The UK tax gap: A variety of views
By Donald Drysdale for ICAS
15 August 2019
HMRC’s estimates of the UK tax gap never cease to attract controversy, and Donald Drysdale believes that public debate on their accuracy should be encouraged.
Tax gaps
Once again HMRC have published their annual report on Measuring tax gaps (MTG). This has estimated the total UK tax gap for the fiscal year 2017/18 at £35 billion – scarcely unchanged from any year since 2005/06.
The total tax gap, and its component parts, are differences between the amounts of tax collected and those which should have been collected.
The statistics published each year in MTG are simply HMRC’s estimates of those differences, based on internal and external data and various analytical techniques.
Trends
As MTG is an annual publication, one may examine movements each year in the total tax gap and in components attributable to different taxes or taxpayer behaviours. It is also instructive to look at some of the longer-term trends.
While the total tax gap has remained within a relatively narrow band in monetary terms, it fell to 5.6% of total theoretical tax liabilities in 2017/18 – down from 7.2% in 2005/06. In other words, HMRC secured 94.4% of all tax due in 2017/18 – up from 92.8% in 2005/06.
In 2017/18 the combined tax gap for income tax, national insurance contributions and capital gains tax was 3.9% and, at £12.9 billion, represented the biggest share of the total tax gap by type of tax.
Over the past 12 years there have been significant reductions in certain component tax gaps when expressed in percentage terms.
For example, the tax gap attributed to avoidance was down to £1.8 billion in 2017/18 (£4.9 billion in 2005/06). Its main components were corporation tax of £1 billion (down from £2.8 billion), and income tax, NICs and CGT of £0.6 billion (down from £1.5 billion).
Over the same 12-year period, the VAT tax gap was cut to 9.1% in 2017/18 (12.2% in 2005/06); the duty-only excise tax gap was reduced to 5.1% in 2017/18 (8.4% in 2005/06); and the corporation tax gap was down to 8.1% in 2017/18 (12.5% in 2005/06).
IMF
Every now and then we get a view of MTG from a different perspective. In 2013 a team from the International Monetary Fund (IMF) published a report assessing HMRC’s tax gap analysis programme and providing advice and guidance on improving it.
The IMF report addressed HMRC’s methodologies, their approach to disseminating the results, and the way the results were used. It concluded that the programme was comprehensive in tax coverage and produced one of the most far-reaching studies of tax gap estimates globally.
It approved of HMRC’s use of ‘bottom-up’ based estimates for direct tax gaps and ‘top-down’ estimates for indirect tax gaps. It found the models and methodologies used were sound, and consistent with the general approaches used by other countries.
The IMF report suggested some possible improvements to HMRC’s approach – including top-down models for the income tax gaps, extending existing models to assess the size of the policy gap by tax type, and comparing different types of VAT gap model.
The report also made 14 key recommendations to further enhance the robustness of HMRC’s programme. These focused on separate aspects of defining, measuring, reporting and using the tax gap.
NAO
In December 2015 the National Audit Office (NAO) published a report entitled ‘Tackling tax fraud’. This looked at how HMRC responded to particular behaviours – the hidden economy, criminal attacks and tax evasion.
The report considered the UK tax gap (also described as non-compliance) which was then estimated at £34 billion for 2013/14. It attributed nearly half of this (£16 billion) to tax fraud – quantifying components as the hidden economy (£6.2 billion), criminal attacks (£5.1 billion) and evasion (£4.4 billion).
The NAO drew a clear distinction between tax fraud and tax avoidance. It emphasised that avoidance involved acting within the letter but not the spirit of the law, and that tax avoiders were often found to have misused tax rules but their actions were not normally illegal.
The report acknowledged that the tax gap was only an estimate, based on the best data available on the amount of tax lost, including tax fraud. The losses attributed to the hidden economy, criminal attacks and evasion had fluctuated from year to year but the overall trend in tax fraud was flat.
IFS
In October 2017 the Institute for Fiscal Studies (IFS) published a briefing note using data from HMRC’s tax investigations programme between 1999 and 2009.
This showed which types of people were more likely to be under-reporting taxes and how their behaviour changed after a tax audit.
Other commentators
Other commentators have suggested alternative sums for the UK tax gap.
Professor Richard Murphy of Tax Research UK has published a blog arguing that the true level of the UK tax gap for 2017/18 is around £90 billion. He sees MTG as unwarranted self-praise by HMRC, and calls for the tax authority to be more efficient and better resourced.
A press release from Tax Watch UK, an investigative think tank, has described as highly dubious HMRC’s claim that the UK has the lowest tax gap in the world – particularly as HMRC say they are the only tax authority in the world to publish an annual estimate of the tax gap covering a comprehensive range of taxes.
UKSA
In May 2019 the UK Statistics Authority published a report on MTG and whether it complies with the UK’s code of practice for the production and release of official statistics.
UKSA praised MTG for informing the national discussion around tax fairness and tax compliance, noting that HMRC’s leadership of the measurement of tax gaps was cited by the IMF and the NAO.
It also suggested that MTG might be reinforced, or used more effectively, by:
- showcasing the statistics to emphasise to stakeholders, commentators and users that HMRC are world-leading in measuring tax gaps and are setting the bar for others to follow;
- testing whether more nuanced reporting of tax gaps, in line with IMF proposals, could widen the uses of the statistics and offer new insights into the effectiveness of the UK tax system;
- asking whether HMRC’s continuing use of US Internal Revenue Service (IRS) research methodology in some estimates represents international good practice – or whether more robust estimates of UK tax gaps might be produced in other ways;
- questioning whether HMRC’s assumptions about under-reporting of alcohol consumption continue to represent established professional consensus;
- linking MTG to tax gap research undertaken by the IFS and to the research capabilities of HMRC’s datalab;
- exploring possibilities for enhancing the public value of MTG by widening engagement beyond HMRC staff; and
- providing comparisons and interpretations of tax gaps statistics and data, to better help users by helping them judge the prospects for future tax raising.
Conclusion
The tax gap will always exist, and tax fraud will always be part of the picture. Estimating tax lost will never be a precise art, and there will continue to be a variety of differing views on the accuracy of HMRC’s estimates. Open, public debate on these topics should be encouraged.
Article supplied by Taxing Words Ltd