Concerns over increase in tax gap for 2012/13

HMRC has published its figures for the 2012/13 tax gap, which is the difference between the amount of tax due and the amount collected. According to HMRC, this was 6.8% of all tax liabilities, or £34bn in 2012/13 – an increase on the revised estimate for 2011/12 of 6.6% of tax liabilities or £33bn. HMRC pointed to illegal trade in tobacco, and VAT receipts growing more slowly than expected, as major factors in the increase. However, HMRC has also emphasised that the long-term trend is downward, with the tax gap falling from 8.5% or £37bn in 2005/06.

Financial secretary to the Treasury David Gauke commented: ‘The UK has one of the lowest tax gaps in the world, but HMRC will continue to deploy its resources and skills to maintain the downward pressure that has proved so effective in recent years.’

However, Labour’s shadow exchequer secretary to the Treasury, Shabana Mahmood, described the figures as ‘damning’ and said they showed that the government was ‘totally failing to tackle tax avoidance and evasion’.

The CIOT expressed its concern at the amounts lost to illegal activity over avoidance. Patrick Stevens, CIOT tax policy director, commented: ‘These figures suggest that tax evasion and other illegal activity are costing the exchequer nearly five times as much as tax avoidance. The CIOT has long argued that HMRC needs to put more effort into investigating and prosecuting those who seek to evade tax. The government are right to have put extra resources in this direction, as well as tackling artificial and abusive attempts to avoid tax.’

Phil Berwick (Irwin Mitchell) echoed similar concerns: ‘Although the method of calculating the size of the “tax gap” is always going to be open to attack, £34bn is a substantial sum of money. HMRC should not be putting a gloss on the position, but increasing its efforts to recover tax that is not paid. Of this, £15.4bn is attributed to illegal activity, including criminal attacks and evasion. HMRC should be allocating its resources to ensure that it is targeting taxpayers who are suspected of such activity. That is likely to have a greater impact on the tax gap than relentlessly pursuing those suspected of tax avoidance, which accounted for £3.1bn.’

Meanwhile, the Association of Revenue and Customs (ARC) called on the chancellor, in his Autumn Statement, to address the significant and growing pay disparity between senior managers and professionals working in HMRC and their private sector counterparts, which it said presented a risk to government efforts to close the tax gap. ARC president Tony Wallace said: ‘Every professional who leaves HMRC increases the capability of the private sector creating a double whammy. The situation is likely to get worse as the private sector seeks experienced tax staff to help them adapt to new requirements aimed at securing the UK’s corporation tax base. The country simply cannot afford to see such experts leave and transfer their skills to the private sector. The gap in salary levels now presents a real and growing risk and if the chancellor is serious in his efforts to tackle avoidance then he has to address that risk as a matter of real urgency. The ARC urges the chancellor to address this issue before more HMRC staff are lost to the private sector.’

Debate remains over the extent of the tax gap. As Tax Journal reported last month, the Public and Commercial Services Union recently released a report, written by campaigner Richard Murphy, estimating the tax gap for 2013/14 at £119.4bn. HMRC dismissed that estimate as ‘over-inflated, flawed and muddled’, and pointed out that the department’s estimates are in line with the code of practice for official statistics that are endorsed by the International Monetary Fund.

What is the tax gap?

HMRC defines the tax gap as ‘the difference between the amount of tax that should, in theory, be collected by HMRC, against what is actually collected. The “theoretical liability” represents the tax that would be paid if all individuals and companies complied with both the letter of the law and our interpretation of Parliament’s intention in setting law (referred to as the spirit of the law). The tax gap estimate is net of the additional tax collected from enquiries. The total theoretical liability is calculated as the tax gap plus the amount of tax actually received.

‘The tax gap can also be described as the tax that is lost through non-payment, use of avoidance schemes, interpretation of the tax effects of complex transactions, error, failure to take reasonable care, evasion, the hidden economy and organised criminal attack.’