HMRC loses £13.2bn in tax to criminals 

HMRC loses £13.2bn in tax to criminals 

HMRC statistics on the tax gap for 2017-2018 reveal overall underpaid tax has risen from £33bn in 2016-17 to £35bn, or 5.6% of all expected tax revenue.

HMRC loses £13.2bn in tax to criminals 

HMRC today released statistics on the tax gap for 2017-2018, and revealed the overall underpaid tax has risen from £33bn in 2016-17 to £35bn, or 5.6% of all expected tax revenue.

Most notably, the £35bn tax gap (underpaid of total theoretical revenue) includes £5.3bn that HMRC attributes to evasion, £4.9bn attributed to criminal attacks, and £3bn to the hidden economy.

“These illegal activities cost the Exchequer £13.2bn in 2017/18,” said George Bull, senior tax partner at RSM. “While this is slightly down on 2016/17’s figure of around £14bn, this still seems intractably high.”

Jason Collins, head of tax at law firm Pinsent Masons, thinks the tax gap increase is “surprising” given the resources made available to HMRC in recent years.

“The increase in the gap is surprising given the tools, powers and money HMRC has been given in recent times,” said Collins. “No doubt there will be a clamour for them to be given more. HMRC and the Treasury are going to be disappointed with this performance.”

James Hender, head of private wealth at Saffery Champness believes there is still confusion between aggressive tax avoidance and sensible tax planning.

“The burden of tax compliance has increasingly shifted onto the tax payer but there remains a general shortfall in tax knowledge, particularly in small businesses which are unlikely to have professional tax teams and may not always be able to afford advice. This is likely to mean innocent errors or misinterpretation continue to form a large chunk of the tax gap,” said Hender.

The tax avoidance gap cost the Exchequer £1.8bn while failure to take reasonable care cost £6.4bn, legal interpretation cost £6.2bn, non-payment cost £3.9bn and £3.4bn was lost down to error.

What happens next

VAT and corporation tax are to be big targets, believes Collins, with major hikes in recent years.

“The yields from investigating bigger businesses will also help drive HMRC’s activity. The ROI from opening an investigation into a large or mid market company is much greater than opening an investigation to microbusiness,” he said.

Bull acknowledges the reduction in the VAT gap in particular, suggesting that with the right legislative action and committed resource, “HMRC can be highly effective.”

The Making Tax Digital (MTD) initiative could also cut down the £6.4bn lost to businesses and individuals who fail to take reasonable care when reporting tax, when it is extended to self assessment and income tax, believes Bull.

“HMRC also estimates that small businesses are responsible for tax losses of £14bn per year, and large businesses £7.7bn. We can expect to see continued calls for more resources for HMRC to tackle these losses. Sometimes, as with Making Tax Digital, it will be a case of HMRC working smarter not harder,” he said.

Hender notes HMRC’s use of ‘legal interpretation’ as a growing contributor to the tax gap, an increase of £1bn on 2016-2017.

“HMRC implies that it is tax payers who are getting things wrong,” he said, “but recent cases – notably those where HMRC has targeted journalists and television presenters it believes are liable for tax under the IR35 rules – have shown that in fact the courts are frequently correcting HMRC’s view of the law and are taking the taxpayers’ side. Put simply, what HMRC thinks it should be collecting is not always correct in the eyes of the courts.”

Tax gap at a glance

  • VAT gap made up 9.1% of expected revenue, accounting for £12.5bn and up on 13% on 2016-2017
  • Corporation tax gap is 8.1% of expected revenue, accounting for £1.4bn
  • Self-assessment tax gap is 17% (14.9% with liabilities) of expected revenue, accounting for £7.4bn and up 10% on 2016-2017
  • Ghosts (those who fail to declare income) and moonlighters (those who fail to declare part of income) accounted for £1.9bn
  • The overall tax gap has reduced from 7.2% in 2005-2006 to 5.6% in 2017-2018
  • Overall VAT tax gap has reduced from 12.2% in 2005-2006 to 9.1% in 2017-2018
  • Overall corporation tax gap has reduced from 12.5% in 2005-2006 to 8.1% in 2017-2018
  • The avoidance tax gap has reduced from £4.9bn in 2005-2006 to £1.8bn in 2017-2018

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