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Slow progress, but UK tax gap is closing

At its inception in 2005, one of HM Revenue & Customs’ commitments was to reduce the UK tax gap. The latest available figures show that the revenue body is sticking to that commitment. But is progress satisfactory, given the £917 million ($1.4 billion) that government made available for this very task?

The tax gap is the difference between the amount of tax that should be collected, and the amount of tax that is actually brought in.

In 2008-2009, the tax gap was 8.1% of liabilities, while new figures indicate that the tax gap for 2009-2010 is slightly smaller, at 7.9% of liabilities, around £35 billion.

An HMRC press alert said: “This is at the lower end of the range of countries who publish their tax gaps.”

The main reasons for the reduction, which was around £4 billion, are the VAT reduction and the state of the economy, said Kevin Hindley, managing director of corporate tax at Alvarez & Marsal Taxand UK.

“£2.1 billion of the £4 billion is purely because of the reduction in the rate of VAT,” he said. “And the remaining £1.1 billion is probably down to macroeconomic forces.”

Dave Hartnett, HMRC permanent secretary for tax, commended his team’s work and put the latest figures down to their work.

“The tax gap is the result of a wide range of behaviours and the challenges are constantly changing, but these figures show we are continuing to tackle non-compliance,” said Hartnett. “The tax gap has reduced from 8.5% of total liabilities in 2004-2005 to 7.9% in 2009-2010 and we have almost doubled compliance revenues since 2005 to £14 billion.”

Despite both government and HMRC stating that it is their initiatives that have triggered the tax gap reduction, advisers say this is probably not the case just yet.

“While we don’t necessarily agree with the reduction being down to HMRC initiatives, we do support those initiatives and are sure that slowly they will have an effect – they are going in the right direction,” said Hindley.

The figures also show £6 billion a year being lost to errors and carelessness by taxpayers. Gary Ashford of the Chartered Institute of Taxation has suggested that this indicates the need for more taxpayers to be getting more adviser support.

“I’m absolutely sure that’s right,” said Hindley. “But it cuts both ways, as Ashford acknowledges. Not all the errors go against the revenue body.”

Hindley added that one of the more interesting points thrown up by the report is that tax evasion is a far bigger problem than tax avoidance.

“Avoidance type activity is dwarfed by evasion of tax,” he said, before going on to praise principles of UK tax policy aimed at legitimising taxpayer assets.

“A very good part of tax policy has been the efforts towards trying to bring people into the legitimate side of the law, which is why these amnesties at the moment are very worthwhile,” said Hindley. “However, I have no sympathy for those who show no interest in being on the legitimate side and contributing to the state.”

One of the key questions is whether the government can do enough to keep the tax gap down. The next set of data will provide us with a yardstick against which the success of HMRC initiatives can be assessed.

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