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Estimated UK tax gap falls to lowest recorded rate

14 July: HMRC has published its tax gap estimate for 2018/19 showing that the gap between tax expected and collected fell to 4.7%, equating to £31bn of lost revenue.

In the 2020 edition of its ‘Measuring tax gaps’ publication, HMRC estimates that in 2018/19 the tax gap was £31bn or 4.7% of tax liabilities, down from 5.0% (also £31bn) in 2017/18. It is the smallest gap recorded since HMRC began publishing estimates from 2005/06.

HMRC’s report breaks down the tax gap by customer group, type of tax and by behaviour and ICAEW’s Tax Faculty notes that the revisions to the gaps reported in previous years are significant.

The most significant change was in VAT, where the gap was estimated at £10bn in 2018/19 down from £11.8bn in 2017/18.

Graphic showing HMRC's figures for the UK 2018/19 tax gap by type of taxLooking at the tax gap by customer group, there was little change year on year with slight increases in the gap for small businesses and individuals, and slight reductions in the gap for large and mid-sized businesses.

This year’s report includes wealthy taxpayers as a separate group for the first time. Defined as an individual with an income greater than £200,000 or assets greater than £2m, HMRC estimates this group represents just 0.3% of the overall 4.7% gap.

It is worth noting that HMRC’s methodology for estimating the gap for income tax self assessment is calculated from the bottom up. It is based on enquiries (which ICAEW members report that they rarely see in practice) together with operational results from compliance activity.

Graphic showing HMRC's figures for the UK 2018/19 tax gap by customer group.In terms of behaviour it was in legal interpretation that the most dramatic change was seen with the tax gap estimated at £4.9bn in 2018/19 down from £5.4bn in 2017/18. While there were also reductions in tax gaps due criminal attacks and errors, there was an increase in monetary terms of taxes not collected due to failure to take reasonable care and non-payment.

Graphic showing HMRC's figures for the UK 2018/19 tax gap by behaviour

In releasing the data, HMRC’s Chief Executive Jim Harra said: “More than 95% of the tax due was paid in 2018/19. Our role is increasingly about making it straightforward for taxpayers to get it right, first time, while also tackling the minority who deliberately set out to cheat the system.”

The government’s press release also highlighted the role that making tax digital (MTD) is expected to play in reducing the tax gap, stating: “MTD seeks to reduce the tax gap caused by error and failure to take reasonable care which cost the Exchequer £8.5bn in lost revenue in 2018-19. More than 1.4m businesses have signed up to the service which helps them reduce errors.”

Given the lag in reporting, ICAEW’s Tax Faculty argues that it is too early to assess the impact of MTD on the tax gap.