Heather Self, a tax expert at Pinsent Masons, the law firm behind Out-law, said that “this is a huge amount of tax that HMRC is still not collecting despite the government's condemnation of 'morally repugnant' tax avoidance”.
The tax gap is estimated to have increased by £1bn from £31bn in 2009/10.
HMRC has largely attributed the rise in the tax gap to an increase in VAT receipts as a result of the increase of the rate of VAT from 17.5% to 20%.
However they also estimate that the tax gap for corporation tax paid by large businesses has increased by £0.3bn. Heather Self points out that this 27% increase is "a big jump".
The overall tax gap in 2010-11 is estimated to be £32bn which is 6.7% of tax liabilities. When expressed as a percentage of tax liabilities, the report states that the tax gap fell from 7.1% to 6.7% between 2009-10 and 2010-11.
The tax gap is defined as the difference between tax collected and the tax that should be collected.
Heather Self pointed out that "despite the perception in the media" the report estimates that nearly half of the 2010-11 tax gap can be attributed to small and medium-sized businesses and "only" around one quarter from large businesses. The report states that the remainder of the tax gap is evenly split between individuals and 'criminals'.
Self said that this is likely to mean that there will be a return by HMRC to a focus on compliance and avoidance by mid-market business and in particular owner managed ones, in addition to an ongoing focus on offshore evasion, as evidenced by the announcement of increased spend on HMRC's Affluent Unit by the Chief Secretary to the Treasury at the Liberal Democrat Conference in September.
“HMRC needs to ensure that in trying to collect more tax from small businesses it does not trample on innocent taxpayers. HMRC has become more error-prone and heavy-handed in some respects over the last few years. My fear is that the pressure on HMRC to reduce the tax gap may prompt it to adopt a blunderbuss approach.”