Thu, 7 Oct 2010

Tax shortfall set to reach £42bn

The tax gap – the difference between revenues collected and the theoretical liability – is around £42bn, of which £14.5bn comes from income tax, National Insurance and Capital Gains Tax, HM Revenue and Customs has reported.

The second year of estimating the tax gap, which HMRC reports is more thorough and detailed than last year’s, covers the tax year 2008/09.

In the case of income tax, shortfalls derive in part from under-reporting on selfassessment by individuals and small companies. The report gives a huge range – from £2.6bn up to £10.8bn – that could be lost due to inaccurate self-assessment returns from individuals.

But the Revenue also detected significant shortfalls from inaccurate returns by large employers (estimated range of £1.3bn to £2.7bn) and small to medium-size employers (£1.1bn-£1.2bn).

Avoidance of income tax could cost up to £2.1bn.

The method for estimating the tax gap has come from analysis of HMRC’s compliance programmes, based on random investigations of returns by self-assessment individuals and employers, and non-payment data. It only covers HMRCadministered taxes, and so does not include council tax or business rates.

The size of the tax gap will put extra pressure on ministers to increase the tax take rather than make cuts in public expenditure. The Liberal Democrats – junior partners in the coalition Government - promised a clamp-down on tax avoidance at their conference last month.

 HMRC welcomes feedback on the issue of the tax gap. Contact Kerry Booth at kerry.booth@hmrc.gsi.gov.uk
 A full report is available at www.hmrc.gov.uk/stats/measuring-tax-gaps-2010.htm.pdf