdown of the statistics suggests that half of the current tax gap (£18.3bn) is down to SMEs, with large businesses accounting for a quarter (£9.5bn), criminals for £4.8bn and individuals for £3.4bn.

Uncollected income tax, National Insurance contributions and capital gains tax amount to £15.5bn or 43% of losses, while VAT losses are put at £12.7bn and missing corporation tax at £3.7bn. The rest is down to missed excise duties and other taxes.

The largest proportionate falls between 2005-06 and 2014-15 have been in the corporation tax and excise percentage gaps, which have fallen by 44% and by 20% respectively.

HMRC says the hidden economy is the biggest driver for the tax gap, accounting for £6.2bn, followed by £5.5bn lost because of failure to take reasonable care, £5.2bn due to legal interpretation, £5.2bn because of evasion, while £4.8bn of losses are down to criminal attacks and £3.6bn to non payment. Error accounts for £3.2bn. 

There has been a large reduction in the PAYE tax gap estimate from £4bn in 2013-14 to £2.8bn in 2014-15, an area where HMRC says the introduction of real time information (RIT) is likely to have made a significant contribution.

The VAT tax gap is at its lowest level of 10.3%, or £12.7bn, for 2014-15.  There is a long-term reduction between 2005-06 and 2014-15 for the excise duty tax gap (8% to 5.3%) and the corporation tax gap (13.5% to 7.6%).

Smith & Williamson national tax partner Tina Riches noted that despite HMRC's keenness to point to the fall in percentage temrs,  the overall level of the gap in monetary terms 'roughly remains stubbornly  at the constant level that it has been at for the last ten years at £36bn'. 

'By far the smallest element of the gap is tax avoidance at £2.2bn, or about 6% of the gap,' she added. 'Other issues, such as illegal evasion at £5.2bn, are far more serious. In terms of the taxpayer group responsible for the gap, over half (£18.3bn) is down to SMEs (small and medium sized businesses) with large businesses responsible for half of that amount (£9.5bn).

'In terms of the taxes themselves, only £3.7bn, related to corporation tax. In other words, on HMRC’s figures, any popular instinct that the tax gap was the fault of large corporations avoiding corporation tax could hardly be more wrong.'

Jane Ellison, financial secretary to the Treasury, said: ‘The UK has one of the lowest tax gaps in the world. By investing £1.8bn since 2010 in boosting HMRC compliance capabilities, we’ve brought our tax gap down to its lowest ever level. And to make it even easier for people to pay the right tax in the future, we’ve invested £1.3bn in new digital tools.’

Jon Thompson, HMRC’s chief executive, said: ‘These figures show we have successfully maintained a downward pressure on the tax gap in 2014-15, while collecting record revenues of £518bn.’
HMRC’s measuring tax gaps 2016 edition:  Tax gap estimates for 2014-15 is here.

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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