Tax is a perennial topic: we pay it and the government provides us services in return… but what if there’s a gap in the system? In this article, we have a look at the so-called “tax gap” and HMRC’s initiative to tackle it across the nation. Read ahead for our take on the important issues and for how you can take action today to help close up the UK’s public revenue shortfall.
HMRC and its role
As the UK's tax authority, HMRC plays a central role in collecting tax revenue, helping the government to raise funds for providing essential public services. As such, HMRC is also tasked with setting out and updating its tax laws (from VAT to Income Tax and beyond) and ensuring compliance across the nation.
What is the “tax gap”?
The “tax gap” refers to the difference between HMRC’s expected tax revenue and the total tax actually received from UK individuals and businesses. In essence, it is a measure of the nation’s tax non-compliance – be it accidental or intentional underpayment.
As of June 2023, the tax gap stands at an approximated 4.8%. Although seemingly insignificant, this percentage equated to £35.8 billion across the tax year 2021–2022 in absolute terms. During this period, a large part of the tax gap originated from discrepancies in expected Income Tax returns and from small businesses.
Why is it important to reduce the tax gap?
There are many reasons why it is important for HMRC to work on reducing the UK’s tax gap. Perhaps the most self-evident is revenue shortfall. Since HMRC’s tax collection provides essential funding for the UK government’s spending on public services, the tax gap has direct impact on our quality of life as citizens of the UK. Closing the tax gap could free up more revenue for development of our public infrastructure, the NHS, education, pensions, and more.
Furthermore, the tax gap could be viewed as a direct measure of inequality: the disparity between expected and actual tax revenue disproportionately burdens law-abiding citizens due to others evading tax or failing to submit correct tax returns. Furthermore, the resulting shortfalls will affect future forecasts for the nation, and rampant underpayment of tax could even undermine trust in the UK's public institutions.
How is the tax gap being addressed?
In recent years, the tax gap has shown a steady decline – from 7.5% in the tax year 2005–2006 to 4.8% more recently (2021–2022). This is in part due to new directives and legislative action initiated by HMRC in an effort to combat and reduce the issue.
One of the most recent such changes regarded the tightening of regulations surrounding trade via digital platforms. As of 2024, apps and websites such as Etsy, Airbnb, and Uber must start recording details of their users’ income (among other data) and reporting them to HMRC on a regular basis.
How can we help to close the tax gap?
It is clear that the tax gap is a significant loss of funds which could have an impact on our quality of life. So – what can we do about it? File taxes on time and correctly! If you’re self-employed, don’t forget to submit your Income Tax Self Assessment. For those running businesses with VAT, make sure you are up to date with Making Tax Digital and prepare to submit your VAT Return online every quarter.
To help you stay both organised and compliant, don’t forget to make use of HMRC-recognised software such as AbraTax to fulfil your regular tax obligations. AbraTax provides a free Self Assessment service, as well as a simple and cost-effective tool for submitting your VAT Returns.