The UK’s tax gap has fallen very slightly to 7% of tax due and is on a continuing long-term downward trend, according to new HMRC figures, reports Harris & Co accountants Northampton.
The percentage tax gap is down from 7.1% in 2010-11 to 7% in 2011-12, having stood at 8.3% in 2005-06. However, the value of the tax gap has increased over the past year, up from £34bn to £35bn, which HMRC says is mainly due to an increase in the VAT gap reflecting the rise in the standard rate of VAT to 20%.
HMRC says it is estimated that nearly half of the 2011-12 tax gap can be attributed to small and medium-sized businesses (SMEs) (£16.7bn) and one quarter from large businesses (£8.8bn). The remainder is split between criminals and individuals.
The tax gap is compiled from around 30 separate estimates for different taxes, and the statistics are regularly revised to take account of improved methods and the latest available information. The current figures include revisions going back to 2005-06, as well as including a new estimate for the wine tax gap for the first time. This puts the wine illicit market share at 6% in 2011-12, with associated revenue losses of £350m.
By tax type, the largest proportion (44%) of the tax gap results from losses in income tax, CGT and NICs (£15.3bn), although this equates to just 5.8% of the total theoretical liabilities for these categories of tax. That is followed by £11.4bn of VAT losses which account for 33% of the total, and equates to 10.5% of the theoretical VAT liabilities.
Overall, HMRC analysis indicates that £5.4bn is lost through the hidden economy; £5.1bn through tax evasion; £4.7bn via criminal attacks; £4bn through avoidance; £4.4bn as a result of non payment; £4.3bn as a result of differences in legal interpretations; £4.3bn as a result of ‘failure to take reasonable care’; and £2.9bn is lost through error.
Ronnie Ludwig, partner in the private wealth group at Saffery Champness, said: ‘It is striking that errors and a lack of care in reporting earnings are costing the nation almost as much as carefully engineered structures to facilitate tax avoidance and evasion. This should be a wake-up call – education for taxpayers has a role to play here as there is surely huge scope for improvement.’
Exchequer Secretary David Gauke said HMRC would continue to ‘challenge non-compliance fiercely’, saying that since 2010, the government has invested nearly £1bn in additional compliance initiatives and that HMRC is on track to secure a further £44bn in tax revenues over the next two years.
The UK is one of the few countries to publish a tax gap estimate. HMRC says that while differences in methodology make it difficult to establish international comparisons, the UK is ‘unquestionably at the low end of the range’, with comparable tax gap rates in the US standing at 14.5% and 10% in Sweden.