The UK tax gap in 2021 to 2022 is estimated to be 4.8% of total theoretical tax liabilities, or £35.8 billion in absolute terms. This means HMRC collected 95.2% of all tax due. Nevertheless, Government focus on closing the tax gap could be better way to raise raise revenue rather than taxing by stealth, says Rachael Griffin, tax and financial planning expert at Quilter.
During this time of high inflation and low economic growth the tax gap deserves the government’s full attention. Plugging the holes in our tax system could help refill public coffers rather than trying to raise revenue by freezing tax thresholds like income tax and inheritance tax and increasing taxes by stealth.
If we managed to reduce the current 4.8% tax gap by around two percentage points, the government could generate an additional revenue of nearly £15bn per year. This could help alleviate the effects of frozen thresholds, easing the financial strain on many and helping more money flow through to younger generations.
HMRC successfully collected 95.2% of all taxes, which is no mean feat and should be celebrated. However, the system is riddled with flaws. The share of the tax gap attributed to small businesses has increased over the past five years, from 40% of the overall tax gap in 2017 to 2018 to 56% in 2021 to 2022. Similarly, wealthy individuals account for 5% (£1.7 billion) while all other individuals account for the remaining 6% (£2.1 billion) of the overall tax gap. While some of this may be as a result of failing to take reasonable care much of this will be down to the complexity of the system and people making understandable mistakes. These numbers show that our tax system is far from user-friendly, and it’s costing the government billions, which could be better used to help people with the finances now.
Another thing worth noting is the stubborn nature of the tax gap. Back in the 2010/11 tax year, it was 6.0%, fast forward a decade and we’ve only brought it down by a small 1.2%. It’s evident that we need to find a better way to fix our tax system.
Initiatives like Making Tax Digital promise to simplify tax procedures and minimise human errors. However, sadly during difficult economic times we often see fraud including tax fraud increase. So it’s more crucial than ever to get our tax system right, especially considering the aftermath of the pandemic and the current economic climate and make sure those who are deliberately not paying enough tax are identified. For those who’re worried about getting their tax returns wrong, seeking professional financial advice can be a wise move. It can help ensure you’re paying exactly what you owe, no more, no less.
