The headline tax gap is 4.8% meaning that, of the total theoretical tax take of £823.8bn, £39.9bn was not collected. This is the first time the estimated tax gap has fallen below 5% of total theoretical tax liabilities, with the headline figure having hovered at or just above 5% since 2017/18. Conversely, £39.9bn appears to be a record high in actual monetary terms, although this represents a smaller percentage of the record tax receipts figure for 2022/23. As the CIOT notes, the tax gap is at both a record high and record low!
In its main findings section, HMRC highlight the largest proportionate fall in the VAT gap (13.7% in 2005/06 down to 4.9% in 2022/23), but acknowledges an increase in the corporation tax gap (11.4% in 2005/06 up to 13.9% in 2022/23).
Commenting on the £12bn of potential tax lost due to taxpayer failure to take reasonable care and the £5.8bn lost as a result of taxpayer error, the CIOT points to the complexity of the tax system. John Barnett, Chair of the CIOT’s Technical Policy and Oversight Committee, said: ‘We are now several years into Making Tax Digital (MTD). With mistakes costing the Exchequer nearly twice as much in cash terms as before MTD was introduced, it is hard to discern whether MTD is meeting its objective of reducing avoidable errors ... The new government must also focus on the need for simplification. A simple tax system, with clear rules and easy to navigate guidance will lead to fewer mistakes by both taxpayers and tax authorities.’
One key finding is the apparent difficulty of collecting tax from small businesses, which represents 60% of the of the overall tax gap. In its analysis of the latest statistics, Tax Policy Associates (TPA) says that the increase in the small business tax gap over the last three years ‘has been remarkable’, with a third of all corporation tax due from small businesses not being paid: ‘If the small business corporation tax gap had remained the same [at 2005–06 levels], £7.5bn additional tax would have been collected. If it had improved in line with what we see for large and mid-sized businesses, £9.5bn additional tax would have been collected.’
TPA suggests that, while additional funding for HMRC will be required, extra money alone will not solve the problem. Funds must be ‘carefully diverted and managed’, making sure HMRC staff are properly trained, customer service is prioritised, those taxpayers who need help are given the assistance they need to remain compliant and those who do not intend to comply are identified:
‘HMRC’s approach to investigations and disputes needs to change. Right now it simultaneously pursues weak and irrelevant cases, cases that are oppressive to taxpayers (and sometimes inexplicable and disturbing) but at the same time misses what’s happening on the ground.’
Prospective government ministers may be keen to listen, given the potential extra billions in tax revenue from addressing the small business tax gap.
Accountancy firm Price Bailey suggests that, under a Labour administration determined to close the tax gap, HMRC may well target small businesses and their owners. In its ‘plan to reduce the tax gap’ the Labour Party identified offshore tax compliance as a main focus, but the firm notes that HMRC have not published an estimate for the offshore tax gap alongside its latest statistics.
Andrew Park, Tax Investigations Partner at Price Bailey, commented: ‘We have been seeing increased HMRC scrutiny of small businesses and directors in recent years. That is likely to intensify as part of a post-election drive to close the tax gap. It’s hard to see how HMRC can make serious inroads into reducing the tax gap without hitting small businesses hard.
‘The notion that HMRC can collect meaningful amounts of additional tax by targeting individuals with offshore assets is fanciful. There was a sustained focus on taxpayers with offshore assets and a disclosure amnesty in the years after the global financial crisis during which most of the low hanging fruit was picked.
‘There are 5.3 million small businesses in the UK, which means a concerted campaign to close the tax gap is going to see HMRC cast its net very wide indeed.’
Park also points out that dubious business expenses could account for a proportion of the small business tax gap: ‘I have seen owner-managers claiming tax relief for expensive suits, leisure travel, family birthday parties and in one case even a hovercraft.’
The headline tax gap is 4.8% meaning that, of the total theoretical tax take of £823.8bn, £39.9bn was not collected. This is the first time the estimated tax gap has fallen below 5% of total theoretical tax liabilities, with the headline figure having hovered at or just above 5% since 2017/18. Conversely, £39.9bn appears to be a record high in actual monetary terms, although this represents a smaller percentage of the record tax receipts figure for 2022/23. As the CIOT notes, the tax gap is at both a record high and record low!
In its main findings section, HMRC highlight the largest proportionate fall in the VAT gap (13.7% in 2005/06 down to 4.9% in 2022/23), but acknowledges an increase in the corporation tax gap (11.4% in 2005/06 up to 13.9% in 2022/23).
Commenting on the £12bn of potential tax lost due to taxpayer failure to take reasonable care and the £5.8bn lost as a result of taxpayer error, the CIOT points to the complexity of the tax system. John Barnett, Chair of the CIOT’s Technical Policy and Oversight Committee, said: ‘We are now several years into Making Tax Digital (MTD). With mistakes costing the Exchequer nearly twice as much in cash terms as before MTD was introduced, it is hard to discern whether MTD is meeting its objective of reducing avoidable errors ... The new government must also focus on the need for simplification. A simple tax system, with clear rules and easy to navigate guidance will lead to fewer mistakes by both taxpayers and tax authorities.’
One key finding is the apparent difficulty of collecting tax from small businesses, which represents 60% of the of the overall tax gap. In its analysis of the latest statistics, Tax Policy Associates (TPA) says that the increase in the small business tax gap over the last three years ‘has been remarkable’, with a third of all corporation tax due from small businesses not being paid: ‘If the small business corporation tax gap had remained the same [at 2005–06 levels], £7.5bn additional tax would have been collected. If it had improved in line with what we see for large and mid-sized businesses, £9.5bn additional tax would have been collected.’
TPA suggests that, while additional funding for HMRC will be required, extra money alone will not solve the problem. Funds must be ‘carefully diverted and managed’, making sure HMRC staff are properly trained, customer service is prioritised, those taxpayers who need help are given the assistance they need to remain compliant and those who do not intend to comply are identified:
‘HMRC’s approach to investigations and disputes needs to change. Right now it simultaneously pursues weak and irrelevant cases, cases that are oppressive to taxpayers (and sometimes inexplicable and disturbing) but at the same time misses what’s happening on the ground.’
Prospective government ministers may be keen to listen, given the potential extra billions in tax revenue from addressing the small business tax gap.
Accountancy firm Price Bailey suggests that, under a Labour administration determined to close the tax gap, HMRC may well target small businesses and their owners. In its ‘plan to reduce the tax gap’ the Labour Party identified offshore tax compliance as a main focus, but the firm notes that HMRC have not published an estimate for the offshore tax gap alongside its latest statistics.
Andrew Park, Tax Investigations Partner at Price Bailey, commented: ‘We have been seeing increased HMRC scrutiny of small businesses and directors in recent years. That is likely to intensify as part of a post-election drive to close the tax gap. It’s hard to see how HMRC can make serious inroads into reducing the tax gap without hitting small businesses hard.
‘The notion that HMRC can collect meaningful amounts of additional tax by targeting individuals with offshore assets is fanciful. There was a sustained focus on taxpayers with offshore assets and a disclosure amnesty in the years after the global financial crisis during which most of the low hanging fruit was picked.
‘There are 5.3 million small businesses in the UK, which means a concerted campaign to close the tax gap is going to see HMRC cast its net very wide indeed.’
Park also points out that dubious business expenses could account for a proportion of the small business tax gap: ‘I have seen owner-managers claiming tax relief for expensive suits, leisure travel, family birthday parties and in one case even a hovercraft.’
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