Last year, HMRC reported the tax gap for 2015/16 fell to 6% (£34bn), but has since revised the figures to 5.7% (£32bn). This year, despite the gap increase, the percentage remained at 5.7%.
The tax gap is the difference between the amount of tax that should be paid to HMRC and what is actually paid.
This was still a large reduction from 10 years earlier, when the tax gap was 7.9% (£35bn).
HMRC revealed in its report that almost half (41%) of the tax gap came from small businesses. The group is responsible for an overall gap of £13.7bn. Large businesses accounted for a further £7bn.
The majority of the tax gap came from failing to pay income tax (IT), national insurance contributions (NICs) and capital gains tax (CGT), amounting to a total of £13.5bn. Unpaid value added tax also contributed £11.7bn to the tax gap and corporate tax added £3.5bn.
The tax gap was driven by failure to take reasonable care (£5.9bn), by criminal acts (£5.4bn), tax evasion (£5.3bn), legal interpretation (£5.3bn), non-payment (£3.5bn), error (£3.2bn), hidden economy (£3.2bn) and finally tax avoidance (£1.7bn).
Mel Stride, financial secretary to the Treasury, said, “These really positive figures show that the tax gap is the lowest in the last 5 years, which reflects the hard work that HMRC and I have been doing to ensure we support businesses to pay the right tax at the right time and clamp down on tax evasion and avoidance.
“Collecting taxes is essential for funding our vital public services such as the NHS – indeed, had the tax gap remained at its 2005/06 level the UK would have lost £71 billion in revenue destined for public services, enough to build 200 hospitals.”
Meanwhile, Jon Thompson, HMRC’s chief executive, pointed out that the UK is the only country in the world to regularly publish their tax gap in detail and at 5.7%, it remains at its lowest for five years.“I am pleased that the downward trend shows HMRC and HM Treasury’s continued hard work to tackle evasion and avoidance is working.”
George Bull, senior tax partner at RSM, said the fact that tax avoidance is the smallest contributor to the tax gap shows how successful HMRC have been using the increasing powers available to them in clamping down on tax avoidance.
“Taken together, tax evasion (£5.3 billion) and the hidden economy (£3.2 billion) cost the UK Exchequer £8.5 billion in lost taxes every year. Clearly this is a much bigger problem than tax avoidance.
“While Parliament is keen to highlight the continuing problem of tax avoidance, the real question is why HMRC has not been given sufficient resources to tackle tax evasion and the hidden economy. After all, taxes lost to dishonesty have to be made good by additional tax burdens on honest taxpayers,” Bull said.
Catherine Robbins, partner at Pinsent Masons, said, "Despite the public perception only a very small percentage of the tax gap is due to tax avoidance.
“Very few businesses are engaged in tax avoidance schemes now and as HMRC hunts for new sources of revenue, it is increasingly coming down hard on basic, almost routine errors.”
Robbins said that HMRC is increasingly challenging companies' interpretation of the UK's tax rules, and putting significant resources into areas where it is easy for businesses to make mistakes.
Brian Palmer, tax policy adviser, Association of Accounting Technicians (AAT), said that more work needs to be done with SMEs.
“Given big-name cases of recent years, the public might be surprised on first glance that SMEs are the biggest contributors to the tax gap.
“But, of course, large firms have the professional and financial expertise to ensure they are correctly paying the taxes they owe – not a penny less, crucially, but also not a penny more.
“With the growth in cloud accounting software, it will be easier for smaller firms to concentrate on running their businesses, store their records digitally and thus be well equipped to meet tax compliance requirements. As a result of this and Making Tax Digital, their tax information (and most likely their overall finances) should be far more accurate.”
Frank Haskew, ICAEW’s head of tax, said that, given the resources that HMRC has been investing in recent years to improve tax yield and compliance, the institute expected that the tax gap figure for 2016/17 would have been lower than the previous year.
“The fact that the tax gap appears to have flat-lined might suggest that HMRC has successfully harvested the low hanging fruit but is now finding the rest of the tax gap much harder to close.”
He added that today’s figures suggest that the areas HMRC should be focusing on include smaller businesses, VAT and evasion and failure to take reasonable care.
The tax investigation insurer PfP said that HMRC is likely to come after SMEs and individuals to boost their tax take.
Managing director Kevin Igoe said, “ HMRC has long made a habit of targeting small business and individuals. That’s unfortunate as they may have less resources to defend themselves.
“There is a danger that HMRC may form a low opinion of tax returns from small businesses, which means that around a fifth of SMEs are at immediate risk of tax investigations.”
Meanwhile, Lucy Brennan, partner at Saffery Champness, said a large part of the tax gap problem remains a “worrying lack of understanding among taxpayers about their obligations and the tax system”.
She explained, “Of course, placing ever more responsibility on the taxpayer makes sense for HMRC, but at the same time needs to be matched by corresponding levels of tax education to ensure people are able to meet the demands made of them.
“There remains a general shortfall in tax knowledge which will mean innocent errors will continue to contribute to the gap, and is likely a large part of the reason why the statistics show that small businesses are by far the biggest contributors to the tax gap by customer group.
“Small businesses are often the most stretched, and in some cases may not be fully aware or able to administer their tax obligations,” she added.