The 2019/20 tax gap is higher than the previous two years, reversing an otherwise steady decline since 2013/14.
HMRC’s latest report on the tax gap (i.e. the difference between the total amount of tax that should, in theory, be paid and the total amount of tax actually paid in the financial year) was published on 16 September 2021. The tax gap is used as a tool for understanding the relative size and nature of non-compliance and for informing HMRC’s strategy for tackling non-compliance. It also therefore helps to understand HMRC’s long term performance. Per the report, the 2019/20 tax gap is estimated at £35bn. As a proportion of total theoretical tax receipts, the long-term trend shows a reduction in the tax gap from 7.5% in 2005/06 to 5.3% in 2019/20. However, the latest data shows the highest tax gap in three years and reverses an otherwise medium-term decline from 7.1% in 2013/14. What does this tell us?
The underlying data released with the report shows how the tax gap is allocated between the various taxpayer populations, major tax-types and taxpayer behaviours. This helps inform an understanding of why the tax gap may reduce or increase over time, including the impact of significant fiscal events. For example, did the introduction of mandatory digital filing of VAT information in April 2019 help to reduce the VAT element of the tax gap? The current reported data pre-dates the onset of the covid-19 pandemic so its effect on the tax gap remains to be seen in the data for 2020/21 and beyond.
The tax gap for 2019/20 is estimated at £35bn (5.3% of total tax receipts). It has been allocated to taxpayer groups, main tax-types and types of taxpayer behaviour as follows (the amounts shown below are followed by the percentage share of the total tax gap; figures are rounded):
Tax gap by taxpayer group:
Small businesses: £15.1bn (43%)
Mid-size businesses: £5.0bn (14%)
Large businesses: £6.1bn (17%)
Criminals: £5.2bn (15%)
Individuals: £2.6bn (7%)
Wealthy individuals: £1.5bn (4%)
The comparative allocations have remained relatively unchanged from the previous year with small businesses accounting for the largest single element of the tax gap. The amount of the tax gap attributed to large business has increased from £5.3bn in 2018/19 to £6.1bn in 2019/20, but it still remains at less than a quarter of the £26.2bn attributed to businesses overall. This relatively low attribution of the tax gap to large business might be seen as running counter to a prevailing narrative that large businesses engage in widespread tax avoidance behaviour.
Tax gap by main tax-types:
Income tax, NICs and CGT: £12.6bn (36%)
Corporation tax: £5.7bn (16%)
Other: £1.6bn (4%)
VAT: £12.3bn (35%)
Excise duty: £3.2bn (9%)
It is interesting to note here that the element of the tax gap attributed to VAT has increased from £10bn in 2018/19 (7% of total theoretical VAT receipts) to £12.3bn in 2019/20 (8.4 per cent of total theoretical VAT receipts). This may be unexpected since one of the arguments for mandating digital filing for VAT with effect from April 2019 was the expected reduction in the VAT gap. The underlying cause for the increase in the VAT gap is not explained in the report. Whilst the figures for the tax gap are subject to revision, the uncertainty level attributed to the VAT gap (included generally for the first time this year) is ‘low’.
Tax gap by taxpayer behaviour:
Failure to take reasonable care: £6.7bn (19%)
Legal interpretation: £5.8bn (16%)
Evasion: £5.5bn (15%)
Criminal attacks: £5.2bn (15%)
Non-payment: £4.0bn (11%)
Error: £3.7bn (10%)
Hidden economy: £3.0bn (8%)
Avoidance: £1.5bn (4%)
The amount of the tax gap attributed to differences in legal interpretation at £5.8bn has increased from £5bn in 2018/19, and it is the highest in absolute terms since 2014/15 (when it was £6bn) and the highest as a percentage of total theoretical tax receipts (0.9%) since 2015/16 (1.0%). This is pertinent in light of the proposed new rules obliging larger companies to disclose details of material uncertain tax treatments adopted in their tax returns.
Impact of covid-19: Looking forward, it will be interesting to see what impact the covid-19 pandemic has on the tax gap. We would expect to see a reduction in the total theoretical tax receipts for 2020/21 given the significant reduction in economic activity in the period. We also might expect to see an increase in the proportion of the tax gap attributed to non-payment given the pressure on business cashflow.
Is it possible though that we may see an increase in compliant behaviour more generally otherwise, perhaps in light of an increase in levels of social solidarity. In this context it is interesting to note recent statements from the chancellor, Rishi Sunak, welcoming the amount of government support payments which have been repaid by businesses, estimated at the time of writing to be £1.3bn since July 2020.
The 2019/20 tax gap is higher than the previous two years, reversing an otherwise steady decline since 2013/14.
HMRC’s latest report on the tax gap (i.e. the difference between the total amount of tax that should, in theory, be paid and the total amount of tax actually paid in the financial year) was published on 16 September 2021. The tax gap is used as a tool for understanding the relative size and nature of non-compliance and for informing HMRC’s strategy for tackling non-compliance. It also therefore helps to understand HMRC’s long term performance. Per the report, the 2019/20 tax gap is estimated at £35bn. As a proportion of total theoretical tax receipts, the long-term trend shows a reduction in the tax gap from 7.5% in 2005/06 to 5.3% in 2019/20. However, the latest data shows the highest tax gap in three years and reverses an otherwise medium-term decline from 7.1% in 2013/14. What does this tell us?
The underlying data released with the report shows how the tax gap is allocated between the various taxpayer populations, major tax-types and taxpayer behaviours. This helps inform an understanding of why the tax gap may reduce or increase over time, including the impact of significant fiscal events. For example, did the introduction of mandatory digital filing of VAT information in April 2019 help to reduce the VAT element of the tax gap? The current reported data pre-dates the onset of the covid-19 pandemic so its effect on the tax gap remains to be seen in the data for 2020/21 and beyond.
The tax gap for 2019/20 is estimated at £35bn (5.3% of total tax receipts). It has been allocated to taxpayer groups, main tax-types and types of taxpayer behaviour as follows (the amounts shown below are followed by the percentage share of the total tax gap; figures are rounded):
Tax gap by taxpayer group:
Small businesses: £15.1bn (43%)
Mid-size businesses: £5.0bn (14%)
Large businesses: £6.1bn (17%)
Criminals: £5.2bn (15%)
Individuals: £2.6bn (7%)
Wealthy individuals: £1.5bn (4%)
The comparative allocations have remained relatively unchanged from the previous year with small businesses accounting for the largest single element of the tax gap. The amount of the tax gap attributed to large business has increased from £5.3bn in 2018/19 to £6.1bn in 2019/20, but it still remains at less than a quarter of the £26.2bn attributed to businesses overall. This relatively low attribution of the tax gap to large business might be seen as running counter to a prevailing narrative that large businesses engage in widespread tax avoidance behaviour.
Tax gap by main tax-types:
Income tax, NICs and CGT: £12.6bn (36%)
Corporation tax: £5.7bn (16%)
Other: £1.6bn (4%)
VAT: £12.3bn (35%)
Excise duty: £3.2bn (9%)
It is interesting to note here that the element of the tax gap attributed to VAT has increased from £10bn in 2018/19 (7% of total theoretical VAT receipts) to £12.3bn in 2019/20 (8.4 per cent of total theoretical VAT receipts). This may be unexpected since one of the arguments for mandating digital filing for VAT with effect from April 2019 was the expected reduction in the VAT gap. The underlying cause for the increase in the VAT gap is not explained in the report. Whilst the figures for the tax gap are subject to revision, the uncertainty level attributed to the VAT gap (included generally for the first time this year) is ‘low’.
Tax gap by taxpayer behaviour:
Failure to take reasonable care: £6.7bn (19%)
Legal interpretation: £5.8bn (16%)
Evasion: £5.5bn (15%)
Criminal attacks: £5.2bn (15%)
Non-payment: £4.0bn (11%)
Error: £3.7bn (10%)
Hidden economy: £3.0bn (8%)
Avoidance: £1.5bn (4%)
The amount of the tax gap attributed to differences in legal interpretation at £5.8bn has increased from £5bn in 2018/19, and it is the highest in absolute terms since 2014/15 (when it was £6bn) and the highest as a percentage of total theoretical tax receipts (0.9%) since 2015/16 (1.0%). This is pertinent in light of the proposed new rules obliging larger companies to disclose details of material uncertain tax treatments adopted in their tax returns.
Impact of covid-19: Looking forward, it will be interesting to see what impact the covid-19 pandemic has on the tax gap. We would expect to see a reduction in the total theoretical tax receipts for 2020/21 given the significant reduction in economic activity in the period. We also might expect to see an increase in the proportion of the tax gap attributed to non-payment given the pressure on business cashflow.
Is it possible though that we may see an increase in compliant behaviour more generally otherwise, perhaps in light of an increase in levels of social solidarity. In this context it is interesting to note recent statements from the chancellor, Rishi Sunak, welcoming the amount of government support payments which have been repaid by businesses, estimated at the time of writing to be £1.3bn since July 2020.
