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United Kingdom: Measuring Tax Gaps 2013 Published

Monday, 21 October 2013   (0 Comments)
Posted by: Author: Chartered Accountants Ireland
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Author: Chartered Accountants Ireland

HMRC have recently published the above official statistical release which relates to estimates of tax gaps - the difference between tax collected and that, which in HMRC’s view, should be collected. The current release relates to Tax Gap estimates for 2011-12. In the context of the ongoing public debate on tax avoidance/evasion, the report is attracting close scrutiny from many quarters.

Overall, HMRC use the report to identify trends in individuals’ and companies’ compliance "within the letter and the spirit of the tax law”. The ‘spirit’ of the law refers to HMRC’s interpretation of what Parliament intended in setting a particular piece of tax legislation.

The latest estimate is an overall gap of some £35 billion, or 7.0% of total tax liabilities. Whilst the 2010-11 gap was slightly higher in % terms as a proportion of tax liabilities (7.1%), the quantum of the previous gap at £34bn was £1bn lower, though it should be noted that the £34bn figure for 2010-11 is a revised figure from the previous amount of £32bn. So, overall, the gap has increased in quantum. HMRC cite an increase in the VAT tax gap as the main cause of the £1bn increase from 2011 to 2012, primarily as a result of the increased VAT rate of 20% which applied from 4 January 2011.

Breaking the gap down purely on the basis of behaviour, the highest element comes from the hidden economy (£5.4bn) with the lowest coming from error (£2.9bn). The gap is split between the various elements of the ‘tax-bearing’ population (or not as the case may be) as follows:- 

  • Criminal activity - £4.7bn
  • Individuals - £4.7bn
  • Large business - £8.8bn
  • SME’s - £16.6bn

When looking at how the gap is split between tax heads, the largest element comes from income tax, NICs and capital gains tax at £15.3bn, VAT at £11.4bn and corporation tax at £4.7bn with the remainder coming from other taxes and excise duties.

The report is not split on a geographical basis as HMRC simply don’t have the data at their disposal to do so though it should be no surprise that the gap for diesel and petrol duty in Northern Ireland equates to 38% of the overall UK wide excise duty gap for hydrocarbon oils. Pages 31-33 of the publication discusses the key findings for NI in more detail.

As part of the 2010 Spending Review, the Government allocated an investment of £1bn to HMRC to target avoidance, evasion and fraud. No doubt many will be disappointed that despite this investment, the UK tax gap remains at the level it does and has actually increased in 2011-12.A roundup of progress made to date by the Government in tackling international tax avoidance is available in a timeline on the HM Treasury website.

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