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Temporary VAT reduction accounts for smaller tax gap, says HMRC

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The tax gap was £35bn in 2009/10, according to HMRC’s estimate released today. The department has revised its £42bn estimate for the previous year to £39bn. 

The decrease of £4bn is ‘mainly due to reduction in the VAT gap since 2008/09 following the reduction in the standard rate of VAT from 17.5% to 15%’, HMRC said.

The 15% rate applied 1 December 2008 to 31 December 2009. The standard rate was increased to 17.5% in January 2010 and 20% in January 2011.

Measuring Tax Gaps 2011 is available on the HMRC website.

The tax gap: HMRC’s definition

‘The tax gap is defined as the difference between tax collected and the tax that should be collected (the theoretical liability). The theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law). The tax gap estimate is net of the Department’s compliance activities. An equivalent way of defining the tax gap is the tax that is lost through non-payment, use of avoidance schemes, interpretation of tax effect of complex transactions, error, failure to take reasonable care, evasion, the hidden economy and organised criminal attack.’

Source: Measuring Tax Gaps 2011