All you need to know about the Tax Gap
The gap between tax revenue the UK government expected to raise and the amount paid annually has hit £40bn, putting extra pressure on both main parties over their pledges to crack down on tax avoidance.
HM Revenue and Customs (HMRC) said there was a shortfall of £39.8bn in the 2022-23 financial year, up from £38.1bn a year earlier. This represents 4.8% of the amount of tax theoretically due, down from 5.2% in the previous financial year.
Inflation between 2021 tax year and 2022 was 9.1%. The £38.1 would have been, if it had just risen by inflation, £41.6 billion. There isn’t some vast amount that can be captured just by making sure everyone pays their taxes - don’t forget, this tax gap includes those who go bust before they’ve paid their taxes and so on.
Of course, there are those who disagree:
Richard Murphy, a tax expert, said the assessment of tax losses to the exchequer was “seriously underestimated” and that Labour’s plans would not improve the situation. He said the amount of tax not being collected could be closer to £100bn.
That’s because the ahem tax-expert measures by how much tax he thinks everyone other than him should pay not by what the law says they should - the second being the measure HMRC uses.
We also have some measures proposed:
In its manifesto, Labour has promised to raise £565m a year by closing the carried interest “loophole”. Under these plans, profits made by private equity managers would be taxed as income at a rate of up to 45% plus national insurance, rather than capital gains, which has a lower rate of 28%.
In March the chancellor, Jeremy Hunt, scrapped tax breaks for non-domiciled residents – foreign nationals who live in the UK to avoid paying tax on their overseas income and gains.
Labour has also said that it would remove tax exemptions enjoyed by private schools, adding VAT to fees at the standard rate of 20%. The plans have been blamed for parents paying years of private school fees upfront to avoid VAT using advance payment schemes.
None of which will change the tax gap by a single penny nor iota - by either the legal or laughable measures above - because they’re changes in the amount legally due, not changes in the amount legally due but not paid.
Tim Worstall