The UK Tax Gap: Understanding the Tax Collection

Article written By Divya T

The concept of a Tax Gap; has become increasingly important in discussions of fiscal policy and government revenue. This term refers to the difference between the amount of tax that should theoretically be collected and what is actually paid to HM Revenue and Customs (HMRC).

Recent estimates from HMRC place the UK Tax Gap at £35.8 billion for the 2021/22 tax year, representing 4.8% of theoretical tax liabilities. This means that while the vast majority of taxes owed are collected, there remains a significant shortfall that impacts government finances.

Contrary to popular belief, the Tax Gap is not solely the result of deliberate evasion or avoidance schemes. HMRC identifies eight different behaviours that contribute to the gap, with ‘failure to take reasonable care’; accounting for the largest portion at 30%. This suggests that many taxpayers may be unintentionally underpaying due to errors or lack of diligence in their tax affairs.

The UK government has made efforts to address the Tax Gap, with both the current administration and opposition parties proposing increased investment in enforcement and compliance measures. However, accurately measuring the Tax Gap presents inherent challenges, as noted by the National Audit Office, due to the hidden nature of some tax-avoiding activities.

Despite these difficulties, HMRC’s methodology for estimating the Tax Gap has received international recognition. The International Monetary Fund (IMF) has described it as ‘one of the most comprehensive studies of the Tax Gap available internationally. This speaks to the UK’s commitment to transparency and continuous improvement in tax administration.

One strategy HMRC is employing to reduce the Tax Gap is the ‘Making Tax Digital’ initiative. This digital transformation aims to simplify tax compliance and reduce errors, with early research indicating positive effects on closing the gap.

It is important to note that the Tax Gap is distinct from HMRC ‘compliance yield’; which measures the additional tax revenue collected through enforcement activities. While related, these metrics are not directly correlated, as the Tax Gap can be influenced by factors outside of HMRC’s control, such as demographic changes in the taxpayer population.

As the UK continues to grapple with fiscal challenges, understanding and addressing the Tax Gap will remain a key priority for policymakers. By combining technological solutions, improved education for taxpayers, and targeted enforcement, the government hopes to further narrow the gap and ensure a fair and efficient tax system for all.

Lawyers have the potential to make a meaningful impact on diminishing the Tax Gap by employing a range of strategies:

• informing clients regarding their tax responsibilities, highlighting the necessity of accurate reporting and timely payments, thus assisting in reducing unintentional errors that result in the Tax Gap.
• participating in ethical tax planning, concentrating on lawful methods to enhance tax positions; advising clients on lawful deductions, credits, and incentives guarantees that they fulfil their tax obligations without engaging in aggressive tax avoidance.
• evaluating tax-related risks that may arise from specific transactions or business arrangements, allowing clients to mitigate them.
• championing for more precise tax statutes simplified regulations,  helping to decrease misunderstandings and lower the risk of unintentional violations.

Lawyers play a crucial role in narrowing the Tax Gap through their commitment to ethical practices and tax compliance.