Record Tax Gap
The total “tax gap” reached £42 billion in 2008/9 – 8.6 per cent of the tax individuals and companies have a legal responsibility to pay. Measuring Tax Gaps 2010, published on Thursday by HMRC looks at the ‘gap’ between the tax that should be collected and the amount that is actually collected. £42 billion is the highest ever in cash terms and the per centage tax gap is the highest since 2005-6, when it was 8.8 per cent.
The tax gap for indirect taxes (like VAT and cigarette duty) was £19 bn (12.8 per cent). By far the biggest tax gap is for VAT – £15.2 bn (16 per cent), which has risen thirty per cent from £11.7 bn last year.
The tax gap for income tax, National Insurance Contributions and Capital Gains Tax is £14.5 bn (5.4 per cent.) The largest single item contributing to this gap is inaccurate self-assessment returns, which HMRC estimates could cost anywhere between £2.6 bn and £10.8 bn, but the most likely figure is £5.8 bn.
These figures are almost certainly an under-estimate. Richard Murphy points out that:
- The new report claims that inheritance tax avoidance and evasion is just £0.1 billion – but this tax is “widely known as an ‘honesty box’ tax”.
- It estimates avoidance of income tax, Capital Gains Tax, and national insurance altogether at just £1.4 billion. Richard points out that, in his June budget speech, the Chancellor said that avoidance of CGT alone cost more than £1 billion.
- It estimates the total evasion of income tax by people who do not receive tax returns at just £0.3 billion. Richard points out that there are 20 million people in this group, “including every single person who trades in the shadow economy”. Richard notes that the World Bank says that the UK shadow economy is 13.5% of GDP.
When the tax gap is running at such a high level and the deficit is such a high priority it is hard to explain why officials working on tax collection are to be made redundant. As the Association of Revenue and Customs (part of the FDA) pointed out in their report Being Bold, the work of these officials already reduces the tax gap by £12 bn – it would make more sense to expand their numbers and increase this figure. As PCS have noted, the cuts that have already been imposed have caused a build up of 18 million “open cases” that have not been properly investigated for lack of staff resources.
Investment in more HMRC staff would significantly raise government income and drastically reduce the need for cuts.