New data released today from HMRC showed that the tax gap estimate across all taxes and levies administered by the IRS is £35.8 billion or 4.8% of the theoretical tax liability. .
The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid.
Dominic Arnold, tax partner at Evelyn Partners, a leading integrated wealth management and professional services firm, comments: “A compliant majority of taxpayers expect HMRC to reduce the tax gap because they ultimately bear the cost. Taxpayers want a tax authority with the appropriate resources, It is accessible, effective and deals with non-compliant appropriately HMRC’s latest tax gap analysis shows that there is still more work to be done.
Small businesses continue to make up the largest share of the tax gap at 56% (£20.2bn) with wealthy individuals at well under 5% (£1.7bn). Direct taxes such as income tax and corporate tax make up about two-thirds of the tax gap with VAT at 5%.
“The underlying behaviors driving the tax gap show a significant increase in taxpayer failures to take reasonable precaution, with tax evasion and the shadow economy making up 20% of the tax HMRC estimates it did not collect. Underpayments related to tax evasion remain steady at 4%.
“Despite a long-term downward trend, the tax gap has remained resolutely flat in recent years and has returned in monetary terms to pre-pandemic levels. Although it remains at a low level, it is on the back of record post-pandemic tax receipts, fueled in part by Fiscal drawdown where many tax credits and exemptions have been reduced or not increased in line with inflation. In 2022/23, tax revenue as a percentage of GDP is at a 20-year high of 31.4%.
To reduce this gap, HMRC needs more resources and effective compliance programs to deal with those who do not abide by the rules. A recent report by NAO indicated that HMRC’s compliance revenue had fallen precipitously during the pandemic by a staggering £9 billion and concluded ‘It seems likely that many non-compliant taxpayers will abscond from paying their fair share of taxes, potentially undermining the sense of fairness on which the system relies.“.
“Those trying to rectify the matter have also been severely affected by HMRC’s performance in handling phone calls and postal correspondence, now compounded by the decision to close the self-assessment helpline in summer 2023,
Shutting down the self-assessment helpline, even for a relatively short period, runs counter to trying to better help taxpayers, especially small businesses, get things right. Redirecting people to online resources will only help many, and the alternative of writing to HMRC risks joining the Much larger waiting list.”
“The Make Tax Digital Program is a transformational project aimed at improving record-keeping in UK businesses.
“The Make Taxes Digital program aimed at helping businesses reduce errors in their tax records through digital record-keeping has been plagued by delays since it was first announced in 2015 and the original 2020 full implementation date is now likely to be 2027. HMRC cannot start reap the full benefits of the program until then.
“With the number of inquiries from HMRC now expected to escalate exponentially, taxpayers contacted by HMRC should consider obtaining professional tax advice to ensure their affairs are in order. Obtaining advice when dealing with an inquiry is usually reasonable and ensures that it is dealt with properly and promptly. “
