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Treasury "will encourage more focus on investigations" to drive down 'tax gap' says expert

The gap between the amount of tax due and that collected by HM Revenue and Customs (HMRC) has fallen as a percentage of the expected tax take, but the department's focus on tax investigations will continue, an expert has said.

Jason Collins of Pinsent Masons, the law firm behind Out-Law.com, said that the latest assessment of the 'tax gap' showed "just how hard HMRC is working". However, although the gap was continuing to fall as a percentage of the expected tax take, the estimated amount of money lost to tax evasion and avoidance in tax year 2011-12 had increased to £35 billion, up from £34bn the previous year, he said.

"With a deficit to be plugged we can expect that HM Treasury will continue to focus on tax investigations work," he said. "For each pound that HMRC invests in tax investigations and other compliance work it gets many more pounds back. It is the kind of return on investment that most businesses would envy."

"The big success has been in reducing lost excise duty on alcohol, petrol and diesel where the tax gap has tumbled from £11.4bn to £9.9bn. The HMRC teams working on this have achieved a great win for the Treasury," he said.

However, the figures also showed significant increases in the inheritance tax gap, up from £300 million to £400m; and that of corporation tax for small and medium enterprises (SMEs), up from £2bn to £2.3bn, he said.

The tax gap is defined as the difference between tax actually collected and that which should have been collected. The figure is based on around 30 separate estimates for different taxes and is broken down by type of tax, customer group and customer behaviours. Reported behaviours include tax evasion and avoidance; customer error; the 'hidden economy', referring to sources of undeclared income; criminal attacks, such as missing trader intra-community (MTIC) VAT fraud; and cases where tax cannot be collected because the business has become insolvent.

"The range of non-compliance behaviours revealed by these tax gap figures underline why it is so important for HMRC to step up our wide-ranging activities against the minority who aren't paying what's due, whether they are SMEs, individuals, big business or organised criminals," said Edward Troup, HMRC's Tax Assurance Commissioner. "This isn't just critical for the nation's finances: it's also important to protect the vast majority of honest businesses and individuals from being cheated by the unscrupulous few."

HMRC has pledged to secure an additional £44bn in tax revenues over the next two years, and has received nearly £1bn to fund additional compliance initiatives since 2010.

Tax expert Jason Collins said that although the figures showed that smaller businesses were responsible for a greater share of the tax gap than large businesses dealt with by HMRC's Large Business Service (LBS), it was unlikely that HMRC would reduce its enforcement activity in this area.

"SMEs now make up 48% of the tax gap whilst large businesses now account for just 25% of the tax gap - however, the relatively higher returns that HMRC makes from investigating large businesses suggests that they will keep up their high level of activity in that area," he said.

"The LBS corporation tax gap – one of the most politically contentious areas, taking in the controversies around companies like Starbucks – is unchanged at £1.4bn and many other personal tax and corporate tax gaps remain resistant to all HMRC's efforts," he said.

The amount of additional corporation tax collected by HMRC through its investigations into large businesses has fallen to its lowest level in six years, according to figures obtained by Pinsent Masons last month. The LBS, which deals with the UK's 770 largest businesses, collected 8% less tax in the year to 31 March 2013 as a result of its compliance activities, while the number of businesses investigated fell by 9%.

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