Tax gap value hits £35bn in third successive year of increase

Out-Law News | 25 Jun 2019 | 4:25 pm | 2 min. read

The value of unpaid tax in the UK has risen to £35 billion, representing 5.6% of tax liabilities, with over £10bn of the shortfall due to tax evasion and other criminal activity.

New figures published by HM Revenue & Customs (HMRC) for the ‘tax gap’ in 2017/18 (92 page / 5.9MB PDF) showed a 0.1 percentage point rise in the percentage of total tax liabilities represented by unpaid tax. The value of the tax gap rose from £33bn in 2016/17.

Tax law expert Jason Collins of Pinsent Masons, the law firm behind Out-Law, said HMRC and HM Treasury would be disappointed with the figures.

“HMRC is now a very driven organisation so the idea that there is £35bn in underpaid tax and over £10bn in underpaid tax through evasion and other criminal behaviour is going to be a trigger for much more investigatory activity,” Collins said.

“The increase in the gap is surprising given the tools, powers and money HMRC has been given in recent times, and no doubt there will be a clamour for them to be given more.”

There was a significant increase in the value of the tax gap attributable to unpaid VAT, which rose 13% from £11.1bn to £12.5bn. This represented 9.1% of expected revenue from VAT, up from 8.5% in 2016/17 – although HMRC noted that the VAT tax gap has largely been on a long-term downward trend.

Collins Jason

Jason Collins

Partner, Head of Litigation, Regulatory & Tax

HMRC is now a very driven organisation so the idea that there is £35bn in underpaid tax and over £10bn in underpaid tax through evasion and other criminal behaviour is going to be a trigger for much more investigatory activity.

The corporation tax gap value increased 8% from £4.8bn to £5.2bn, representing 8.1% of expected revenue. The value of unpaid tax due from large businesses is also on the rise, and last year totalled £7.7bn – up from £6bn in 2012/13.

“We anticipate that VAT and corporation tax will be big targets as the tax gaps here, have seen major increases in value. The yields from investigating bigger businesses will also help drive HMRC’s activity,” Collins said.  

Collins said HMRC’s return on investment from opening an investigation into a large or midmarket company was much greater than opening an investigation to microbusinesses.

Failure to take reasonable care when preparing tax returns remains the main reason for tax to be unpaid, and accounted for £6.4bn last year.

However underpayment due to ‘legal interpretation’ is rising. In 2017/18 HMRC said £6.2bn of the tax gap was due to legal interpretation, which is when the taxpayers’ interpretation of the law and how it applies to the amount of tax owed, differs to HMRC’s view of the law. The tax gap due to legal interpretation rose from £5.7bn in 2016/17 and has gone up by over 50% since 2005/06.

There was also a rise in the value of the tax gap due to tax evasion, now accounting for £5.3bn of the total amount of unpaid tax. Tax avoidance made up £1.8bn of the gap last year.

Collins said HMRC was expected to continue its focus on recovering unpaid tax.

“HMRC’s approach to stamping out tax avoidance has changed almost beyond recognition in the last few years. There has been significant investment in computer systems to identify undeclared taxes and new debt collection practices to chase money down,” Collins said.

“As much as possible, HMRC is turning more to automated processes involving big data to audit taxpayers and outsourcing the heavy spadework at the end of the process to external debt collectors,” Collins said.