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The tax gap is the difference between the tax in theory that should be collected by HMRC and what actually is collected.
At its formation in 2005, HMRC committed to reduce the gap. In its 2010 spending review, the government made £917 million available to HMRC to tackle the tax gap and raise additional revenues of £7 billion a year by 2014/15.
Recent figures released by HMRC show the tax gap for 2009/10 is estimated to be 7.9% of liabilities, around £35 billion, down from 2008/09, when stood at £39 billion and 8.1% of liabilities.
According to Dave Hartnett, HMRC permanent secretary for tax, the reduced figure shows that the taxman is ‘continuing to tackle non-compliance’.
He added that the department has ‘almost doubled compliance revenues since 2005 to £14bn’.
Taxation notes that around 80% of the reduction of the tax gap relates to VAT.
The decrease to a rate of 15% during much of the most recently measured period means less VAT was due to be collected in the first place, so inevitably the amount which failed to be collected was also smaller.
Also, in 2008/09 a significant amount of VAT had to be written off as the recession hit, a problem that diminished as the economy seemed to recover during 2009/10.
With the VAT rate having increased through 17.5% to 20%, and growth apparently stalling, it is likely that the gap for future years will be significantly larger.
