HMRC has measured the tax gap for 2014 -15 as £36bn, which is 6.5% of theoretical tax liabilities – one of the lowest tax gaps in the world.
As summarised in Measuring tax gaps 2016, the difference between tax that should be collected and what is actually collected has reduced from 6.9% in 2013-14, and continues the downward trend from 8.3% in 2005-06.
Breaking the tax gap down by behaviour reveals that £5.2bn (15%) is actually due through “legal interpretation”. It also reveals a rise in inadvertent non-compliance, with error contributing to £3.2bn and failure to take reasonable care blamed for £5.5bn. All of these added together amounts to 39% of the tax gap.
Meanwhile, SMEs have contributed the most towards the tax gap, being responsible for £18.3bn (51%) of the tax gap, while large businesses are held responsible for £9.5bn (25%).
However, HMRC’s chief executive Jon Thompson has set his sights on the highest non-payment culprits: criminal attacks and evasion.
Thompson said HMRC will further close the tax gap by “relentlessly pursuing the small minority who seek to cheat their taxes through evasion, aggressive avoidance and organised crime”.
Revenue ‘should focus on customer service’
While the CIOT’s tax policy director John Cullinane applauds HMRC’s progress in managing the tax gap and putting extra resources into artificial and abusive attempts to avoid tax, he suggests HMRC should focus on customer service as direct way to “help large numbers of fairly ordinary taxpayers who find themselves confronted by an ever more complex tax law and increasing compliance obligations.”
After all, he continues: “A billion pounds more is lost in errors than in tax avoidance. If the tax authority needs more resources to directly help taxpayers to pay the correct sums, then we suggest taxpayers think they should get it.”
One of the measures financial secretary Jane Ellison anticipates will close the tax gap further and alleviate errors is through HMRC’s £1.3bn investment in “digital tools”.
For example, HMRC believes the effectiveness of digital tools such as RTI has “significantly contributed” to reducing the PAYE tax gap from £4bn in 2013-14 to £2.8bn in 2014-15. The hope is that its Making Tax Digital plans will be able to close the tax gap attributed to SMEs.
HMRC explained in its Bringing business tax into the digital age consultation how “nudges and prompts” will “flag to the business any areas where a potential inconsistency or error is being made”.
RSM’s senior tax partner George Bull accepts the impact of RTI in reducing the tax gap, and expects HMRC’s digital plans will be able to contribute towards tackling the gap caused by evasion and crime when the fully digital system is rolled out in full by 2020.
“It’s important, however, that HMRC implements digitalisation as something which is primarily there to meet the needs of honest taxpayers,” Bull warns, “rather than a weapon against evaders and criminals which may cause problems for citizens who wish to fully comply with their tax obligations with the minimum of fuss and bother.”