HMRC reduces tax gap to lowest recorded rate

According to a National Audit Office (NAO) report, HMRC reported record tax revenue of £627.9 billion in 2018-19, an increase of £22.1 billion (3.6%) on 2017-18, as it continues to close the tax gap.

More than 95% of the tax due was paid in the 2018 to 2019 tax year.

The NAO notes that tax administrations rely heavily on taxpayers reporting and paying their taxes in line with the rules; and in 2018-19 HMRC received 90% of total tax owed this way.

HMRC’s most recent estimate of the difference between the amount of tax theoretically owed and the amount collected was £31 billion in 2018-19, the equivalent to 4.7% of the total tax owed.

The NAO concludes that HMRC’s work to tackle non-compliance offers good value for money, with rates of return ranging from 7:1 to 44:1.

It found that HMRC has been successful in targeting mass-marketed tax avoidance schemes, but lessons from these successes have not been applied more broadly, such as where taxpayers bend the rules or do not take reasonable care.

HMRC’s strategy to tackle non-compliance is based squarely on preventing it happening in the first place, by:

1. promoting compliance – designing it into systems and processes, enabling taxpayers to get things right from the outset;
2. preventing non-compliance – by using data to spot mistakes, prevent fraudulent claims, personalise online services and automate tax calculations; and
3. tackling non-compliance – by identifying and targeting the areas of
4. greatest risk, and tackle those who deliberately cheat.

However, the NAO continues to seek complementary improvements:

• Balancing prevention and enforcement – pre-emptive measures to promote tax compliance should be balanced against those to tackle non-compliance. HMRC should get better understanding of the link between risks to revenue, the resources used, and the cost and return of different compliance activities.
• Customer experience – customers experiencing excellent service are more likley to believe tax evasion is unacceptable.
• Target setting – the NAO wants HMRC to agree to targets for reducing the tax gap. HMRC has resisted this as an annual performance indicator because it believes that reducing the tax gap is affected by factors outside its control.

Phil Hall is AAT's Head of Public Affairs and Public Policy.