A tax gap is the difference between the amounts of tax government should collect and the amount it is actually paid. It is the tax lost to the Treasury through tax evasion and avoidance, human error and deliberate omission. Every country has this problem in some way.
How much is the UK’s tax gap?
Every year, HMRC publish an approximate figure which shows our national tax gap. It is currently £35bn. There are different ways of looking at this figure. HMRC point out that it is only 5.6% of the UK’s total tax bill. Giving it some context,
The Independent point out that this is the equivalent of £673m every week and that the police budget is £12,2bn. Looking at the year on year numbers, this is the highest it has been since 2008, when tax gap figures were first made public. In 2016 it was £30bn, a 17% increase in a very short time period. This spike leads to questions about why this figure is rising so quickly and what can be done to close the tax gap.
How is it calculated?
This is a very important question, in order to understand the statistics and to make any kind of international comparison. We do know that HMRC does not include multinational companies’ “profit shifting”. This excludes the figures lost when global companies manage to legally get round paying a fair amount of UK tax. HMRC also doesn’t factor in any monies lost when they have not been successful in cases against tax avoidance schemes. Both of these elements could add millions of pounds, if not billions, to the overall tax gap figure.
International tax gap comparison
It appears that the UK is the only country that publishes a figure that amalgamates different taxes, so comparison isn’t possible. But other countries do report on their collection of particular taxes, like VAT. Britain doesn’t fair very well in these comparisons. When looking at the proportion of VAT loss compared to the potential VAT available, Britain came 11th highest out of the 28 European Commission countries.
Further comparisons are tricky because countries measure their tax gaps in different ways, with no internationally standardised factors or methodology.
Why are HMRC struggling?
We know that HMRC are fighting against tax evasion and avoidance across the spectrum of industries. But their department has not been unaffected by years of austerity, with 40,000 staff cut from 104,000 since they were created in 2006. Prior to that The Inland Revenue and HM Customs existed as separate government entities.
People feel less emotionally connected to cutting the numbers of tax inspectors, than the number of nurses or fire fighters. This has made it an easy place for governments to cut budgets, as there is less public outcry. The thing is, all the other departments suffer if the correct taxes are not collected in order to fund them. Maybe government need to invest more in HMRC in order to close down the tax gap, for everyone’s benefit.