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Tax gap falls to lowest recorded rate

Tax gap falls to lowest recorded rate

HMRC have published their latest estimate of the ‘tax gap’ finding it to be £31 billion or 4.7 percent of total tax liabilities.

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Director, Tax Policy

KPMG in the UK

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HMRC have estimated the ‘tax gap’, the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid, to be £31 billion for 2018-2019. In total the estimated tax gap amounts to 4.7 percent of tax liabilities which is its lowest recorded rate. This represents a reduction of 0.3 percent when compared with the prior year and an overall long term reduction of 2.8 percent since 2005-2006 when the tax gap stood at 7.5 percent.

The report analyses the gap according to type of tax, type of taxpayer and type of behaviour. According to HMRC’S report the £31 billion tax gap is comprised as follows:

  • Income tax, national insurance and capital gains - £12.1 billion;
  • VAT - £10 billion;
  • Corporation tax - £4.4 billion;
  • Excise duties – £2.8 billion; and
  • Other taxes - £1.7 billion.

Notably HMRC’s report shows that there has been a sustained reduction over time particularly in the VAT tax gap. HMRC mention their progress on digitising VAT returns and record-keeping through Making Tax Digital (MTD) in their accompanying press release, commenting that one of the aims of MTD is to reduce the tax gap, but they do not suggest this has had any impact on the latest figures. Bearing in mind MTD mandation did not commence for most businesses until April 2019 (although many signed up early) this is not surprising – it will be interesting to see if there is any impact next year.

HMRC attribute 72 percent of the tax gap to businesses, with 43 percent relating to small businesses, 17 percent to large businesses and 12 percent to mid-sized businesses. Notably, for the first time HMRC have separately identified the tax gap attributable to wealthy individuals which stands at £1.7 billion (6 percent).

The taxpayer behavioural reasons for the tax gap were consistent with prior years. The largest contributor to the tax gap remains the ‘failure to take reasonable care’ (18 percent). This involves carelessness or negligence in recording transactions and returns. A further 3.1 billion (10 percent) is attributable to error. HMRC will no doubt hope that further digitalisation of the tax administration will make inroads into these figures.

Other significant contributors are differences in legal interpretation of £4.9 billion (16 percent), £4.6 billion of evasion (15 percent) and £4.5 billion lost to criminal attacks (15 percent). A further £2.6 billion (9 percent) relates to the hidden economy.

Addressing differences in legal interpretation will be difficult for HMRC to achieve without substantial simplification of the tax system. Tackling criminal behaviour by taxpayers is potentially easier to achieve and an area we may see HMRC shift their focus to as in aggregate this amounts to 39 percent of the overall gap.

Now that the Corporate Criminal Offence rules have been in place for almost three years and the first investigations are underway, we will no doubt begin to see prosecutions under the rules. Digitalisation of the tax system may also play a part in reducing traditional forms of tax evasion which thrive in the cash economy.

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