HMRC has estimated the overall tax gap at £32bn for 2010/11 – equivalent to around 6.7% of the estimated total tax liability – and has reduced its estimate for 2009/10 from £35bn to £31bn.
The increase of around £1bn is ‘mainly due to increases in the VAT rate from 15% to 17.5% in January 2010 and to 20% in in January 2011’, HMRC said in Measuring tax gaps 2012.
‘The tax gap is compiled from 30 separate estimates for different taxes. It is also broken down into the reasons that tax hasn’t been collected. These include tax evasion and avoidance, as well as customer error, the hidden economy, criminal attacks and where tax cannot be collected because businesses have become insolvent.’
Today’s figures include revisions going back to 2004/05 including ‘downward revisions by the Office for National Statistics that affect the VAT gap’. They show that the tax gap as a percentage of liabilities has declined from 8.2% in 2004/05 to 6.7% in 2010/11, HMRC added.
Source: HMRC, Measuring tax gaps 2012
David Gauke, the exchequer secretary, said: ‘These tax gap figures show that the vast majority of people and businesses pay the tax they owe on time. Last year £468.9bn was collected, including £13.9bn brought in through HMRC’s work policing the rules.’
Lin Homer, HMRC’s chief executive, said the department’s ‘determination to support the honest majority and to crack down on evasion, avoidance and fraud’ had kept downward pressure on the tax gap.
HMRC defines the tax gap as ‘the difference between tax collected and the tax that should be collected (the theoretical liability)’.
The theoretical tax liability represents ‘the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law)’.
HMRC’s analysis of the tax gap ‘by behaviour’ indicates that error, failure to tax reasonable care, criminal attacks, evasion and the hidden economy accounted for £23bn or 73% of the tax gap.
Of the remainder, £5bn or 14% was attributed to avoidance, which HMRC distinguishes from ‘legitimate tax planning’.
‘Legal interpretation’ accounted for £4bn or 13%. HMRC describes this as ‘the potential tax loss from cases where HMRC and individuals or businesses have different views of how, or whether, the law applies to specific and often complex transactions’.
George Bull, senior tax partner at Baker Tilly, said many people would welcome the ‘downward trend’.
‘With many tax avoidance loopholes now blocked and schemes being litigated through the tribunals and courts, we can expect to see the percentage tax gap continuing to decline for at least the next three years,’ he said.
‘What I do think is interesting is that HMRC has said it believes that SMEs are largely responsible for nearly half the tax gap, and that this is mostly due to tax evasion. It seems HMRC are prepared to put their money where their mouth is too as they will be increasing the resources aimed at tackling avoidance and evasion by SMEs, including the use of new cutting-edged technology that will help to identify it sooner. Clearly SMEs had better make sure their books are in order as the taxman is going to keep a close eye on them in the future.’
Mark Serwotka, general secretary of the Public and Commercial Services union which represents most HMRC staff, said: ‘Research conducted for us puts the figure much higher at more than £120bn lost each year, largely through tax avoidance and evasion by very wealthy individuals and organisations.’
HMRC has challenged the estimate, prepared by Richard Murphy, director of Tax Research, arguing that the £120bn figure is ‘very misleading’.
‘It confuses the tax gap with cash flow and legitimate reliefs in a number of areas,’ HMRC said in submission to the Treasury Committee in May.
