The official HMRC estimate of the UK tax gap for 2014-15 is 6.5 percent.
On 20 October, HMRC released Measuring Tax Gaps 2016, which sets out the Government’s estimate of the difference between the amount of tax that should in theory be collected by HMRC, and the amount of tax actually collected. The most recent estimate puts this figure at £36 billion, or 6.5 percent of the UK’s theoretical tax liability – a reduction from last year’s estimate of 6.9 percent. The report sets out a breakdown of this amount across different taxes, taxpayer groups and activities.
HMRC’s press release notes that the UK currently has one of the lowest tax gaps in the world, as well as highlighting the steps they have taken to reduce the tax gap. In particular, they credit the £1.8 billion invested since 2010 in HMRC’s compliance operation, and the £1.3 billion invested in new digital tools to help taxpayers calculate and pay their tax liabilities.
Commenting on the tax gap analysis, Michelle Quest, head of tax, pensions and legal services at KPMG in the UK, said:
“It’s clearly reassuring to see the headline tax gap figures in this year’s report showing a reduction from 6.9 percent (£37 billion) in 2013-14 to 6.5 percent (£36 billion) in 2014-15.
“Looking at the corporation tax gap, the figures show it has fallen by 44 percent overall since 2005/06. However, this year’s report shows the tax gap rose to 7.6 percent compared to 7.2 percent in 2013-14. Both SMEs and big business have contributed to the increase with the corporation tax gap rising 0.3 percent and 0.2 percent respectively.
“Nevertheless, it’s encouraging to see tax avoidance numbers reducing by another £0.5 billion - now £2.2 billion for 2014-15 having been £5 billion and higher not too long ago. This suggests the statistics are starting to reflect changes in corporate behaviour with avoidance of inheritance tax, national insurance contributions and capital gains tax contributing more to the overall avoidance figures than corporate tax avoidance.
“Despite the media suggesting otherwise, the attitudes of big business towards tax behaviours have changed over the past decade and the reality is that tax avoidance activity is restricted to a small minority of corporate offenders.
“Headline figures show the Pay As You Earn (PAYE) tax gap is much reduced and HMRC highlight that Real Time Information is likely to have made a significant contribution. Better quality data and increased compliance are also likely to have contributed to the reduction from £4 billion in 2013-14 to £2.8 billion in 2014-15. However, the implementation of HMRC’s Making Tax Digital proposals represents a daunting change for many tax payers. The resources required for the initial switch will be a significant challenge for many businesses and this could adversely impact the tax figures in the short-term.”
Robin Walduck, head of international tax and treasury at KPMG in the UK, added:
“While these figures don’t yet reflect any impact of the EU referendum result, we may see a knock-on impact of Brexit in future years. HMRC have championed that the VAT gap is at its lowest level in this year’s report, but 10.3 percent is still a relatively high gap for a tax, particularly when you compare it to corporation tax which is 7.6 percent and PAYE at 5.2 percent.
“There may be challenges ahead for HMRC in keeping the indirect tax gap under control as we expect the UK’s decision to leave the EU will have a disproportionate impact on indirect taxes (such as VAT) as well as tariffs and customs duties. As these areas of tax become more complex for businesses to understand, this will no doubt affect how easy they are to administer.
“This increased complexity could lead to a short term impact on the tax gap for these taxes as business (and HMRC) get to grips with the impact of Brexit. We may also see more examples of the tax gap needing to be re-calculated (as it was this year in relation to 2013/14 data) as a result of Brexit driving an evolving interpretation and application of the tax code.”