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Measuring the tax gap in 2017/18

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HMRC has published the 2019 edition of Measuring tax gaps, containing estimates for 2017/18. This shows an overall tax gap of £35bn, representing 5.6% of total liabilities.

HMRC’s estimate of the tax gap in 2017/18 is £35bn, which represents 5.6% of the total tax and duties due. This compares with £33bn (5.7%) for 2016/17.

The largest share of the overall gap belongs to income tax, NICs and CGT at £12.9bn (3.9% of liabilities for these taxes). This includes £7.4bn in respect of self-assessment, of which £4bn is attributable to self-employed individuals. The VAT gap is £12.5bn (9.1% of VAT due), slightly up on 8.9% 2016/17, while corporation tax accounts for £5.2bn (8.1% of CT due), slightly up on 2016/17. The gap for excise duties is £2.7bn (5.1% of duties due), down from 5.8% in 2016/17.

The breakdown by taxpayer group shows small businesses making up the largest share of the overall tax gap at £14bn, followed by large businesses with £7.7bn, mid-sized businesses with £4.3bn and individuals with £3.9bn.

In terms of taxpayer behaviour, criminal activity accounts for £4.9bn of the total, while the hidden economy and evasion account for £3bn and £5.3bn respectively. Avoidance is responsible for an estimated £1.8bn. More than half of avoidance is attributed to corporation tax (55%), while income tax, NICs and CGT make up 35%. VAT and other direct taxes account for the smallest share of avoidance (around 3%).

Errors and mistakes account for £9.8bn (28%) of the overall tax gap. The largest behavioural component of the overall tax gap was ‘failure to take reasonable care’, amounting to £6.4bn (18%), with ‘error’ making up £3.4bn (10%). These percentages are the same as the previous year, although the cash value has increased slightly in both cases.

While the overall tax gap percentage has fallen from 7.2% to 5.6% since 2005/06, the last three years have seen a slight reversal, showing an increase of 0.3%.

Commenting on the latest figures, the financial secretary to the Treasury, Jesse Norman, said: ‘The UK’s low tax gap underlines both how the vast majority of people are paying the correct amount of tax, and how effective HM Revenue and Customs has been in its efforts to clamp down on tax evasion and avoidance’.

While the majority of taxpayers want to get their tax right, ‘too many are still finding this hard, with avoidable mistakes costing the exchequer over £9.9bn a year’, the financial secretary added.

CIOT president, Glyn Fullelove, acknowledged the ‘fairly low levels’ of tax lost to the UK exchequer, when observed in historical and international terms. However, he speculated that ‘the government is likely to be disappointed that progress in reducing the tax gap seems to have stalled’.

‘Estimating the tax gap is a complex and necessarily imprecise process so we should be careful not to read too much into small year-on-year changes’, Fullelove, said.

The CIOT believes HMRC should be guided by the fact that tax evasion and other illegal activity (at £13.2bn) are costing the exchequer seven times as much as tax avoidance. Meanwhile, the complexity of the tax system means that the figure of nearly £10bn for taxpayers ‘inadvertently not getting things right’ has ‘remained stubbornly high’.

Glyn Fullelove commented: ‘HMRC should focus on customer service as a direct way to help large numbers of ordinary taxpayers who find themselves confronted by ever more complex tax law and increasing compliance obligations. If the tax authority needs more resources to help taxpayers to pay the correct sums, we believe they should get it.’


Issue: 1449
Categories: News