HMRC revealed today that if the gap, which is the difference between the tax due and the tax collected, had remained at the 2005/2006 levels, it would have grown to £46bn, leaving the country £12bn poorer.
The decrease was driven by a strong crackdown on tax avoidance by multinationals carried out by the Revenue, as well as the introduction of tough criminal laws that made it easier to prosecute evaders and companies that failed to prevent evasion.
The majority of the tax gap came from SMEs at £15.5bn, followed by large businesses (£9.7bn), criminals (£5.1bn) and individuals (£3.6bn).
HMRC lost more money in income tax, national insurance contributions and capital gains tax, with £13.7bn unpaid, followed by value added tax (VAT) at £12.6bn and corporate tax at £3.3bn.
HMRC said that the VAT gap (9.8%) was at its lowest since 2010/11. The corporate tax gap was also at its lowest level at 6.4%, down from 13.7% ten years ago.
The hidden economy tax gap for 2014/15 has also been revised down by £2.7bn, and is expected to be £1.7bn in 2015/16.
Jim Harra, director general at HMRC’s customer strategy & tax design, said that measuring the tax gap gives the Revenue “vital insights” on if its strategy is succeeding and where to direct its efforts.
But Mel Stride, financial secretary to the Treasury and paymaster general, warned there is still work to do in tackling avoidance, evasion and non-compliance.
“We will continue to take action to ensure that everyone pays the tax they owe.”
The mid-tier firm RSM pointed out that little had changed since last year, when the tax gap was 6.1%.
Moreover, HMRC predicted moonlighters – those with at least one source of undeclared income – stood at £0.9bn, but Andrew Hubbard, tax consultant at RSM, questioned how the Revenue could accurately measure this.
With the SME sector contributing the most to the tax gap, Hubbard said that businesses are “getting in a muddle over their tax affairs” and not giving tax compliance enough attention.
“The tax gap on that alone is more than 10 times that, due to avoidance by large companies,” and “the public perception that it is all the fault of multi-nationals has no rational basis”.
Meanwhile, law firm Pinsent Masons warned that the amount of underpaid tax due to “legal interpretation” had increased 9% to £6bn.
“Any kind of tax planning is now being scrutinised by HMRC to see if it can be challenged - no area is off limits for HMRC and this is reflected in the recent jump in the tax gap relating to legal interpretation,” explained Jason Collins, partner and head of tax at the firm.
He also said the 9% rise may reflect the fact that some large businesses are struggling to get certainty from their customer relationship managers at HMRC over complex new rules.
“This means more differences of opinion over legal interpretation are ending up as disputes rather than being resolved at an earlier stage,” he added.
The Association of Accounting Technicians (AAT) said the high percentage of SMEs not paying tax could be due to limited resources and a lack of education of best practice over tax compliance.
AAT tax policy expert Brian Palmer said, “There’s still a long way to go to ensure all companies pay their fair share of tax which serves their own economic interests in the long run, with customers staying loyal to those brands they perceive to act fairly and in the public interest.”
The Institute of Fiscal Studies (IFS) published its own research using data from HMRC’s audit programme, and found 36% of self-assessment taxpayers had some under-reporting on their taxes. This rose to almost 60% among the self-employed.
The IFS said that although most under-payments were less than £1,000, about 4% owed more than £10,000 and this accounted for nearly half of the missing tax revenue from self-assessment.
Its report found that HMRC had become better at targeting their audits and spotting under-reporting, but that this didn’t translate into more revenue from audits because they did fewer of them.