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Tax gap rises by £1bn, HMRC reports

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14th Oct 2013
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HMRC estimated this week that the tax gap for 2011/12 increased to £35bn, up £1bn on 2010/11.

Overall, however, there was a slight decrease in tax gap as a percentage of tax liabilities, down from 7.1% last year to 7% this year, the department claimed.

The biggest contribution to the increase came from a £1.5bn bigger VAT gap, which was offset by a reduction in the alcohol tax gap of £0.4bn. 

The tax gap reflects the difference between the amount of tax HMRC expected to reap and what it actually collected.

The figures are compiled from about 30 estimates for different classes of tax and are broken down into sections including tax evasion and avoidance, customer error and where tax cannot be collected.

The £35bn figure for 2011/12 was mainly based on:

  • An increase in the VAT gap of £1.5bn
  • A decrease of £0.6bn in excise duties
  • An increase in corporation tax gap for small and medium sized business of £0.3bn
  • A decrease in corporation tax gap for large businesses

Edward Troup, HMRC’s tax assurance commissioner said: "The range of non-compliance behaviours revealed by these tax gap figures underline why it is so important for HMRC to step up our wide-ranging activities against the minority who aren’t paying what’s due, whether they are SMEs, individuals, big business or organised criminals." 

"This isn’t just critical for the nation’s finances: it’s also important to protect the vast majority of honest businesses and individuals from being cheated by the unscrupulous few."

HMRC had to adjust last year’s tax gap figure up from £32bn to £34bn, after “a large amount of new operational and external data” was received.

It said that the tax gap had however “fallen steadily” over the last six years, from 8.3% of tax due in 2005/06 to 7% in 2011/12.

During the past eight years in which HMRC has compiled the figures, the total tax gap has remained between £31bn and £35bn.

The majority of the £35bn tax gap (30%) is due to both hidden economy and evasion. Next biggest are criminal attacks at 13%, legal interpretation, non-payment and failure to take reasonable care at 12% apiece; then tax avoidance at 11% and the remainder due to error.

The figures have been subject to questions and challenges, however. Last year AccountingWEB member Locutus said people "obviously don't submit returns showing the tax they evade or avoid".

"The margin of error for the tax gap is so large that trying to quantify the annual change is pretty much meaningless. The only effective way of narrowing the tax gap is to simplify the tax system and to tax things that are difficult to hide or dispute the value of," he said.

This years' figures were also subject to some criticism from tax commentators such as Richard Murphy, who called them "ludicrous"

"The methodology – much of which relies on ignoring the fact that tax evaders do not submit tax returns or file their company accounts with HMRC or Companies House – continues to be absurd," he argued.

Murphy pointed out that HMRC estimated CT avoidance at £1.5bn, when an estimated £685m was lost in CT to high-profile tech companies such as Google and Apple.

However, HMRC did not recognise that the companies did anything wrong.

What do you think of the tax gap figures - do they ring true and fit your experiences of tax losses and evasion?

Replies (4)

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By johnjenkins
18th Oct 2013 14:53

What is the point of

having a tax gap when it is "made up". Tax evasion cannot be quantified by any means, nor can the black economy. What's done is done. We shouldn't forget that most illgoten gains will nearly always find their way back into the real economy. Tax avoidance has a better chance of being estimated, but if it's legal (which avoidance stands for) then it cannot be counted. So we are left with "Debtors" of which 25% is probably penalties. If Government said we are owed x in tax and we have collected y so we are going to do z to get the difference, then you know where you are. I have a feeling that the collection department is not doing too well so they can hide what they haven't recovered with these silly "gap" figures.

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By The Black Knight
21st Oct 2013 12:20

Political non sense.

"To reduce the tax gap just lower the budgeted income figure!"

Oh what a tangled web we weave when first we practice to deceive!

How much tax should have been collected if HMRC did its Job well that's a different figure all together.

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By LooksLikeSunday
21st Oct 2013 12:27

That's what happens

every time you mix tax with politics: GIGO

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By Vaughan Blake1
21st Oct 2013 12:59

Statistics, statistics

It's a bit like trying to work out the volume of the sea whilst bailing out a sinking ship. And about as useful.

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