Tax gap: HMRC compliance activity shows little sign of declining

HMRC has published its latest tax gap estimates which found the tax gap (the difference between the annual amount of tax HMRC collects and the amount it believes is payable) is estimated to be £46.8bn in the 2023-24 tax year.

Olivia Wiggett, associate director at RSM UK, comments: “It is estimated that £37.9bn or 81% of the tax gap is the result of non-compliance associated with business activity. Ten years ago, it was estimated that corporation tax made up 10% of the tax gap, which has now grown to 40% a decade later. This huge increase in unpaid corporation tax could be indicative of the global economy and external factors impacting the cashflow of businesses.

“We anticipate that the government’s announcement of 2,400 debt management staff over the next four years will be allocated towards applying pressure on businesses that fail to pay the right amount of tax at the right time.

“60% of the tax gap was attributed to small businesses, and phoenixism, where company insolvencies are contrived to evade tax or write off debts owed with the directors then setting up a new company, is likely to be a key contributor to this. But the government is expected to be cracking down on this area with HMRC, Companies House and the Insolvency Service joining forces to deliver a plan to tackle those using contrived insolvencies to evade tax and avoid debts.”

Paul Marcroft, tax partner at RSM UK, added: “Income tax, capital gains tax and National Insurance accounted for £14bn of the tax gap, with half related to self-assessment. Given the number of taxpayers in self-assessment, HMRC lacks the resource to open compliance checks into the tax returns of each individual taxpayer. Instead, it relies on One to Many (OTM) campaigns to educate taxpayers on common pitfalls or prompt them to review their tax affairs for potential inaccuracies. Given the sizeable financial exposure from personal tax matters and resource constraints faced by HMRC, it’s likely HMRC will continue to make use of OTM campaigns.

“Criminal activity makes up an estimated £4.4bn or 9% of the tax gap. HMRC tends to have a strong preference of using its civil powers of enforcement rather than criminal investigations when tackling tax fraud. But we may well see a shift in this behaviour as it comes under increasing pressure to close the tax gap. It’s clear HMRC is making progress, but with more work to be done, the extent of HMRC’s compliance activity shows no sign of declining anytime soon.”