The “tax gap” is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid.
HMRC relies heavily on taxpayers - individuals and organisations - reporting their finances and paying their taxes in line with the rules. In the last financial year, 2018-19, it collected 90% of the tax owed through this “voluntary compliance” and payment of tax.
Inevitably some taxpayers make mistakes, others choose not to comply fully, and some cannot pay because of insolvency. Taxpayers can genuinely interpret tax rules differently from HMRC - or construct artificial arrangements to avoid tax.
In 2018-19, HMRC reported a new record tax revenue of £627.9 billion - an increase of £22.1 billion (3.6%) on the year before.
But the tax gap, of tax owed “by the book” but not paid, was £31 billion or 4.7% of the total tax owed – though this is down from a peak tax gap of 7.2% in 2014.
The state of the economy, how many people in are in self-employment or employed, and the perceived fairness of tax policy - all these and other factors can affect how many voluntarily pay completely the right tax.
Tax administrators like HMRC can increase tax revenue by encouraging “voluntary compliance”, but also of course by stopping non-compliance. Keeping the tax gap low is always a challenge because taxpayers continually change their behaviour to exploit “opportunities” in the tax system.
The NAO report “Tackling the tax gap” published 22 July 2020 found that HMRC’s work to tackle non-compliance is offering good value for money. HMRC has successfully reduced the tax gap by targeting the factors underpinning non-compliant behaviour - which recently included a series of mass-marketed tax avoidance schemes.
But the NAO also found that HMRC has not extended these successes to the cases where taxpayers are bending the rules, or don’t take reasonable care they’re paying the right tax, and there are questions about the focus and resource HMRC dedicates to tackling the tax gap across big business, SMEs and individuals.
In September, the Committee will question senior Government officials on how effectively HMRC is tackling the tax gap. If you have evidence on the issues raised above, please submit it here by Thursday 27 August.