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Mind the tax gap
Introduction – tax gap
Jostling for attention with the start of the World Cup was the publication of HMRC’s report on the tax gap.
Indeed, this report might have made better viewing for Saudi Arabia fans who were walloped by the hosts (if the Russians can do that, then what will Mohammed Salah do to that defence!?!)
Of course, this was the eagerly anticipated 2018 edition which analyses the figures from the 2016/17 tax year.
What is the tax gap?
In summary, the tax gap is the difference between the amount of tax that HMRC believes should be collected from UK taxpayers and the amount that it actually manages to bring in to the Government’s coffer.
How much is the tax gap?
For 2016/17, the tax gap is estimated to be around 33bn.
Of course, this is a huge figure. It would probably manage to cover just over half the cost of HS2.
It represents 5.7% of the total theoretical tax take. In other words, the Government collects 94.3% of the taxes that it thinks it should.
Over the last decade this amount has generally reduced year on year from a level of 7.9% in 2005/6. That said, the tax gap has increased by £1bn from last year.
All in all, decent progress.
How much is attributable to tax avoidance?
However, the amount of the tax gap attributable to tax avoidance is £1.7bn. This is a mere 5% of the tax gap and 0.3% of the total theoretical tax take.
This might come as a surprise to many who would assume that the tax leakage is largely or significantly as a result of the action of tax avoiders. This is understandable as it is what the press and many politicians would have us believe.
But it is simply not correct.
The biggest culprit is the failure for taxpayers to take reasonable care. Careless mistakes and / or negligence. This is £5.9bn or 18% of the tax gap.
Next over the line is the tax loss as a result of criminal attacks on the system. This contributes £5.4bn to the tax gap.
Note that this is not tax evasion. It is where organised criminals undertake co-ordinated and systematic attacks on the UK tax system. For example, activities would include smuggling goods – such as alcohol or tobacco
Evasion is the next cab off the rank with £5.3bn attributable to it. This has increased from £4bn in 2005-06.
In a similar vein, the hidden economy also contributes another £3.2bn to the tax gap. This was £2bn in 2005-06.
Why is this the case?
Quite simply, HMRC’s resources have been focused on the identification and counteraction of tax avoidance.
In tandem with this, the raft of powers given to HMRC and crucial changes in legislation such as DOTAS and Accelerated Payment Notices (‘APNs’) have effectively killed off the marketed tax avoidance industry.
So increased resources and a bolstering of powers has delivered a return on investment.
The types of taxes that are avoided?
One thing to note is that out of the £1.7bn that is attributable to tax avoidance £0.8bn is due to corporation tax avoidance and £0.7bn to PAYE avoidance and CGT. My view is that little of this second figure will be due to CGT.
These categories represent the vast majority of all taxes avoided. However, it is also clear that even these amounts are much reduced from the 2005-06 tax year, where corporation tax avoidance was some £2.8bn.
It is interesting that in the category ‘other taxes’ is IHT avoidance. The total figure for this category is £0.1bn which would indicate that there is very little IHT avoidance going on. This does lead to the question as to why we needed a new IHT DOTAS regime.
For the sake of completeness, VAT avoidance is £0.1bn. It should be pointed out that VAT carousel fraud is included in the criminal attack figures.
It is clear that the return on investment that the Counter Avoidance teams can generate will be markedly reduce over the next few years.
There is simply less and less tax they can squeeze out of tax avoidance.
It is clear that attention and resource will need to be switched to ensure that revenue does not continue to be haemorrhaged through criminal attacks and tax evasion.
Of course, this is a much more difficult exercise.
Much of the return on investment in tax avoidance has been as a result of the fact that the taxpayer has had to comply with DOTAS. In recent years, this has given HMRC a list of people to call on for a tax boost through APNs.
This was like shooting fish in a barrel.
Even where the scheme was not disclosable, certain disclosure would need to be made in accounts and tax returns.
However, this is not the case with tax evasion or attacks by criminal gangs. Clearly, HMRC are not helpfully provided with lists of taxes evaded by tax dodgers or an itinerary of activities of criminal gangs.
As such, it will be a much more difficult task for HMRC to cut the tax gap in these areas.
If you have any queries or comments on the tax gap or tax in general then please do not hesitate to get in touch.