Tag Archives: tax-gap

VAT: Mind the gap – HMRC latest figures

By   24 June 2024
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GOV.UK has published details of the most recent measurement of the tax gap for 2022-20223.

What is the tax gap?

The tax gap is measured by comparing the net tax total theoretical liability with tax actually paid. This is comparing the amount of tax HMRC expected to receive in the UK and the amount HMRC actually received.

The figures

The tax gap is estimated to be 4.8% of total theoretical tax liabilities, or £39.8 billion in absolute terms, in the 2022 to 2023 tax year.

Total theoretical tax liabilities for the year were £823.8 billion.

There has been a long-term reduction in the tax gap as a proportion of theoretical liabilities: the tax gap reduced from 7.4% in the tax year 2005 to 2006 to 4.8% in the tax year 2022 to 2023.

While most of the components follow a downward trend, with the largest proportionate fall between 2005 to 2006 and 2022 to 2023 in the VAT gap, falling from 13.7% to 4.9%, the Corporation Tax gap estimate has increased from 11.4% in 2005 to 2006 to 13.9% in 2022 to 2023.

The Corporation Tax gap share has increased from 17% of the overall tax gap in 2018 to 2019 to 34% in 2022 to 2023, while the share of the tax gap from VAT has fallen from 28% of the overall tax gap in 2018 to 2019 to 20% in 2022 to 2023. The Income Tax, NICs and Capital Gains Tax gap share decreased from 39% to 34% over the last 5 years.

The tax gap from small businesses is the largest component of the tax gap by customer group at a 60% share in 2022 to 2023; the tax gap from wealthy and individuals each make up a low proportion of the tax gap at 5% each in 2022 to 2023

The VAT gap

VAT represents 20% of the overall tax gap.

The VAT tax gap is 4.9%.

There are several approaches to measuring tax gaps. VAT and excise duties gaps are mainly estimated using a ‘top-down’ approach, by comparing the implied tax due from consumer expenditure data with tax receipts. Most other components are estimated using a ‘bottom-up’ approach, based on HMRC’s operational data and management information.

A top-down approach uses independent, external data on consumption to estimate the tax base. The tax base is used to calculate a theoretical value of tax that should be paid. The actual amount of tax paid is subtracted from this theoretical value to estimate the tax gap.

VAT: Mind the gap – HMRC latest figures

By   23 June 2023
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GOV.UK has published details of the most recent measurement of the tax gap for 2021-2022.

What is the tax gap?

The tax gap is measured by comparing the net tax total theoretical liability with tax actually paid. This is comparing the amount of tax HMRC expected to receive in the UK and the amount HMRC actually received.

The figures

The tax gap is estimated to be 4.8% of total theoretical tax liabilities, or £35.8 billion in absolute terms, in the 2021 to 2022 tax year.

Total theoretical tax liabilities for the year were £739.3 billion.

There has been a long-term reduction in the tax gap as a proportion of theoretical liabilities: the tax gap reduced from 7.5% in the tax year 2005 to 2006 to 4.8% in 2021 to 2022 – remaining low and stable between the years 2017 to 2018 and 2021 to 2022.

Criminal activity and evasion accounted for £4.1billion loss in tax collected.

30% of all underpayments of tax were due to a failure to take reasonable care, while 13% of instances were down to evasion.

A massive 56% of the tax gap is made up by small businesses (up from 40% of the total in 2017-18). Whether this is down to HMRC improving collection from large businesses or an increasing failure to crack down on small business is a moot point. It remains to be seen how HMRC react to this new information, but experience insists that small businesses may expect increased attention for the authorities.

The VAT gap

VAT represents 21% of the overall tax gap.

The VAT tax gap is 5.4%.

The absolute VAT gap is £7.6 billion.

The VAT gap has reduced from 14.0% of theoretical VAT liability in 2005 to 2006 to 5.4% in 2021 to 2022.

More than two thirds of the theoretical VAT liability was estimated to be from household consumption. The remainder came from the expenditure by businesses that supply goods and services where the VAT is non-recoverable (they are exempt from VAT), and from the government and housing sectors.

Information on the method used to estimate the VAT gap is here for those interested (I don’t imagine that there will be that many…).

So, £7.6 millions of VAT is missing. That seems an awful lot.

The VAT gap rises

By   20 June 2018
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In the latest figures released by HMRC the amount of unpaid tax has increased by circa £1 billion.

What is the tax gap?

The VAT gap is the difference between the amount of VAT that should, in theory, be collected by HMRC, against what is actually collected. The ‘VAT total theoretical liability’ (VTTL) represents the VAT that should be paid if all businesses 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 below.

Summary

Here is an overview of the figures which are for the year 2016-17:

The VAT gap is estimated to be £11.7 billion in which equates to 8.9% of net VAT total theoretical liability. HMRC report that there has been a long-term reduction between 2005-06 and 2016-17 for the VAT gap (12.5% to 8.9%). The information is provided by The Office for National Statistics, National Accounts Blue Book 2017 and Consumer Trend.

MTIC

The Missing Trader Intra-Community (MTIC) fraud estimate reduced to less than £0.5 billion in 2016-17, from between £0.5 billion and £1 billion in 2015-16.. VAT debt has been fairly stable since 2011-12. It is estimated at £1.5 billion in 2016-17. Around 70% of the VAT total theoretical liability in 2016-17 was from household consumption. The remaining gap was from consumption by businesses making exempt supplies and from the government and housing sectors. Around half of household VAT-able expenditure was from restaurants and hotels, transport and recreation and culture.

VAT debt

The contribution of debt to the VAT gap is defined as the amount of VAT declared by businesses but not paid to HMRC. The VAT gap showed a peak at 12.6% in 2008-09, which was partly because the recession caused an increase in VAT debt from £0.9 billion in 2007-08 to £2.4 billion in 2008-09. VAT debt has been fairly stable since 2011-12. It is estimated at £1.5 billion in 2016-17.

Avoidance

VAT avoidance is another component of the VAT gap. HMRC say that avoidance is artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter, but not the spirit, of the law. VAT avoidance is estimated at £0.1 billion in 2016-17.

Other indirect taxes

The overall excise tax gap is estimated to be £4.1 billion (£3.1 billion in excise duty and £1 billion in VAT). This is analysed as:

  • £2.5 billion tobacco tax gap, with associated losses in tobacco duty (£1.9 billion) and VAT (£0.5 billion )
  • £1.3 billion alcohol tax gap, with associated losses in alcohol duty (£0.9 billion) and VAT (£0.4 billion)
  • £150 in GB diesel duty and associated VAT
  • £40 in Northern Ireland (NI) diesel duty and associated VAT
  • £170 in other excise duties

Overall tax gap

The report indicates that small businesses were most likely to be underpaying tax generally. They accounted for £13.7 billion of last the overall tax gap. Large businesses had underpaid £7 billion and medium-sized businesses £3.9 billion.

The tax gap for Income Tax, National Insurance and Capital Gains Tax was 4.2%.  Along with VAT there has been a long-term downward trend in the Corporation Tax gap. This has reduced from 12.4% in 2005/06 to 7.4% last year.

It appears that the days of large tax avoidance schemes have passed and HMRC is now concentrating on compliance mistakes and routine errors.  HMRC is also increasingly challenging legal interpretations of tax law in order to recover more tax. Please see here for further details on HMRC’s approach.

What causes the tax gap?

The behaviour giving rise to the gap are as follows:

  • £5.9 billion – failure to take reasonable care
  • £5.4 billion – criminal attacks
  • £5.3 billion – legal interpretation
  • £5.3 billion – evasion
  • £3.4 billion – non-payment
  • £3.2 billion – error
  • £3.2 billion – hidden economy
  • £1.7 billion – avoidance