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Tax gap for 2015/16 falls to 6.5%

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The tax gap, which is the difference between the amount of tax due to HMRC and the amount collected, is estimated to have been £36bn in 2014/15, representing some 6.5% of the total tax and duties due. The estimate announced for the previous year (2013/14) has been revised upwards from £34bn to an actual figure of £37bn (from 6.4% to 6.9% of the total dues). HMRC’s latest data suggests that the scale and amount of non-compliance among self-assessment taxpayers is higher than previously estimated.

The PAYE tax gap estimate for 2014/15 is £2.8bn, down from £4bn in 2013/14. This reduction is attributed to the introduction of real time information.

Around a half of the tax gap (£18.3bn) relates to SMEs, while around a quarter (£9.5bn) relates to large businesses. The remainder involves individuals (£3.4bn); and ‘criminals’ (£4.8bn).

Illegal activity, including criminal attacks (£4.8bn), evasion (£5.2bn) and the hidden economy (£6.2bn), together account for 44% of the total (£16.2bn). Criminal attacks are defined as those involving organised gangs committing excise and VAT fraud.

Tax avoidance accounts for 6% of the total (£2.2bn), while tax lost though error and failure to take reasonable care amounts to around 21% (£8.7bn).

Commenting on the figures, the CIOT’s tax policy director, John Cullinane, noted that: ‘Tax evasion and other illegal activity are costing the exchequer more than seven times as much as tax avoidance.’  However, he acknowledged that the government has announced extra resources to tackle evasion.

Turning to the fact that ‘a billion pounds more is lost in errors than in tax avoidance’ and alluding to making tax digital, Cullinane said: ‘The many changes to the tax system made and planned in the past 12 months should push HMRC into focusing on customer service as a more direct way to help large numbers of fairly ordinary taxpayers who find themselves confronted by an ever more complex tax law and increasing compliance obligations.’

The CIOT’s broad welcome for the tax gap figures has prompted Cullinane to comment on what he regards as ‘some unfair criticism’ of HMRC. He believes HMRC is ‘being judged against extremely challenging standards, such as solving the political problems thrown up by how much tax some multinational corporations pay and where they do so. This is a matter of international tax law and diplomacy, for which politicians and their international negotiators are responsible, and has little to do with how well or badly HMRC enforces existing rules.’

The total figure of tax collected by HMRC during 2014/15 was £517.7bn.

See the full report, Measuring tax gaps 2016 edition, at here.