The UK tax gap for 2019 – 2020 has been estimated to be £35bn, which is 5.3% of total theoretical tax liabilities (5.5% up on the previous year). HMRC said the tax gap has been reducing over the past 15 years from 7.5% in 2005 – 2006.
What is particularly interesting is that HMRC attributes most of the gap to small businesses with large businesses coming second and criminals coming third
| Sector | Amount £bn | % of total |
| Small businesses | 15.1 | 43% |
| Large businesses | 6.1 | 17% |
| Criminals | 5.2 | 15% |
| Medium businesses | 5.0 | 14% |
| Individuals | 2.6 | 7% |
| Wealthy (income >£200k | 4.0 | 1.5% |
If this is carved up a different way, looking at the behaviours/reasons for non-payment of tax, a very interesting picture emerges…
| Behaviour | £bn | % |
| Failure to take reasonable care | 6.7 | 19 |
| Legal interpretation | 5.8 | 16 |
| Evasion | 5.5 | 15 |
| Criminal attacks | 5.2 | 15 |
| Non-payment | 4.0 | 11 |
| Error | 3.7 | 10 |
| Hidden economy | 3.0 | 8 |
| Avoidance | 1.5 | 4 |
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. No doubt the shift the digitisation is designed to help with this, but the process of digitisation for VAT (which doesn’t apply to the smallest of businesses and individuals anyway) doesn’t exactly inspire one with confidence. I serious concerns as to whether most small businesses will be ready for the digitisation of income tax which is now only a year or so away.
Whilst a large part of the tax gap is clearly due to lack of understanding the complexities of compliance, a huge amount (£13.75bn or 40%) of the total is due to tax evasion, criminal attacks and activities in the hidden economy. This is clear fraudulent behaviour 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 or 4% 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.
The figures just published don’t take any account of the effects of the pandemic which will come through in the figures over the next couple of years. Two key factors will probably influence how the figures look. First, in the early days of the pandemic HMRC rightly paused a significant amount of compliance activity whilst it focused on introducing the coronavirus support schemes. Secondly the very introduction of these schemes will, thirdly, no doubt have been attractive to those looking to cheat the system and claim amounts that were not due to them. I hope and suspect that this will drive an increase in targeted investigations by HMRC.
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.
