Amid continuing concerns about inflation and the economy, it seems that the UK Government has at least some reason for cheer: the “tax gap” for the year 2021 to 2022 has remained at its lowest ever level, holding at the same 4.8% figure as last year. 

What is the tax gap? 

In simple terms, the tax gap is the gap between the total amount of tax expected to be paid, and the amount of tax actually paid. The latest tax gap is estimated by HM Revenue and Customs’ (HMRC) annual Measuring Tax Gaps publication.

Jonathan Athow, Director General for Customer Strategy and Tax Design at HMRC, commented: “The tax we collect funds the country’s public services and we want to ensure everyone pays the correct amount. These figures show most taxpayers and businesses pay what they should.

“This important research enables us to better help those making common mistakes or failing to take sufficient care, as well as tackling the minority deliberately hiding their income.”

History of the tax gap 

The figures show that in recent years, the tax gap has dropped from 7.5% in the 2005-2006 tax year to 4.8% in the 2020-2021 tax year, where it remains. 

When the gap is expressed in monetary terms, the difference is estimated to be £36 billion for the 2021 to 2022 tax year. Estimated tax liabilities for the same tax year, meanwhile, are £739 billion. 

Who is responsible for the tax gap?

It is important to note that the existence and significance of the tax gap cannot be attributed solely to one party; there are a number of elements and groups that help contribute to its existence. 

According to the figures, small businesses represent the largest proportion by group, at 56%, or £20.2 billion. This is followed by criminals, with an 11% proportion (£4.1 billion), large businesses (£3.9 billion), and mid-sized businesses (£3.8 million).

Outside of businesses, wealthy individuals are thought to account for around 5% of the tax gap, at an estimated £1.7 billion, and other individuals for the remaining 6%, at an estimated £2.1 billion. 

Looking at the specific types of tax that account for the gap, Income Tax, Capital Gains Tax, and National Insurance contributions make up 35% of the gap (around £12.7 billion). Corporation Tax takes another 30%, or £10.6 billion. 

Meanwhile, the VAT gap is now 5.4%, or £7.6 billion, compared to the 14% (£11.9 billion) recorded for 2005 to 2006. 

What are the most common causes of the tax gap?

There are a number of elements that come together to cause the tax gap, and some of the most common include:

• Failure to take reasonable care and error

It seems that simply failing to take reasonable care, and human error, play the most significant role in the tax gap, and are responsible for 45% of the overall figure. This essentially means that a number of taxpayers fail to double-check their tax returns for accuracy, causing mistakes and errors which result in less tax being paid.

• Evasion

Deliberate evasion makes up just 13% of the tax gap – a figure that might surprise many. This can include false expenses, and using tax evasion techniques to minimise the amount of tax that is paid by a business or individual.

• Legal interpretation

Legal interpretation makes up 12% of the tax gap – this can include using technically legal methods and interpretations of tax laws to minimise the amount of tax paid.

• Criminal attacks

Criminal attacks make up around 11% of the tax gap – this refers to deliberate criminal activity that is used to avoid tax.

• Non-payment

Finally, classic non-payment makes up 9% of the tax gap, and this refers to individuals who simply fail to pay the tax that they owe.

Are you keeping on top of your own tax obligations? 

Has reading about the latest HMRC findings in relation to the “tax gap” reminded you of your need to ensure you fulfil your own tax responsibilities? 

If so, please don’t hesitate to reach out to your nearest TS Partners office to learn more about the high-quality and responsive HMRC help for business in Plymouth, Newton Abbot, or Wellington that we can provide.