UK Inquiry Tracker

Tackling the tax gap

Public Accounts Committee Closed Inquiry

Opened: 27 Jul 2020 Closed: 9 Nov 2020 Parliament page

The “tax gap” is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid. HMRC relies heavily on taxpayers - individuals and organisations - reporting their finances and paying their taxes in line with the rules. In the last financial … Read more The “tax gap” is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid. HMRC relies heavily on taxpayers - individuals and organisations - reporting their finances and paying their taxes in line with the rules. In the last financial year, 2018-19, it collected 90% of the tax owed through this “voluntary compliance” and payment of tax. Inevitably some taxpayers make mistakes, others choose not to comply fully, and some cannot pay because of insolvency. Taxpayers can genuinely interpret tax rules differently from HMRC - or construct artificial arrangements to avoid tax. In 2018-19, HMRC reported a new record tax revenue of £627.9 billion - an increase of £22.1 billion (3.6%) on the year before. But the tax gap, of tax owed “by the book” but not paid, was £31 billion or 4.7% of the total tax owed – though this is down from a peak tax gap of 7.2% in 2014. The state of the economy, how many people in are in self-employment or employed, and the perceived fairness of tax policy - all these and other factors can affect how many voluntarily pay completely the right tax. Tax administrators like HMRC can increase tax revenue by encouraging “voluntary compliance”, but also of course by stopping non-compliance. Keeping the tax gap low is always a challenge because taxpayers continually change their behaviour to exploit “opportunities” in the tax system. The NAO report “Tackling the tax gap” published 22 July 2020 found that HMRC’s work to tackle non-compliance is offering good value for money. HMRC has successfully reduced the tax gap by targeting the factors underpinning non-compliant behaviour - which recently included a series of mass-marketed tax avoidance schemes. But the NAO also found that HMRC has not extended these successes to the cases where taxpayers are bending the rules, or don’t take reasonable care they’re paying the right tax, and there are questions about the focus and resource HMRC dedicates to tackling the tax gap across big business, SMEs and individuals. In September, the Committee will question senior Government officials on how effectively HMRC is tackling the tax gap. If you have evidence on the issues raised above, please submit it here by Thursday 27 August. Show less

6 Recommendations

14 Conclusions

1 Report

1 Oral session

2 Letters

1 Event

Activity timeline 5 events

21 Jun
2021

Correspondence

Correspondence from Jim Harra, Chief Executive and First Permanent Secretary, re Consequential impacts on historical tax gap estimates from…

4 Feb
2021

Report published

Treasury minutes: Government response to the Committee of Public Accounts on the Twentieth report from Session 2019-21

3 Nov
2020

Correspondence

Correspondence to HM Revenue and Customs on the Tackling the tax gap report, dated 22 October 2020

16 Oct
2020

Report published

Twentieth Report - Tackling the tax gap

7 Sep
2020

Oral evidence

Tackling the tax gap

Oral evidence sessions 1 session

7 Sep 2020

View on parliament.uk

Tackling the tax gap

Beth Russell · Her Majesty's Treasury Jim Harra · HMRC Penny Ciniewicz · HMRC

Reports 1 report · click to expand

Title	HC No.	Published	Items	Response
Twentieth Report - Tackling the tax gap	HC 650	16 Oct 2020	20	Responded

Recommendations & Conclusions

5 results

20 Recommendation Rejected

Twentieth Report - Tackling the ta…

In addition, HMRC does not publish any tax gap analysis for different types of industry.

In addition, HMRC does not publish any tax gap analysis for different types of industry. For example, HMRC has not published an estimated tax gap for the construction industry despite introducing the construction industry scheme to deal with high levels … Read more

Government Response

The government rejects the recommendation to include tax gap analysis by industrial sector due to data and modelling limitations, feasibility issues, and the high level of assumption required, and implicitly rejects analysis for the four nations for similar reasons.

HM Treasury

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7 Conclusion Rejected

Twentieth Report - Tackling the ta…

HMRC measures the additional amount it generates by tackling tax avoidance, evasion and non-compliance, known...

HMRC measures the additional amount it generates by tackling tax avoidance, evasion and non-compliance, known as compliance yield. In its 2018–19 Annual Report, HMRC reported £34.1 billion of compliance yield, compared with £30.3 billion in the previous year.12 HMRC confirmed … Read more

Government Response

The government rejects the implicit suggestion of providing confidence intervals for compliance yield, explaining that due to complexity and varied methodologies, a robust method would be complex, assumption-based, and of limited insight.

HM Treasury

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8 Conclusion Rejected

Twentieth Report - Tackling the ta…

HMRC publishes a breakdown of the tax gap by taxpayer group, tax type and behaviour.16...

HMRC publishes a breakdown of the tax gap by taxpayer group, tax type and behaviour.16 HMRC told us that it uses the outcomes of its tax gap analysis as indicators 7 Q 23; C&AG’s Report, para 1.12 8 Qq 23–25 … Read more

Government Response

The government rejects the implicit recommendation for tax gap analysis in the four nations due to data and modelling limitations, stating that current methods do not comprehensively allow for such subgroup analysis, though it disaggregates the oils tax gap for Northern Ireland where feasible.

HM Treasury

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9 Conclusion Rejected

Twentieth Report - Tackling the ta…

It also transpired, when we questioned the Department about the size of the tax gap...

It also transpired, when we questioned the Department about the size of the tax gap in the construction industry, that HMRC does not assess and publish the relative size of the tax gap across different industries. The construction industry has … Read more

Government Response

The government disagrees with the implied recommendation to assess and publish the tax gap across different industries, explaining that current models, data, and resources do not allow for comprehensive or precise industry-specific analysis.

HM Treasury

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11 Conclusion Rejected

Twentieth Report - Tackling the ta…

HMRC’s tax gap does not capture the ‘policy gap’, which HMRC characterised as the tax...

HMRC’s tax gap does not capture the ‘policy gap’, which HMRC characterised as the tax loss that is not due, but which might be due if the tax rules could be tightened up. HMRC confirmed to us that there is … Read more

Government Response

The government rejects the idea of measuring tax loss from 'undesirable sophisticated tax planning' due to definitional and feasibility issues, though it states it already estimates the avoidance tax gap (bending rules, not the spirit of the law).

HM Treasury

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Government Response AI assessment · 19 of 6 classified

Accepted 7

Accepted in Part 1

Acknowledged 2

Not Addressed 4

Rejected 5

Total 6 recs + 14 conclusions

Correspondence 2 letters

21 Jun 2021 Correspondence from Jim Harra, Chief Executive and First Permanent Secretary, re Consequential impacts on historical tax gap estimates from revisions to tax receipts, dated 10 June 2021

Parliament page

3 Nov 2020 Correspondence to HM Revenue and Customs on the Tackling the tax gap report, dated 22 October 2020

Parliament page