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Tax gap: Fraud problem six times worse than avoidance

MORE FOCUS must be placed on tackling tax fraud as HM Revenue & Customs seeks to close the tax gap.

That’s the message from the CIoT following the release of the latest tax gap figures this week.

The numbers show the shortfall fell to 6.4% from 6.8% of tax due for 2013/14, remaining static in cash terms at around £34bn.

Of that total, an estimated £2.7bn was lost to tax avoidance, down from £2.8bn the previous year – a figure itself revised down from the estimate of £3.1bn published a year ago. However, £5.1bn was lost to criminal attacks, £4.4bn to evasion and £6.2bn to the ‘hidden economy’ – a total of £15.7bn from illegal activity.

CIoT tax policy director John Cullinane said that HMRC needs to put more effort into investigating and prosecuting those who seek to evade tax.

“The government are right to have put extra resources in this direction, as well as tackling artificial and abusive attempts to avoid tax,” he said.

“It should be noted though, that HMRC’s avoidance figure does not include a lot of what gets described as avoidance in the newspapers, especially in relation to multinational businesses. This is because, as HMRC puts it, it ‘is the result not of frustrating UK law but of exploiting the international tax framework’.”

Stakeholders noted that more should be done to make inroads into the cash value of the gap, which has stubbornly hovered just above £30bn since 2004/05 – the furthest back estimates go – with the lowest figure coming in 2009/10 at £31bn and highest being £37bn in 2006/07. In two of the nine years, the tax authority posted a £33bn shortfall.

As a result, the ICAEW has called for an increase to HMRC’s budget to drive the size of the gap down.

“Clearly HMRC needs to keep spending in this area if it is to continue reducing the tax gap year on year,” head of the institute’s tax faculty Frank Haskew said. “We would like to see assurances from the Chancellor in next month’s Autumn Statement that HMRC will be protected from further budget cuts and instead should be given more resources to improve service standards and reduce the tax gap. Given the substantial reduction in staff and budget over the years, HMRC deserves credit for making this progress.”

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