The tax gap is the difference between the amount of tax owed to the tax man and the amount collected in real terms. In 2018/19 the UK Exchequer collected circa £628bn of tax. By the estimates of HMRC, this involved a gap of missing tax of about £31bn (or 4.7%).

This so-called “tax gap” has steadily reduced, falling by a third in the previous five years and is now, according to the Chartered Institute of Taxation, “proportionately low, reflecting a high level of taxpayer compliance in the UK”.

As the pandemic continues to cause economic disruption, surely the need for the Chancellor to take action and close the gap has never been more pressing. But how is the gap made up, in broad terms?

£bn
Failure to take reasonable care (aka mistakes)8+
Differences due to legal interpretation5
Illegal behaviour (i.e. evasion and the hidden economy)11+
Non-payment4
Avoidance (i.e. exploiting rules to achieve unintended outcomes)3
£31bn+

5 factors contributing to the gap

Mistakes or so-called ‘failure to take reasonable care’ remains significant in the estimate of underpaid tax. But the government has to be clear, when it addresses this category, that:

  • the tax system we have is one of the most complex in the world;
  • the tendency has been to add law to try and make it better, rather than removing law to simplify;
  • guidance from the Government (Gov.uk) is mixed in its quality and timeliness; and
  • making tax digital (MTD) is not simplifying matters very much – among over 400 approved software products are applications which are yielding multiple errors.

Differences due to legal interpretation largely affects big ticket cases and major areas of law.

Illegal behaviour remains “stubbornly high”. Criminals, it seems, do not perceive a material threat of punitive consequences for their dishonest actions.

Non-payment arises largely as a consequence of insolvencies. We cannot be surprised if this category sees a material increase in 2020/21, as a direct result of the pandemic.

Avoidance (or the legal application of the law in ways which yield tax outcomes which are apparently contrary to what the government intended by that law) has been the subject of continual effort to counter, over a long and sustained period of years, if not decades now. The energy and political attention still given to this category would imply that it is the most serious offence to the public purse despite the fact that this is actually the smallest element of the tax gap (and probably smaller, still, given that a proportion of the estimated missing tax is bound to involve continuing “schemes” which simply do not work and which are arguably better categorised as Illegal behaviour).

What’s the message?

The overriding message coming out of the current tax gap analysis and the Government’s efforts to reduce it further is that there surely needs to be a re-focus on to tackling criminal behaviour. This now makes up 38% of the problem on its own. Government does still seem to prefer to chase those who are in the system and trying to get it right rather than those operating in the hidden economy and completely disrespecting the law.

How can we help?

Earlier this month, Tax Tuesday flagged three actions to take now, using the current window of opportunity to take action ahead of the Chancellor’s anticipated tax hikes, which will also act as an attempt to improve collection.

To discuss your options, please speak to Tax Partner Chris Barrington or your usual relationship principal, or call us on 0161 905 1616.

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