Tax gap shrinks but higher VAT limits revenues

Ben Southwood
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THE TAX gap narrowed as a proportion of total tax liabilities in the 2010-11 tax year, Her Majesty’s Revenue and Customs (HRMC) said yesterday (see graph, below), despite widening in absolute terms.

The proportion of total estimated tax liabilities the taxman missed slipped from 7.1 per cent to 6.7 per cent, which HMRC touts as impressive compared to other countries that publish tax gap figures.

Mexico had a tax gap of 23 per cent over the year, HMRC said, while the US missed 14 per cent of potential tax income and Sweden 10 per cent.

HMRC boss Lin Homer put the proportional reduction down to determination, and promised to spend more and make compliance easier, in order to narrow the gap further.

“We are devoting increasing resources to pursuing those who do not pay the tax they owe, while making it easier for people and business to comply with their tax obligations,” Homer said.

The tax gap, which measures the difference between tax collected and anticipated liabilities, was £32bn in 2010-11, up in absolute terms from £31bn the year before, data from HMRC showed, driven by increased evasion of VAT after its rate rose from 15 per cent to 17.5 per cent and then later to 20 per cent.

The tax gap is estimated not only based on illegal tax evasion, the hidden economy and criminal attacks but also tax avoidance – which HMRC defines separately from “legitimate tax planning.”

“Tax avoidance is bending the rules of the tax system to gain a tax advantage that Parliament never intended,” the report reads.

The biggest area of contribution to the tax gap were the direct personal taxes – national insurance contributions, capital gains tax and income tax – which made up 45 per cent of the overall £32bn wedge. Corporation tax made up just 13 per cent while VAT made up 30 per cent. Duties on alcohol and tobacco made up 10 per cent of the tax gap.

The total tax gap from large employers was 1.5 per cent of large employer liabilities or £2.1bn.