150827 The width of the tax gap
  • The tax gap… HMRC is in the dreadful business of collecting taxes. But what about the taxes that they don’t collect? This is what the tax gap, shown in the graph above, attempts to describe. It’s the difference between all the money that the taxmen could theoretically take and all the money that they do actually take. In the financial year of 2012-13, this added up to 6.8 per cent of all tax liabilities, or the rather sizeable sum of £35 billion. That’s half of this year’s entire expected budget deficit. Uncollected.
  • …and its causes.This £35 billion goes uncollected for various reasons. The largest single part of it – £5.9 billion, or 17 per cent – is accounted for by the hidden economy, where people work without declaring all of their income. But there’s also criminal attacks (£5.4 billion), differences in legal interpretation between companies and the state (£4.5 billion), straight-up non-payment (£4.4 billion), an absence of reasonable care in people’s tax returns (£4.2 billion), evasion (£4.1 billion), avoidance (£3.1 billion), and good, old-fashioned error (£2.9 billion).
  • It’s an uncertain figure… The hidden economy? Criminal activity? These, you’ve probably already realised, are difficult things to ascertain. HMRC has had its calculations checked and marked by the International Monetary Fund, which reckons that they’re okay, but they’re still uncertain estimates based on uncertain estimates. Presumably, this is why the latest figures are for three years ago.
  • …but a useful one. This doesn’t mean that the tax gap is a meaningless construct. HMRC uses it to identify its own weaknesses and address them over time. The graph at the top of this post suggests that they’ve been fairly successful in this. The gap for 2012-13 was 1.7 percentage points, or £3 billion, narrower than it was a decade ago.
  • Persistent avoidance. Yet it’s not all progress and pats on the back. Tax avoidance, for instance, added up to 0.6 percentage points of the gap before the Coalition came to power. It was still 0.6 percentage points half-way through the Coalition’s reign. And this despite a lot of promises to close loopholes in the meantime. It remains to be seen whether the Government’s efforts will have succeeded in the years since, but I’m not confident. Avoidance remains something that politicians find all too easy to talk about it, but not to legislate against.

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