How much does tax evasion cost the UK? Start at £75 billion

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I was asked this question today. Let me give a current estimate.

According to reports in The Times yesterday:

The VAT gap – the difference between how much should be collected and how much was – rose to 14.5 per cent last year, the first increase since 2002.

Now VAT fraud has increased because of carousel activity, but let’s be clear, the rate was about 17% at the turn of the century, so the current figure is an improvement. This happens to be the only ‘evasion estimate’ HMRC publish. I think it’s low. My own Tax Gap estimates are higher at up to 24% for corporation tax. I think that’s likely. A top line error on VAT is likely to give rise to a bigger error on the bottom line, by definition. But let’s live with 14.5%.

The pre-Budget Report suggests current year income (2006-07) should be £518 billion.

Take 14.5% of £518 billion and the resulting cost of evasion is not less than £75 billion. That’s my current base line estimate. I expect that’s conservative.

Add avoidance onto that (minimum£10 billion according to HMRC) and you can see why we concentrate on this issue. Combined that’s more than the whole UK education budget – which seems to be Gordon Brown’s focus for his premiership.