Latest HMRC estimate shows tax gap was 5.6 percent (£35 billion) for 2017-18.
HMRC have published their latest figures for the ‘tax gap’ - the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid. According to the report published on 20 June 2019, the UK tax gap for 2017-18 was estimated to be £35 billion, 5.6 percent of the total tax liabilities. This year’s figure represents a slight increase of 0.1 percentage points from the 2016-17 figures.
The total tax gap is estimated at £35 billion, the largest in absolute terms since 2005-2006. However, on percentage terms (which broadly adjusts for inflation, economic growth etc.) there has been an overall reduction in the tax gap from 7.2 percent in 2005-06 to 5.6 percent in 2017-18.
The largest proportionate falls over those years were in relation to corporation tax (12.5 percent to 8.1 percent), VAT (12.2 percent to 9.1 percent) and excise duties (8.4 percent to 5.1 percent). The other tax gaps have remained relatively constant.
There is much good news in the report. The tax gap represents 5.6 percent of tax liabilities which means that 94.4 percent of tax liabilities are being collected. Ideally there would be no tax gap but collecting almost 95 percent of liabilities is not an insignificant achievement. The UK also continues to perform well when compared to its international peers.
The report analyses the gap according to type of tax, type of taxpayer and type of behaviour.
In relation to behaviour one of the largest contributors to the tax gap is the ‘failure to take reasonable care’ (18 percent). This involves carelessness or negligence in recording transactions and returns. HMRC will be hoping that the ongoing digitalisation of the tax administration in the form of initiatives such as Making Tax Digital (MTD) will make inroads into this figure (as well as the tax gap attributable to error of £3.4 billion).
An equally large contributor to the gap is ‘legal interpretation’. Narrowing this gap will be a more difficult nut to crack, particularly whilst the UK tax code remains as complex as it is.
Interestingly, the report separately itemises the gaps relating to evasion, criminal attacks and the hidden economy although they are all variations on the common theme of illegal activity. Aggregated, these behaviours total 38 percent of the gap and show that HMRC still have some work to do in this area.
By comparison avoidance, which is defined as the exploitation of tax rules to gain a tax advantage Parliament never intended, only contributes £1.8 billion (or 5 percent) of the gap. The report excludes BEPS arrangements that are being tackled multilaterally under the OECD BEPS initiatives. Views differ on whether or not these amounts should be included in the reported tax gap. HMRC have included within the figures BEPS type activity that, in their view, can be tackled using UK law.
Looking forward, the increasing digitalisation of the tax administration in particular and the economy more generally should help close the gap further, reducing the capacity for carelessness and error but also reducing the opportunities for criminal activity still heavily dependent upon the cash economy. With MTD for VAT now being implemented it is hoped that the report will be expanded over the next few years to specifically comment on the impact of MTD on the VAT gap.
MTD is still expected to be rolled out to income tax and corporation tax in due course. If executed well this may become a game changer in reducing the tax gap. Currently, self-assessment taxpayers contribute 57 percent of the gap in relation to income tax, national insurance and capital gains tax. An effective digital strategy could be transformational.
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