Steady as She Goes

HMRC's figures show tax gap remains consistent

Last Thursday, HMRC published figures which estimated the tax gap for 2010/11 at £32 billion or 6.7% of tax total tax liabilities.

The tax gap is compiled from 30 separate estimates for different taxes and reflects the difference between the amount of tax HMRC anticipate collecting and what is actually secured. It is also broken down into the reasons that tax hasn't been collected, including tax evasion and avoidance, taxpayer error, the black market, criminal attacks (smuggling and VAT fraud) and corporate insolvencies.

HMRC Tax Evasion

HMRC attribute £4 billion and £5 billion of the tax gap to evasion and avoidance respectively and their 50 page report provides us with their definition of tax avoidance as being “bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no commercial purpose other than to produce a tax advantage. It involves operating within the letter but not the spirit of the law.

Tax avoidance is not the same as legitimate tax planning. Legitimate tax planning involves using tax reliefs for the purpose for which they were intended. For example, claiming tax relief on capital investment, saving in a tax-exempt ISA or saving for retirement by making contributions to a pension scheme are all legitimate forms of tax planning.”

Since HMRC first started publishing the figures in 2004/05, the tax gap has remained relatively consistent over those seven years ranging between £31 – 35 billion.

In comparison to the previous year of 2009/10 the tax gap was up by £1 billion due to the impact of the VAT increase in January 2011.

Contrary to media hype the report suggests that big businesses are, in the main, paying their fair share of corporation tax, PAYE, NIC's and VAT.  Small and Medium-sized enterprises (SME's) on the other hand are accused of being the worst offenders for tax avoidance and evasion and these businesses can expect to be targeted for enquiry if HMRC plough more resources into this area. The Revenue may well need to bolster compliance and enforcement teams if The Telegraph's recent report is to be believed that a third of HMRC's staff from these divisions will be able to retire in the next five years.

Richard Murphy, an accountant and director of Tax Research UK, is a critic of the way the tax gap statistics are calculated, saying, "Over three years the tax gap has, amazingly, fallen from £42billion to £32billion and at least £7billion of this is because HMRC couldn't get data right in the first place. Candidly they're fixing this up to suit their own purposes as they go along.”

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