Tax gap

 

The tax gap has jumped for the first time in five years to 5.3%, according to recent HMRC statistics. It represents £35bn for the 2019-20 tax year, up from £33bn 2018-19. Whilst HMRC points to the long-term reduction in the tax gap (down from 7.5% 2005/6) and that nearly 95% of the tax due was paid, the obvious question is whether this is a just short-term glitch or the start of an ongoing trend. 

The figures will have been impacted to an extent by the emergency VAT deferral scheme, which offered hard-pressed businesses a lifeline by suspending VAT payments for the period 20 March to 30 June 2020. Nevertheless, HMRC must have concerns about the growing tax gap, particularly given that these figures don’t include the full impact of COVID-19 and the unprecedented economic downturn, which will be published in next year’s Measuring Tax Gaps publication.  

What is the tax gap?

The tax gap is the difference between the amount of tax that HMRC believes should be collected and the amount of tax it actually collects. It’s the total of all errors, evasion and non-payment etc. and represents a loss of revenue to the government.  With a huge £300bn gap in the public finances, HMRC is increasing its audit activity to address both the tax gap and to help chip away at the national deficit.

The tax gap and large businesses

The VAT gap has increased by 23% to £12.3bn in the latest figures, equivalent to 8.4% of total VAT receipts, and now accounts for 35% of the total tax gap. This increase came as a surprise to many given that the period included the first year of MTD for VAT.  MTD was meant to “reduce the amount of tax lost to avoidable errors” and, make it “easier for customers to get their tax right” (you can read our analysis behind this here [LINK to VAT tax gap blog]). 

The Corporation Tax gap also surged by nearly 30% to £5.7bn, or 8% of total CT receipts, and now represents 16% of the total tax gap. There was also a spike in the amount of tax underpaid by large businesses, which is up 15%, from £5.3bn in 2018-19 – its lowest point for many years – to £6.1bn. It’s fair to assume these results will inevitably lead to pressure on HMRC to further increase its compliance focus on large corporates. 

The tax authority has some considerable compliance resources at its disposal and is continuing to ramp up its data analytics capabilities for better targeted audits. This, coupled with the fact that large businesses will be obliged to notify HMRC of “uncertain tax treatments” from 1 April 2022, will see large corporates needing to stay on top of their tax position. 

Tax gap causes

‘Failure to take reasonable care’ remains the single biggest contributor to the tax gap by type, costing £6.7bn (equivalent to 19% of the tax gap). This was up from £6.1bn the previous year. Interestingly, ‘Error’ was also up 11% from £3.1bn to £3.7bn. As these were the two main issues that MTD for VAT was meant to address, you can have no doubt HMRC will place VAT firmly within its sights when it comes to audits.


Takeaways

It remains to be seen if these figures signal a reversal of the downward trend or just a blip. However, there are enough red flags in the results for HMRC to renew its emphasis on increasing the compliance yield. With this in mind, tax and finance teams need to consider how they can demonstrate being on top of their tax return processes by addressing the accuracy of their tax data and making sure all errors and anomalies are picked up in the review and submission process. 

If you’d like to find out how digital tax platforms such as Alphatax and AlphaVAT can help you keep on top of your tax data, reduce risk of ‘error’ and prove you’ve taken ‘reasonable care’ to validate the accuracy of your calculations, do contact us for a one-to-one demonstration or download the AlphaVAT brochure.