MTD fails to reduce the tax gapby
The gap between amount of VAT paid and VAT expected to be paid has increased by £2.3bn during the first year of MTD for VAT, undermining a key justification for the MTD programme.
The tax gap is the difference between the amount of tax that should be paid to HMRC, and what is actually paid. The theoretical “should be paid” figure is open to interpretation, and therein lies the crux of the problem in estimating the total tax gap.
HMRC has produced a tax gap report every year since at least 2009, but each year the comparison figures reported for prior years are adjusted, as data from earlier periods (eg from settled compliance cases) becomes available. It is therefore difficult to draw conclusions from apparent trends as the figures are always imprecise and retrospectively altered.
As Wendy Bradley has pointed out the methodology used in complying the tax gap report still leaves something to be desired. For example, HMRC is still using the US Internal Revenue Service research for creating multipliers to apply to UK data (see sources of error in methodological annex), which is derived from a very different tax system. Most UK taxpayers do not submit a self-assessment tax return which is available to audit for errors and mistakes, but almost everyone submits a tax return in the USA.
The HMRC report into measuring the tax gaps for 2019/20 reveals that after five consecutive years of a falling rate of the tax gap, there have been a slight uptick in 2019/20. The data for year’s report comes from the period immediately before the COVID pandemic, and the amounts of tax collected have been adjusted for the tax which was deferred at the end of March 2020.
The total tax underpaid or missing is estimated at £35 billion which is 5.3% of total tax liabilities. This figure was 5.0% of total tax due in 2018/19, and that percentage has proportionately fallen for the previous five years, from 7.1% in 2013/14.
Breaking the data down
The tax gap total is broken down by the perceived causes categorised by these behaviours:
|Percentage of total liability|
The avoidance category is further analysed into the type of tax, but the other behaviour categories are not.
The VAT gap has risen from £10bn to £12.3bn over 2019/20, lifting the total VAT gap from 7% to 8.4% of total VAT receipts. Table 1.6 of the tax gap tables shows that the amount of VAT lost through tax avoidance is £0.1 bn, and this amount has remained steady at that level over the last six years.
How has the additional £2.3bn of VAT been lost in 2019/20?
As this year saw the introduction of MTD for VAT the amount of VAT lost through taxpayer error and carelessness should surely reduce. In the MTD policy paper HMRC justified the MTD program by saying that it would “reduce the amount of tax lost to avoidable errors”.
However, HMRC has not highlighted any reduction in the level of VAT lost to taxpayer error, nor has it broken down the total of the tax gap due to carelessness or to taxpayer error, into the different taxes. In fact the amount of tax lost to carelessness has increased significantly from £6.1bn to £6.7bn, and the amount lost through taxpayer error has also increased from £3.1bn to £3.7bn.
John Barnett, Chair of CIOT’s Technical Policy and Oversight Committee, commented: “Whilst we recognise that we are in the early days of MTD and the published tax gap data doesn’t allow a granular analysis, we are surprised to see such a significant increase in these elements of the tax gap. MTD is supposed to reduce the tax lost from these behaviours and bring in hundreds of millions of pounds of additional revenue. So far there is no clear sign that this is happening.”
Barnett added: “These figures back up what CIOT have heard from our members – that MTD is unlikely to reduce the amount of taxpayer error and may even in some situations be increasing it.”
The CIOT has also called for HMRC to thoroughly assess the effectiveness of MTD, as well as whether the administrative burden it is imposing on business is reasonable, before it expands the MTD program further.