HMRC has released its annual data analysing the tax gap. Issued on 22 June, the figures show that the tax gap has remained at 4.8%. This is the difference between what HMRC expects the total tax take to be for 2021/22 and the actual tax received. HMRC has previously said that the tax gap has been reducing over the past 15 years from 7.5% in 2005 – 2006, but this trend appears to have plateaued.
Type of taxpayer
What is particularly interesting is that HMRC attributes most of the gap to small businesses (56%) with criminals coming second and mid-sized businesses coming third. Large businesses come in at 4th place with individuals and the wealthy bringing up the tail (not as perceived by many taxpayers who think that cracking down on tax avoidance by the wealthy would have a huge effect on tax revenues).
Although there is an upward trend in small businesses not paying the correct tax due, the income tax self-assessment gap is going down. So it appears that the majority of the increase is due to higher levels of corporation tax non-compliance. It also begs the question as to whether making tax digital for income tax is really worth the effort…
Behaviour
If the data is carved up a different way, looking at the behaviours/reasons for non-payment of tax, a very interesting picture emerges…
Criminal behaviour (which includes evasion, criminal attacks and the hidden economy) accounts for 30% of the tax gap. Failure to take reasonable care also comes in at 30%. Does this mean there is deliberate non-compliance or is the tax system becoming so complex that even those who think they are complying are actually falling short of what is required?
Type of tax
Let’s now look at which taxes make up the gap. The highest by far is income tax, NICs and capital gains tax, which together account for over £12bn. The tax gaps for VAT and corporation tax have all shown a slight increase, with excise duties being the only one showing a small downturn.
So, what does this all mean?
Of particular relevance to most readers of this will be the tax gap attributed to small and medium-sized enterprises. The tax world is complex both in terms of legislation and interpretation, and there’s no end of changes. Whilst is clear from the above figures that some people look to exploit this, it’s also clear that there is a lot of confusion and lack of understanding as to how the rules and regulations work. It highlights the urgency of simplifying the tax system, making the rules clearer and making compliance easier.
Whilst a large part of the tax gap is clearly due to lack of understanding the complexities of compliance, a huge amount of the total is due to tax evasion, criminal attacks and activities in the hidden economy. This is clear fraudulent behaviour and ought to be a number one priority area for HMRC, much as it was for tax avoidance (which whilst morally might be objectionable, is still legal) which now accounts for only £1.5bn of the total tax gap. Whilst it has become a common feature of budgets in recent years, hearing the Chancellor talk about the further efforts to tackle tax avoidance is probably a thing of the past. What we now need to hear is the Chancellor stating that HMRC (and maybe other enforcement agencies) will be channelling their efforts into the overtly criminal side of tax evasion and associated criminal activities.
Of course, figures like this tell only one side of the story. Human nature, being what it is, will always lead to people trying to pay less tax than is legally due. In my view, making the tax code more complex by introducing complex anti-avoidance legislation only gives grist to the mill for those people looking to exploit the system and the people who advise them. A better approach would be to have a clear, simple and easy to apply tax code which whilst never completely eliminating the chances of innocent error or mistake, should make it harder for those who look to manipulate the legislation to their own advantage.
