UK’s tax gap for large businesses rises

The figures show that the UK’s overall tax gap increased over the past year from £33bn in 2018-19 to £35bn in 2019-20. However, the tax gap for high net worth individuals closed slightly over the last year, falling from £1.6bn to £1.5bn.

Clara Boyd, a tax disputes expert at Pinsent Masons, the law firm behind Out-Law, said: “HMRC will no doubt look to close the tax gap as the economy recovers from the pandemic. It has amassed a formidable arsenal of measures which it can use to claw back unpaid tax, and I expect it will seek to use those powers to their full extent as the Treasury looks to balance the books post-covid.”

The tax gap is the difference between the amount of tax that HMRC considers should be paid, based on its interpretation of tax law, and what is actually paid. The estimated tax gap of £35bn for 2019-20 represents 5.3% of tax liabilities, whereas in the previous year the estimated tax gap represented 5% of tax liabilities. 

The tax gap for large businesses in 2018/19 was a record low of £5.3bn, down from a high of £7.6bn in 2005-06. The statistics show that large businesses represent only 17% of the tax gap, with 43% of the tax gap attributable to small businesses and 14% to medium sized businesses. Wealthy individuals and other individuals account for the smallest share of the tax gap at 4% (£1.5bn) and 7% (2.6bn) respectively.

HMRC estimates that 19% of the tax gap is attributable to a failure to take reasonable care, with 16% represented by disputes over legal interpretation.

The government is introducing legislation applying from 1 April 2022 requiring large businesses to notify HMRC of any ‘uncertain amounts’ included in tax returns relating to corporation tax, VAT or income tax, including amounts collected via PAYE. This measure is designed to close the legal interpretation tax gap by giving HMRC advance notice of areas which may lead to disputes.

“The fall in the high-net-worth tax gap is a result of HMRC getting more aggressive in how it investigates wealthy individuals’ tax affairs,” Boyd said.

“This has been and will remain a real focus for HMRC. The Treasury believes it is missing out on tax paid by wealthy individuals. While routine audits were suspended for a period during the pandemic, there will likely be a focus on increasing income from investigations quite aggressively as lockdown has ended,” she said.