Opinion Former Article

Shrinking ‘tax gap’ welcomed, but rising business failures pose risk

The Chartered Institute of Taxation (CIOT) has welcomed figures published today (Thurs) showing that the ‘tax gap’ has fallen by a third in five years.1 But the CIOT has warned that the complexity of the tax system means taxpayer error is likely to remain high going forward, and that tax lost to non-payment due to business failure could be set to rise as a result of the current recession caused by COVID-19.

The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid. Today’s HMRC report looks at the estimated tax gap in 2018-2019. The report puts the tax gap at an estimated £31 billion, which is 4.7 per cent of tax liabilities. It was 5.0 per cent in 2017-2018 and has fallen steadily from 7.2 per cent in 2013-14.

John Barnett, Chair of CIOT’s Technical Policy and Oversight Committee, said:

“These are impressive figures showing a fall of a third2 in the tax gap over five years, to which falls in all parts of the tax gap have contributed. Taxpayers will be reassured that HMRC is making good progress on tackling and managing the gap between the tax they are collecting and the total amount theoretically due.

“Estimating the tax gap is a complex and necessarily imprecise process. This is reflected in the revisions of previous figures which are made every year. These are especially large this year, telling us, for example, that the tax gap fell between 2016-17 and 2017-18 when last year’s report said it had risen. We should be careful not to put undue weight on relatively small changes, but instead look at trends over a number of years.”

Taxpayer mistakes

The report puts tax lost due to taxpayers’ failure to take reasonable care in 2018-19 at £5.5 billion (0.8% of total theoretical liability) and tax lost due to taxpayer error at £3.1 billion (0.5%).

John Barnett commented: “The findings in this report illustrate the complexity of the tax system. Around £8.6 billion of the tax gap relates to taxpayers not getting things right through what HMRC categorise as error or a failure to take reasonable care.

“HMRC must focus on customer service and providing clear and up to date guidance to help large numbers of ordinary taxpayers who find themselves confronted by ever more complex tax law and increasing compliance obligations. It is understandable that HMRC have been focused on setting up and running large projects like the Job Retention Scheme over recent months – and they have done an excellent job of this – but if customer service and support for other aspects of their work suffers as a result, which appears to be happening in some areas, then these aspects of the tax gap are likely to remain high.

“Ministers must also stay focused on the need for simplification – a simple tax system, with clear rules and easy to navigate guidance will lead to fewer mistakes by both taxpayers and tax authorities.”

Criminal activity

The report puts tax lost due to evasion in 2018-19 at £4.6 billion (0.7% of total theoretical liability), tax lost due to criminal attacks on the tax system at £4.5 billion (0.7%) and tax lost due to the hidden economy at £2.6 billion (0.4%).

John Barnett commented: “The figures show substantial falls in evasion and criminal attacks over the last five years, though the size of the hidden economy appears relatively unchanged. This does suggest the Government’s actions in the early 2010s to put extra resources into identifying and tackling tax evasion and other illegal activity have borne fruit.”

Non payment

The report puts tax lost due to ‘non-payment’ (largely taxes written off as a result of insolvency) in 2018-19 at £4.1 billion (0.6% of total theoretical liability). This is up from £3.1 billion (0.5% at the time) in 2015-16.

John Barnett commented: “Non-payment reflects in large part the state of the economy, rather than anything HMRC can control. It increased sharply between 2006-7 and 2009-10, doubling both in absolute terms and as a share of the theoretical liability. With it looking likely that the UK will experience another severe recession, it is alarming that tax lost due to non-payment was increasing already in 2018-19, albeit slowly.

“The Government has introduced changes in the current Finance Bill to enable HMRC to recover more of the debt businesses owe when they become insolvent. These are predicted to cut the tax gap by £150-200 million a year in a typical year. Notwithstanding this we fear tax lost to non-payment will increase further when figures for 2020-21 appear in two years’ time.”


The report puts tax lost due to avoidance in 2018-19 at £1.7 billion (0.3% of total theoretical liability).

John Barnett commented: “Avoidance remains low, though we note that the avoidance tax gap estimates for the Income Tax, National Insurance contributions and Capital Gains Tax component are being projected this year due to issues with data processing.

“It is noteworthy that nearly twice as much is lost to errors as to avoidance.”

Legal interpretation

The report puts tax lost due to ‘legal interpretation’ in 2018-19 at £4.9 billion (0.8% of total theoretical liability).

John Barnett commented: “Legal interpretation is about tax which is not legally due but HMRC misunderstood the law. HMRC define this as where the customer’s and HMRC’s interpretations of the law and how it applies to the facts in a particular case result in different tax outcomes. Examples include the correct categorisation of an asset for allowances, the allocation of profits within a group of companies, or VAT liability of a particular supply.  We query why it is part of the tax gap at all. If even HMRC do not understand the law to the tune of £4.9 billion what hope is there for the ordinary taxpayer faced with the same complexity in the tax system?”

Notes for editors

1. Measuring Tax Gaps 2020, HMRC, published 9 July 2020.   

2. As a share of theoretical liability.

3. The Chartered Institute of Taxation (CIOT)

The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 19,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.

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