In the run up to last year’s election, most political parties made pledges to reduce the ‘tax gap’ and help balance the UK’s books. The tax gap is an estimate of the difference between the total amount of tax theoretically due and how much is actually collected.
The scale of that challenge has been laid clear by HMRC’s latest annual tax gap report, which shows the tax gap has widened for the third consecutive year. It grew to almost £47 billion in the latest period (2023-24 tax year), meaning that an estimated 5.3% of the total tax theoretically due went unpaid.
What makes up the tax gap?
Once again, small businesses are reckoned to make up the majority of the tax gap – around 60%. Whilst the proportion of the tax gap believed to be down to small business has increased from 48% only five years ago, large and mid-sized businesses have seen significant falls in their contribution to the tax gap, suggesting tax compliance has improved among larger organisations.
As for why the tax goes unpaid, almost half of the tax gap (46%, equating to £21.7 billion) is believed to be a result of taxpayers failing to take reasonable care and making errors. By contrast, whilst evasion and avoidance tend to attract media attention, they account for a comparatively small £7.1 billion.
Steps are already being taken to try to reduce these errors among small businesses. However, the ATT has suggested that the prevalence of mistakes may also be down to taxpayers not understanding complex tax rules as well as shortfalls in HMRC customer support.
How do employers fare?
The PAYE tax gap (covering income tax and National Insurance Contributions due on earnings and other income from employment) is estimated at just 1% of the total PAYE due. This level has remained remarkably consistent over recent years.
The tax gap for PAYE is the lowest of all tax regimes, and employers deserve credit for this. However, despite this strong performance, the scale of the PAYE system means that almost £4 billion of the total tax and NIC expected in 2023-24 was not collected.
Whilst employers make a relatively small contribution to the tax gap in terms of tax due but not collected under PAYE, businesses should remain vigilant in their broader tax affairs to avoid inadvertently adding to the tax gap and risking scrutiny by HMRC.
Not a precise science?
The latest report explains that significant revisions were made to the previous year’s figures, reflecting better data and revised calculation methods. The 2022-23 tax shortfall is now reckoned to have been 5.6% of the amount theoretically due, rather than 4.8% as previously estimated.
This revision highlights a fundamental challenge in analysing the tax gap – by its very nature, it is a difficult amount to quantify. Given the challenges of measuring the tax gap, and identifying what goes into it, the problem of how to tackle it is likely to be extremely tricky for both HMRC and the Treasury.
This article reflects the position at the date of publication. If you are reading this at a later date you are advised to check that that position has not changed in the time since.
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