HMRC report the 2020/21 Tax Gap is steady at 5.1 percent

HMRC have published their estimate of the 2020/21 Tax Gap – the difference between the amount of tax that should, in theory, be paid to HMRC, and the amount that is actually paid. There are a range of reasons for the Tax Gap, including errors in tax returns, differences in interpretation of the tax rules, tax evasion, business failures and criminal attacks. The percentage Tax Gap gives a better measure of compliance over time as it takes into account the effects of inflation, economic growth and changes to tax rates, which the cash figure does not. The Tax Gap has fallen from 7.5 percent in 2005/06 to 5.1 percent in 2020/21 – the same percentage as last year, and the second lowest recorded. However, the impact of the pandemic means the current estimate is subject to a higher degree of uncertainty than usual.

HMRC have allocated the £32 billion Tax Gap between taxpayer populations, major tax-types, and behaviour per the tables below (amounts shown in £ billion followed by percentage share of total Tax Gap).

The comparative allocations across all the tables have remained relatively unchanged from the previous year.

Tax Gap by customer group

As in previous years, the report attributes the largest proportion of the Tax Gap, 15.6 percent, to small businesses with large businesses only contributing 11 percent which runs counter to the narrative that large businesses engage in widespread tax avoidance.

Tax Gap by type of tax

The biggest movement has been in VAT where the gap has decreased from £12.5 billion in the prior year to £9 billion this year. HMRC had expected the VAT gap to reduce following the introduction of Making Tax Digital (MTD) for VAT in April 2019. MTD may be part of the reason for this year’s reduction, however it will take several years before any definite trend regarding the impact of MTD can be established.

Moreover, the report itself notes that the VAT gap estimate this year is subject to more uncertainty than usual.

Tax Gap by behaviour

The make-up of the Tax Gap in terms of behaviour has remained relatively constant over the last five years. Again, it will be interesting to see if, as MTD extends to income tax and eventually corporation tax, we will see some of the stubborn numbers in the areas of ‘error’ and ‘failure to take reasonable care’ reduce.

Impact of COVID-19 

To try to ensure consistency in the data series over time various pandemic-related adjustments have been made to this year’s data.

For example, the Tax Gap is calculated net of ‘compliance yield’ – i.e. it reflects the gap remaining after HMRC’s compliance work. This year’s figure includes a 0.1 percent (£0.7 billion) revision downwards to compensate for lower income tax compliance activity during the pandemic. Adjustments have also been made in relation to the impact of the special COVID-19 VAT payment deferral schemes and the impact of insolvencies being paused during the pandemic.

Uncertainty in this year’s estimate

The models, methodology and data that make up the ‘Measuring Tax Gaps’ report each year have varied levels of underlying uncertainty.

To evaluate this in a systematic way, HMRC assign an uncertainty rating for each Tax Gap component ranging from ‘very low’ to ‘very high’. The amount of the Tax Gap given a low uncertainty rating has reduced from 63 percent in the prior year to 31 percent in the current year. However, the amount of the Tax Gap given a medium, high or very high rating has increased from 37 percent in the prior year to 70 percent in the current year. This underlines a recurring theme in the report that the impact of COVID-19 has caused heightened uncertainty in the methodology and data in this year’s estimate.

Tax Gap reports contain HMRC’s best estimates at the time of publication and are often subject to revisions in future years. It will be interesting to see how impactful revisions to this year’s figures will be and if the 5.1 percent estimated gap remains unchanged.

For further information please contact:

• Sharon Baynham

• Paul Harrison