Tax gap drops to record low

Tax gap drops to record low

The UK’s tax gap, the difference between the amount of tax expected and that actually paid, has fallen to a record low, according to official figures.

Data from HM Revenue and Customs, published yesterday (June 9), revealed the tax gap estimate for 2018-19 was 4.7 per cent, meaning more than 95 per cent of tax was paid to the tax authority.

HMRC collected a total of £628bn in tax revenue in 2018-19.

Any impact of Covid-19 on the tax gap is likely to be first seen in the 2020-21 tax year.

Jesse Norman, financial secretary to the Treasury, said: “At 4.7 per cent, the 2018-19 tax gap is the lowest on record. The coronavirus pandemic has highlighted the importance of everyone playing their part and paying the tax that is due.

“Having a secure and comprehensive tax base is what allows the government to pay for public services, but also to provide financial support in a crisis, at a time when it is most needed.”

However with the gap at 4.7 per cent, it means HMRC is still missing out on about £31bn in tax, which could be used to pay off the growing Covid-19 debt.

Dawn Register, partner in tax dispute resolution at accountancy firm BDO, said: “This could be a crucial ‘Covid-19 fighting fund’ to help raise tax revenues, without the need to actually increase tax rates.

"Given the summer economic update on 8th July, it is clear that government strategy right now is to stimulate the economy rather than burden individuals and businesses with increased taxes.”

Tom Selby, senior analyst at AJ Bell, said: “A financial black hole of £31bn remains eye-watering by any standards. To put that in context, the missing cash roughly equates to the entire budget of the Department for Transport and BEIS in 2018/19…combined.

“In reality of course there will always be a discrepancy between the amount of tax the revenue expects to receive and the amount it rakes in each year.

“Businesses that become insolvent and so by definition can’t pay the tax they owe, for example, will represent part of the gap, while human error accounts for £3.1bn of missing tax receipts. There will also be people in the so-called ‘hidden economy’ who simply do not declare their income to HMRC."

He added: “With Covid-19 placing a huge strain on public finances, HMRC will be under even greater pressure to close the UK tax gap in 2020-21 and beyond.”

According to the data, the tax gap for income tax, national insurance contributions and capital gains tax was 3.4 per cent in 2018-19 at £12.1bn, representing the biggest share of the total tax gap by type of tax.

There has been a long-term reduction in the tax gap for VAT, from 14 per cent in 2005-06, to 7 per cent in 2018-19.

The corporation tax gap has also decreased from 11.3 per cent in 2005-06, to 7 per cent in 2018-19.