Investing in HMRC to tackle the tax gap: a realistic approach?

05 July 2024

The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid. It consists of several components including at one end taxpayers simply getting things wrong, to more targeted tax evasion, tax avoidance, and the hidden economy. 

Tax gap by value and as a percentage 

The tax gap for 2022/23 is estimated to be £39.8bn, with small businesses shown as the largest component of the tax gap by customer group, contributing a 60% share. 

There have been fluctuations in the tax gap over the last parliament, and depending on which measure you take (or which side of the political divide you sit) it gives a different story. In absolute terms, the current tax gap has increased from a figure of £32.4bn in 2018/19, but as a percentage of the total theoretical tax take (which is at a record high) the tax gap has marginally fallen over the same period. 

But there will always be a tax gap and since 2016/17 it has been in and around the 5% mark. So, this does raise the question, despite what the parties say: is closing the tax gap to help fund public services and other policies achievable? 

The Conservatives, Labour and Liberal Democrats all made pledges to raise additional revenue from tackling avoidance and evasion, and to do this funds will be invested in HMRC, both in additional staff and improved technology. The amounts suggested as being raised in manifestos have certainly been eye-catching, and the headlines range from up to £5bn per year from Labour, to up to £6bn per year from the Conservatives, and up to £7.2bn per year from the Liberal Democrats. 

However, investing in HMRC is not a quick fix or short-term solution. It is a good sound bite, but results will not happen overnight and will require sustained investment that requires patience and strategic planning. The costings behind these headline figures confirm those annual targets are only predicted to be reached by the end of the next parliamentary term, and the initial returns are estimated to be much more modest. This is not such a surprise as this would not only require a significant recruitment drive and investment in training, which will delay productivity, but also there will be a need to ensure the resources are allocated to the right targeted compliance areas, and this is not always straightforward. 

But most of all it will require a shift in relation to government’s approach to HMRC, which, like many departments, has seen reduction in staff and consolidation of its office network. HMRC is a department under pressure. 

Our current day-to-day experience is of a department that has significant problems hitting response deadlines, at times showing a lack of quality, and inexperienced HMRC officers. This all results in taxpayers and advisors alike getting frustrated and experiencing difficulties in dealing with HMRC enquiries and compliance activity. 

Experience suggests HMRC is struggling in several of its compliance areas, and although the pledge of raising additional revenue through reinvestment is commendable, the analogy of turning an oil tanker has never been so apt.

Very few would argue that investing in HMRC to boost its tax compliance activity, enabling it to target tax avoidance and evasion and reduce the tax gap, is not a good idea. However, it is not yet clear whether these targets will become a reality or remain mere aspirations. 

However, the strength of any tax system is underpinned by robust and efficient tax compliance. The hope is that the focus on the investment in HMRC and reduction of the tax gap will lead to meaningful improvements that will help, support, and strengthen HMRC’s compliance activity. 

Holly Walmsley
Holly Walmsley
Manager, Tax Dispute Resolution Services
AUTHOR
Fajar Hafandi
Fajar Hafandi
Tax Assistant
AUTHOR
Holly Walmsley
Holly Walmsley
Manager, Tax Dispute Resolution Services
AUTHOR
Fajar Hafandi
Fajar Hafandi
Tax Assistant
AUTHOR