Tax gap of £31bn shows downwards trend

The tax gap, which is the difference between tax that should be paid and what is actually paid, has fallen to 4.7%, its lowest recorded rate, according to HMRC estimates

In total, HMRC collected £628bn in tax revenue in 2018-19, with £31bn outstanding.

There is a long-term downward trend in the tax gap, which stood at 7.5% in 2005-06.

Jim Harra, HMRC CEO, said: ‘More than 95% of the tax due was paid in 2018-19. HMRC’s aim is for everyone to pay the tax that is due, no matter who they are.

‘Our role is increasingly about making it straightforward for taxpayers to get it right, first time, while also tackling the minority who deliberately set out to cheat the system. I’m pleased that we’re now able to share more information about who pays what.’

This is the first year that a stand-alone tax gap for wealthy taxpayers has been included in the report. HMRC said the total wealthy tax gap stands at £1.7bn and represents a very high collection rate of all tax due within this group. The wealthy tax gap is the smallest proportion (6%) of the total gap by taxpayer group.

In contrast the biggest loss (£13.4bn) is down to small businesses, followed by £5.3bn owed by large businesses, with £4.5bn of missing tax attributed to criminal activity.

The most likely reason for tax not being paid was failure to take reasonable care, which accounted for £5.5bn, compared to £3.1bn lost through error. Tax evasion was responsible for £4.6bn of losses, while there was £4.1bn of non-payment and £2.6bn missing due to the hidden economy.

The tax gap for income tax, National Insurance contributions and capital gains tax stood at 3.4% in 2018-19 at £12.1bn, and was the biggest share of the total tax gap by type of tax.

The corporation tax gap has reduced from 11.3% in 2005-06 to 7% in 2018-19, while the avoidance tax gap has reduced from £3.7bn to £1.7bn over the same period.

With tax revenues likely to come under pressure as a result of the slowdown in the economy due to coronavirus, Dawn Register, partner in tax dispute resolution at BDO, said: 'the tax gap could be a crucial ‘Covid-19 fighting fund’ to help raise tax revenues, without the need to actually increase tax rates. 

Register said: ‘We expect HMRC to use this data to focus its resources and efforts on raising coffers for the Treasury.

‘The numbers suggest that 30% of the tax gap relates to evasion and “criminal attacks” and we expect this will be a key area for future HMRC interventions and risk analysis.

‘It is notable that the current data shows small businesses are responsible for over 43% of the tax gap (£13.4bn), in comparison to £2.4bn from individuals and £1.7bn from the wealthy.’

‘In March 2020, the target figure to collect from tax evaders and avoiders was £4.4bn by 2024-2025, but given the severe economic impact of Covid-19, there is little doubt that there will be increased pressure on HMRC to do even more to collect additional and much-needed funds.’

For its part, CIOT warned the complexity of the tax system means taxpayer error is likely to remain high going forward, and that tax lost to non-payment due to business failure could be set to rise as a result of the current recession caused by Covid-19.

John Barnett, chair of CIOT’s technical policy and oversight committee, said: ‘Around £8.6bn of the tax gap relates to taxpayers not getting things right through what HMRC categorise as error or a failure to take reasonable care.

‘HMRC must focus on customer service and providing clear and up to date guidance to help large numbers of ordinary taxpayers who find themselves confronted by ever more complex tax law and increasing compliance obligations.

‘It is noteworthy that nearly twice as much is lost to errors as to avoidance.’

Measuring tax gaps 2020 edition is here.

By Pat Sweet

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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