Tax gap value rises to £33bn as HMRC cracks down on routine errors

Figures released (94 page / 1.52MB PDF) by HM Revenue & Customs (HMRC) show that the value of the tax gap attributed to ‘legal interpretation’ has risen by over £1bn in the last five years, while the tax gap attributed to failure to take reasonable care has also risen by over £1bn in that period.

The tax gap represents the difference between the amount of tax collected by HMRC and the amount that should, in theory, be collected. HMRC records underpayment due to legal interpretation when a taxpayer’s interpretation of how much tax it owes differs from that of the authorities.

Tax expert Catherine Robins of Pinsent Masons, the law firm behind Out-Law.com, said tax avoidance accounted for a much smaller proportion of the tax gap than most people believed, with only £1.7bn of the total sum (5%) now due to tax avoidance.

“Very few businesses are engaged in tax avoidance schemes now and as HMRC hunts for new sources of revenue, it is increasingly coming down hard on basic, almost routine errors,” Robins said.

"HMRC is increasingly challenging companies' interpretation of the UK's extremely complex tax rules. It is putting significant resource into areas like employer tax compliance, where it is very easy for businesses to make mistakes,” Robins said.

Robins said the tax gap attributed to tax avoidance had fallen by £500 million in the last five years.

“Avoidance is not the cash cow HMRC wants it to be. As a result, HMRC is increasingly challenging legal interpretations in order to add to businesses’ tax bills,” Robins said.

HMRC said the tax gap had reduced from 7.3% in 2005/06. It revised the percentage tax gap for 2015/16 down from 6% to 5.7%, meaning there was no percentage change in the last two years. However the value of the tax gap rose from £32bn in 2015/16.

The largest portion of the tax gap (£5.9n) was attributed to companies’ failure to take reasonable care over their tax liabilities. A total of £5.4bn was attributed to criminal attacks, £5.3bn to legal interpretation, and the same amount to tax evasion.

Small businesses were most likely to be underpaying tax. They accounted for £13.7bn of last year’s tax gap. Large businesses had underpaid £7bn and medium-sized businesses £3.9bn.

The tax gap for income tax, National Insurance and capital gains tax was 4.2% last year, its joint-lowest level since 2009/10. The tax gap for value added tax was 8.9% last year, reflecting a continued long-term reduction.

There has also been a long-term downward trend in the corporation tax gap. This has reduced from 12.4% in 2005/06 to 7.4% last year.

HMRC said that if the tax gap had remained at 2005/06 levels the UK would have lost £71bn in revenue last year.