HMRC report the 2022/23 Tax Gap has reduced to 4.8 percent

HMRC have published their estimate of the 2022/23 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, which measures the Tax Gap as a proportion of theoretical liabilities, gives a better measure of compliance over time than the cash figure as it takes into account the effects of inflation, economic growth and changes to tax rates. The Tax Gap has fallen from 7.4 percent in 2005/06 to an all-time low of 4.8 percent in 2022/23. Although it should be noted that, at this time last year when the 2021/22 figures had just been published, the estimate was also 4.8 percent, but that was subsequently revised upwards to 5.2 percent. As always, the figure represents HMRC’s best estimate of the tax gap at the time of publication and is subject to revision as more data becomes available. The Tax Gap cash figure for 2022/23 is estimated at £39.8 billion. This compares with £38.1 billion the year before.

In their introduction, HMRC compare the movement in percentage terms for each category of tax from the first year of reporting (2005/06) to the latest year. Only corporation tax shows an overall increase in this timeframe (from 11.4 percent in 2005/06 to 13.9 percent in 2022/23); all other tax types show reductions. HMRC also make the point that the Tax Gap from small businesses is the largest component of the Tax Gap by customer group at a 60 percent share in 2022/23. As several of the election manifestos of the main parties mention tackling the Tax Gap to raise revenue, this perfectly illustrates the challenge facing the incoming Government. The easiest route - targeting a small number of the largest corporations and wealthiest individuals - is not going to reap the greatest rewards

The figures below have been sourced from HMRC’s estimates published on 20 June 2024. The percentage figures are the percentage share of the total Tax Gap.

Tax Gap by type of tax 
 

The most notable change this year is the increase in the Corporation Tax gap, which is largely attributable to small businesses. When looked at as a percentage of theoretical corporation tax liabilities, it has remained fairly steady at 14 percent in 2021/22 and 13.9 percent in 2022/23. However, the theoretical tax liability for Corporation Tax increased significantly from £77 billion in 2021/22 to £98.1 billion in 2022/23 increasing the absolute amount of the gap.

Tax Gap by customer group 
 

By far the largest contributors to the Tax Gap continue to be small businesses and they make up the largest share of the Corporation Tax gap too.

The Corporation Tax gap for small businesses, when looked at as a percentage of theoretical corporation tax liability, is estimated at 32 percent in 2022/23 rising from 19.9 percent in 2018/19. The most recent data also shows 45 percent of small businesses submitting an incorrect Corporation Tax return with under-declared tax liability, up from 22 percent in 2016/17.

Tax Gap by behaviour 

Whilst failure to take reasonable care continues to top the list in terms of behavioural causes of the Tax Gap, there was a noticeable uptick in non-payment, perhaps reflecting the difficult economic conditions during a period of high inflation in the UK. Other behavioural categories stayed fairly constant.

For further information please contact:

• Sharon Baynham