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HMRC confirms tax gap falls to lowest recorded rate of £31bn

The tax gap estimate for 2018-19 is 4.7%, HM Revenue and Customs (HMRC) confirmed on Thursday.

There is a long-term downward trend in the tax gap, falling from 7.5% in 2005-06 to 4.7% in 2018-19, its lowest recorded rate.

More than 95% of the tax due was paid in 2018 to 2019. This is the result of sustained efforts by HMRC to support the overall health of the tax administration system and make it as easy as possible for taxpayers to pay the right tax at the right time.

The tax gap is the difference between tax that should be paid and what is actually paid. HMRC collected £628bn in tax revenue in 2018 to 2019.

This is the first year that a stand-alone tax gap for wealthy taxpayers has been included in the report. The total wealthy tax gap stands at £1.7bn and represents a very high collection rate of all tax due within this group. The wealthy tax gap is the smallest proportion of the total gap by customer group, making up 6% of the total tax gap.

Any impact of the coronavirus pandemic on the tax gap is likely to be first seen in the tax year 2020 to 2021.

Jesse Norman, Financial Secretary to the Treasury said, “At 4.7%, the 2018-19 tax gap is the lowest on record. The coronavirus pandemic has highlighted the importance of everyone playing their part and paying the tax that is due.

“Having a secure and comprehensive tax base is what allows the Government to pay for public services, but also to provide financial support in a crisis, at a time when it is most needed.”

HMRC’s Chief Executive Jim Harra added, “More than 95% of the tax due was paid in 2018-19. HMRC’s aim is for everyone to pay the tax that is due, no matter who they are.

“Our role is increasingly about making it straightforward for taxpayers to get it right, first time, while also tackling the minority who deliberately set out to cheat the system. I’m pleased that we’re now able to share more information about who pays what.”

Making Tax Digital (MTD) for businesses launched in April 2019. Businesses with a taxable turnover above the VAT threshold now have to use digital record keeping tools and submit their VAT return data direct from those records using MTD-compatible software.

MTD seeks to reduce the tax gap caused by error and failure to take reasonable care which cost the Exchequer £8.5bn in lost revenue in 2018 to 2019.

More than 1.4m businesses have signed up to the service which helps them reduce errors and see, in close to real time, the health of their finances. This includes around 280,000 businesses below the VAT threshold who have joined voluntarily.

Further findings from the Measuring the Tax Gap publication include, the tax gap for Income Tax, National Insurance contributions and Capital Gains Tax is 3.4% in 2018-19 at £12.1bn, which represents the biggest share of the total tax gap by type of tax

There has also been a long-term reduction for the Value Added Tax (VAT) gap from 14.0% in 2005-06 to 7.0% in 2018 to 2019.

The excise duty gap has reduced from 8.4% in 2005-06 to 5.0% in 2018 to 2019, whilst the Corporation Tax gap has reduced from 11.3% in 2005-06 to 7.0% in 2018 to 2019. The avoidance tax gap has reduced from £3.7bn in 2005 to 2006 to £1.7bn in 2018 to 2019.

Each year, HMRC estimates the tax gap for direct and indirect taxes based on the latest available information. HMRC may revise previous years’ tax gaps as more data becomes available, in order to show the long-term trend.

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