The tax gap is HMRC's estimate of the amount of tax which ought to be collectable but which never reaches the Treasury’s coffers for a variety of reasons. Those reasons reflect everything from the inability of honest taxpayers to meet their liability, through to deliberate criminal activity. Any tax gap figures need to be treated with a healthy pinch of salt, simply because measuring the unknown is always going to be difficult.
The tax gap for 2017/18, the most recent year for which figures are available, is £35bn which is 5.6 per cent of total tax liabilities. That represents a slight increase from 2015/16 (5.3 per cent) and 2016/17 (5.5 per cent). For every pound of tax lost in the tax gap, honest taxpayers suffer tax increases. It's in everybody's interests that the tax gap is reduced significantly and rapidly. For example, RSM estimated that if all the tax lost due to illegal behaviours had been collected during the last 10 years, the age of austerity which followed the global financial crisis would have only been half as bad as it actually was.
We don’t yet have a firm date for the publication of the next figures but it would be unfair to conclude that, because the gap seems to fluctuate around 5.5 per cent of total tax liabilities, HMRC is not doing anything to tackle it. Far from it.
Over the last decade, working alone and also with other tax authorities via the G20 and the OECD, HMRC has introduced an impressive range of measures. While I do not make any claim that this list is exhaustive, these initiatives were quickly identified:
- IR35: changes to scope and procedures
- Widespread data-mining through HMRC’s Connect computer system, to identify fraudulent or undisclosed activity
- The loan charge
- Diverted profits tax (DPT)
- Accelerated payment of capital gains tax
- Making Tax Digital for VAT. This will in due course be followed by Making Tax Digital for the self-employed
- Collection and exchange of information with other jurisdictions, affecting individuals, trusts and companies
- Reporting cross-border tax arrangements (DAC6)
- Digital services tax (DST)
- General anti-avoidance rule and new targeted measures (GAAR and TAARs)
- Extension and rationalisation of mandatory disclosure of tax-avoidance schemes by scheme promoters and people who use them (DOTAS)
The scope and diversity of these initiatives is impressive and, although the tax yield of each is not yet known, it’s certain that together they will be significantly increasing the total amount of tax collected by HMRC.
Drilling down into this big picture, a number of important similarities link most of the initiatives. First, they help remedy innocent taxpayer errors or deliberate concealment of liabilities in areas which HMRC has previously found to be intractable. Second, they make maximum use of technology. Third, with new reporting and self-assessment mechanisms, most of the burden for administering the new measures falls on tax-paying individuals and companies. By working smarter not harder, HMRC clearly hopes to maximise the tax yield without going on a major hiring spree of its own.