HMRC has published details of the tax gap for 2019/20. This is the gap between the expected tax that should be paid to HMRC and what is actually paid. The headline was that the tax gap was 5.3%. which represents an estimated £35 billion.
Total tax liabilities for the year were £674 billion.
What is the tax gap?
The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid.
Why is it measured?
The tax gap provides tool for understanding the relative size and nature of non-compliance. This understanding can be applied in many different ways:
- it provides a foundation for HMRC’s strategy – considering the tax gap helps the government to understand how non-compliance occurs and how it can be addressed
- the analysis provides insight into which strategies are most effective at reducing the tax gap
- it provides important information which helps HMRC understand its long-term performance
- provides information to the public on tax compliance, creating greater transparency in the tax system.
Why is there a tax gap?
The tax gap arises for a number of reasons. Some taxpayers make simple errors in calculating the tax that they owe, despite their best efforts, while others don’t take enough care when they submit their returns. Legal interpretation, evasion, avoidance and criminal attacks on the tax system also result in a tax gap.
Analysis
Around £3.7 billion of the gap is estimated to be due to error and £3 billion due to the hidden economy.
The tax gap for wealthy individuals fell from £1.6 billion in 2018/19 to £1.5 billion in 2019/20
£15.1 billion of the gap is attributed to small businesses and £6.1 billion is attributed to large businesses, with £5 billion attributed to medium-sized firms.
Taxpayers paid more than £633.4 billion in tax during 2019/20, an increase of more than £100 billion since 2015/16, when the total revenue paid was £532.5 billion.
The tax gap for Income Tax, National Insurance contributions and Capital Gains Tax is 3.5% in 2019 to 2020 at £12.6 billion which represents the largest share of the total tax gap by type of tax.
VAT
The VAT gap was estimated to be £12.3 billion in tax year 2019 to 2020. This equates to 8.4% of net VAT total theoretical liability.
The VAT gap has increased from 7.0% in tax year 2018 to 2019 to 8.4% in 2019 to 2020. Growth in VAT receipts (1.8%) was slower than the growth in the net VAT total theoretical liability (3.3%).
Behaviour
HMRC estimate that the causes of the tax gap are:
- Failure to take reasonable care £6.7bn 19%
- Legal interpretation £5.8bn 16%
- Evasion £5.5bn 15%
- Criminal attacks £5.2bn 15%
- Non-payment £4bn 11%
- Error £3.7bn 10%
- Hidden economy £3bn 8%
- Avoidance £1.5bn 4%
Taxpayers
Tax gap by taxpayer groups:
- Small businesses £15.1bn 43%
- Large businesses £6.1bn 17%
- Criminals £5.2bn 15%
- Mid-sized businesses £5.0bn 14%
- Individuals £2.6bn 7%
- Wealthy £1.5bn 4%
The impact on the tax gap from the coronavirus lockdowns and economic downturn is likely to be first seen in the 2020/21 figures, which will be released next year. It will also be interesting to see how the fallout from Brexit is covered (if at all).