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New data out today from HMRC today showed the estimate of the tax gap across all taxes and duties administered by the tax authority to be £35.8bn or 4.8% of theoretical tax liabilities.
The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid.
Dominic Arnold, tax partner at Evelyn Partners said, “The compliant majority of taxpayers expect HMRC to minimise the tax gap as they ultimately are the ones that bear the cost. Taxpayers want a tax authority which is properly resourced, accessible, efficient and that deals with the non-compliant appropriately. HMRC’s latest tax gap analysis shows there’s still more work to be done.
“Small businesses continue to make up the biggest proportion of the tax gap at 56% (£20.2bn) with wealthy individuals at a much lower 5% (£1.7bn). Direct taxes such as income tax and corporation tax make up around two thirds of the tax gap with VAT at 5%.
“Underlying behaviours driving the tax gap show a marked increase in taxpayers failing to take reasonable care, with tax evasion and the hidden economy making up 20% of the tax HMRC estimates it did not collect. Tax avoidance related underpayments remain static at 4%.
“Despite the long-term downward trend, the tax gap has remained doggedly static in recent years and in monetary terms has returned to pre-pandemic levels. Although it remains at a low level, it is against a backdrop of record post pandemic tax receipts, fuelled in part by fiscal drag as many tax allowances and reliefs have been reduced or not increased in line with inflation. In 2022/2023, tax receipts as a percentage of GDP were at a 20 year high of 31.4%.
“To reduce this gap HMRC needs more resources and effective compliance programmes to tackle those who don’t play by the rules. A recent NAO report suggested that HMRC compliance yield plummeted during the pandemic by a staggering £9bn and concluded ‘It seems likely that many more non-compliant taxpayers will escape paying their fair share of tax potentially undermining the sense of fairness on which the system relies.
“Those trying to get it right have also been badly affected by HMRC’s performance in dealing with telephone calls and postal correspondence and this has now been compounded by a decision to close the Self Assessment Helpline in summer 2023.
“Closing the Self Assessment helpline, even for a relatively short period, flies in the face of trying to better help taxpayers, particularly small businesses, get things right. Redirecting people to online resources will only help so many and the alternative of writing to HMRC risks joining a much bigger queue. ”
“Making Tax Digital programme is a transformational project aimed at improving the standard of record-keeping in UK businesses.
“The Making Tax Digital programme which aims to help businesses reduce errors in their tax records through digital record-keeping has been beset with delays since it was first announced in 2015 and the original fully implementation date of 2020 is now likely to be 2027. HMRC cannot begin to reap the full benefits of the programme until then.
“With the number of enquiries from HMRC now expected to escalate significantly, taxpayers who are contacted by the HMRC should consider getting professional tax advice to ensure their affairs are in order. Getting advice when dealing with an enquiry is usually sensible and ensures it’s dealt with correctly and quickly.”
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