Tax lost to error and ‘failure’ rises – four years on from digital tax

Newsletter issue – July 2024

Whilst the main focus of the nation in terms of tax talk has all been about the General Election, some very interesting figures have been published this month by HMRC.

Have you heard before of the phrase the ‘Tax Gap’? The stats in question surround this topic. According to the Chartered Institute of Taxation, the definition of this gap is “the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid.”

The new report assesses the tax gap in 2022-23. The result was an estimated £39.8 billion, which is 4.8 per cent of tax liabilities, according to the CIOT’s assessment.

The publication of the report has shown the first four years of data since digital record keeping and quarterly digital reporting for VAT became compulsory as part of the Making Tax Digital (MTD) project.

The CIOT said: “HMRC stated that this (MTD) would ‘reduce the amount of tax lost to avoidable errors’. However, the amount of tax lost to both error and ‘failure to take reasonable care’ has increased significantly since then, though the overall ‘VAT gap’ has fallen since MTD began.”

The CIOT’s analysis found that the gap stands at a record high in cash terms but a record low as a share of the tax that should be collected, with some of the highlighted trends being a rising amount lost to non-payment due to corporate insolvencies, and big revisions upwards in corporation tax non-compliance by small businesses.

John Barnett, Chair of CIOT’s Technical Policy and Oversight Committee, said: “There is something for everyone in these figures. Critics of HMRC can point to a record amount – nearly £40 billion – not being collected, but HMRC can legitimately point out that they are bringing in a record share of the expected tax take. That both these things can be true simultaneously tells us more about current tax levels than anything else.”

“There are some alarming revisions in these numbers, especially with respect to small business non-compliance. Rising numbers of business insolvencies (and general inability to pay) are also having an impact on tax collection.”

“These figures show there is plenty of work for HMRC to do in a range of areas to reduce the tax gap. However, we should not lose sight of the fact that their record, collecting more than 95 per cent of tax due, compares well internationally.”