The tax gap – new HMRC data

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HMRC have always been reluctant to measure the tax gap – the tax they do not collect. They’ve only done it once before – but new data has been published as part of the PBR.

I won’t pretend to have read this all as yet – but the overall claim that the tax gap is 8% seems likely to be seriously understated to me. If 15.3% of VAT was lost in the last tax year for which data was available – and that’s what the report says – then that means 15.3% of turnover of businesses that should be registered has not been declared. The loss is even higher when well over half of all businesses are not VAT registered because they are below the VAT registration threshold. This number is not now materially distorted by massing trade fraud which is also separately calculated. if 15.3% of turnover is lost from view so is all the income tax that flows from it. That has to be true because it means wages are paid in cash, and so on. this data is however only reflected in the estimate that 16% of corporation tax is lost. The claim seems to be that becasue just 6% of income tax is lost – which seems to assume no loss arising from all that missing VAT – then an 8% overall result occurs.

Sorry – I don’t buy that at all. I buy a 15% plus loss overall. And that means the loss is not £40 billion a year but something in excess of £80 billion a year.

This is a much more serious issue then the Treasury is suggesting – and that helps no one.