New tax gap figures – but where’s the greatest tax leak?

The central public narrative about tax over recent years is that there is massive tax leakage due to the aggressive avoidance activities by multinational companies, and if only that could be stopped the country would be in much better economic health. That was a complete caricature and the latest tax gap figures published today by the Treasury show just how wide of the mark this perception is.

The tax gap is the difference between the actual tax collected and the amount which in theory should be collected. The latest figures show that the gap has actually gone up slightly in real terms (£34bn from £33bn) but because tax revenues have increased, the gap as a percentage has reduced slightly, from 6.1 per cent to 6 per cent. Given the uncertainty in many of the underlying figures (after all how do you accurately measure the tax due from people who are moonlighting?) and the rounding involved in getting to numbers in the billions - the overall picture is probably that there has been very little change since last year. But there is definitely a long-term trend downwards from the 2005-6 figure of 7.9 per cent. This does reflect HMRC’s determined attempts to tackle non-compliance in all its forms and the department deserves credit for its achievements.

But back to avoidance by multi-nationals. The first thing to say is that avoidance as a whole is the smallest element in the tax gap. At £1.7bn is it only 5 per cent of the total. But delving deeper into the figures we see that the gap attributable to avoidance by the largest businesses is only £0.5 bn. That is a very small proportion of the total tax gap of £34bn. We can debate whether or not this is due to increased HMRC compliance success or a move away from avoidance from the largest companies. In truth, it is probably a combination of the two. But it is clear that the public perception that ‘it is all the fault of multi-nationals’ has no rational basis.

So, what do the figures actually show? The sector which contributes most to the tax gap is Small and Medium-sized businesses at £15.5bn, and of that the biggest element is failure to take reasonable care. In effect, businesses getting in a muddle over their tax affairs and not giving tax compliance enough attention. The tax gap on that alone is more than 10 times that due to avoidance by large companies.   

Deliberate non-compliance in all its forms – from under declaring income to non-payment and criminal activity – accounts for something like £14bn of the total tax gap. As we have said many times before, HMRC needs to be doing more, and be seen to be doing more, to tackle deliberate non-compliance. The battle against avoidance has largely been won and we need to see a shift in the public debate to ensure that evasion in all its forms is seen by everybody as unacceptable.

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. These figures recognise this by giving a range of possibilities. For example, the gap for self-assessment is shown as £6.5bn but this is within a range of possible amounts from an upper estimate of £14bn and a lower estimate of £2.4bn. It is the trends and make-up of the figures, rather than their absolute values, which matter. The government and HMRC have, understandably, put a positive spin on the figures. I think that is justified so long as it means that future policy is based on intelligent analysis of what these figures actually say.