CIOT publishes explainer ahead of “tax gap” figures

Ahead of Thursday’s publication of the annual “tax gap” figures, CIOT has published a guide to the tax gap and tax avoidance.
Labour, the Conservatives and the Lib Dems all say there are billions of pounds in uncollected tax that, with a bit of effort, could be brought in by HM Revenue and Customs, the UK’s tax authority.

The explainer explores whether this is the case, and what contributes to the annual tax gap figures.

It also covers:

  • The impact of tax avoidance, evasion and error and carelessness
  • How past Governments have done at reducing the tax gap
  • What could be done in the future to reduce the figure

The explainer in brief –

Politicians think there are billions of pounds in uncollected tax that could be brought in by HMRC, the UK’s tax authority. Are they right?

Obviously it’s not deliberately uncollected. But yes, according to the government’s own estimates, there is nearly £36 billion a year of tax that should be collected but is not being collected. This is the ‘tax gap’.

Is this tax avoidance?

Nearly one and a half billion of it is. But £11 billion is evasion and other illegal activity. And the biggest part of the tax gap – over £16 billion of it – comes from taxpayer mistakes – what HMRC categorise as error and carelessness.

How well have past governments done at reducing the tax gap?

Not too badly. As a share of the total theoretical tax liability – that is, what HMRC think they would bring in if everyone was perfectly compliant – the tax gap has fallen by about a third since 2005.

Which areas have past governments done best at?

The biggest fall is in avoidance. Back in 2005 it’s reckoned that £11 in every thousand of tax was avoided. That’s been cut to £2. Changes to the law have had an impact, but so have big changes in public attitudes which have increased the reputational risk of engaging in tax avoidance.

Past governments have also done well at tackling illegal activity, halving the share of the tax take lost to this.

Are there areas where they’ve been unsuccessful?

Estimates of tax lost to taxpayer error and carelessness have risen in recent years.  Why? Changes in how the tax gap is calculated may be one factor, but the increasing complexity of the tax system, worse HMRC customer service and the inadequacy of published guidance may also be playing a part.

So, can the tax gap be reduced further?

Probably – although the law of diminishing returns may mean further marginal gains are becoming harder to come by. Ambitious targets are to be applauded but our advice to politicians of all parties is not to spend the money until it’s been collected.

Read the full explainer or watch our short video. You can also browse CIOT’s catalogue of General Election 2024 explainers.