Avoiders 'are far from the tax gap's main contributors'

Only five per cent of the ‘tax gap’ is down to avoidance, with fraudsters most to blame for the missing billions, a chartered body says.

In fact, out of the £34billion between what HMRC says is due and what it has collected, just £1.7bn is down to avoidance, said the Chartered Institute of Taxation.

Almost £14bn of this now lowest ever tax gap is down to illegal activity -- made up of the hidden economy (£3.5bn); evasion (£5.2bn) and criminal attacks (£5.1bn).

“These figures suggest that tax evasion and other illegal activity are costing the exchequer more than eight times as much as tax avoidance, “ said the CIOT’s John Cullinane.

The institute explained that it has long argued that HMRC needed to put more effort into investigating and prosecuting those who seek to evade tax.

And it wants the Revenue to also do more for unintentional law-breakers. “The many changes to the tax system made and planned in the past 12 months should push HMRC into focussing on customer service”, CIOT said.

“[That would be] a more direct way to help large numbers of fairly ordinary taxpayers who find themselves confronted by an ever more complex tax law and increasing compliance obligations. After all, nearly twice as much is lost in errors as in tax avoidance.”

However, announcing the figures, the Treasury’s Mel Stride only singled out intentional offenders -- including those suspected of avoiding their obligations.

“[The tax gap] data shows how far we have come in tackling avoidance, evasion and non-compliance, but there is still more to do and we will continue to take action to ensure that everyone pays the tax they owe,” he said.

The biggest increase in the tax gap in the past year is in the amount of tax lost due to ‘legal interpretation’ -- “where the customer’s interpretation of the law and how it applies to the facts in a particular case and HMRC’s interpretation results in a different tax outcome”.

Also in a provided definition, HMRC said examples included the correct categorisation of an asset for allowances, the allocation of profits within a group of companies, or VAT liability of a particular supply.

“This [increase in the ‘legal interpretation’ area] may reflect increased zealousness on HMRC’s part in challenging taxpayers’ claims,” said Cullinane, who acknowledged the government was right to tackle artificial and abusive attempts to avoid tax.

Available in a methodological annex (PDF), the tax gap data fall follows the introduction of 75 measures over the last seven years to reduce tax avoidance, evasion and non-compliance.