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Tax gap value up to £35bn

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HMRC has estimated the tax gap for 2011/12 at £35bn, or 7% of tax due, and suggested that the latest figures reflected a ‘long-term downward trend’. Measuring tax gaps: 2013 edition includes revisions for 2005/06 onwards to take account of ‘improved methods and the latest available information’.

The tax gap has ‘fallen steadily’ from 8.3% of tax due in 2005/06 to 7% in 2011/12, the department said. ‘However, the value of the tax gap has increased from £34bn in 2010/11 to £35bn in 2011/12, mainly due to an increase in the VAT gap reflecting the rise in the standard rate of VAT to 20%.’

The figures showed that the tax gap was ‘continuing to fall’, said exchequer secretary David Gauke. But Labour MP Shabana Mahmood, the shadow exchequer secretary, said they showed that the government was ‘failing to tackle’ avoidance and evasion.

Most of HMRC’s 2011/12 estimates are provisional and there are ‘many sources of uncertainty and potential error’, the department said. But it attributed £15.2bn of the tax gap to criminal attacks, evasion (where income is understated) and the hidden economy (where entire sources are omitted); £4.4bn to non-payment; £4bn to avoidance; £4.3bn to legal interpretation; and £7.2bn to error and failure to take reasonable care.

HMRC pointed out that avoidance does not include legitimate tax planning, which ‘involves using tax reliefs for the purpose for which they were intended’. Its estimates necessarily exclude the impact of ‘base erosion and profit shifting’ by some multinationals, which is the subject of the OECD’s BEPS project.