In 2008, as the result of a Freedom of Information request, HM Revenue & Customs (HMRC) published details of an analysis from 2005 that attempted to derive broad brush estimates of the direct tax gap at the start of the decade.
HMRC is today releasing details of further work done on estimating the tax gap as a result of a further Freedom of Information request. This information has not previously been published because of concerns over some of the methodologies used and the accuracy of some of the resulting estimates.
On 9 December 2009, HMRC published two documents as:
The statistical release provides more accurate estimates for many components of the tax gap, including Corporation Tax for large business, and an estimate of the overall tax gap. The PBR document places these estimates in the context of the work that HMRC is doing to close the tax gap. The publication of this information means that we are now able to publish the earlier estimates. Given concerns over the robustness of this data, these earlier estimates should be treated with caution.
Tax gap estimates are very difficult to produce and are necessarily subject to large margins of error, itself difficult to calculate. Not least of these difficulties is that a lot of the activities that lead to tax gaps are deliberately shrouded in secrecy. For this reason, not many countries undertake tax gap measurement. Comparison with the other countries that have published tax gap estimates suggests that tax gaps are a significant issue for all, and that the UK tax gap is in line with that found elsewhere.
The material released in response to the Freedom of Information request includes:
Further details are given below.
Following the publication alongside the Pre-Budget Report in 2007 of earlier estimates of the direct tax gap for individuals and small and medium sized businesses, HMRC began systematically developing estimates for direct tax avoidance and large business Corporation Tax. This was made possible because HMRC had begun recording both large business and disclosed avoidance risks.
There was considerable internal discussion about how the tax gap should be measured for large business. As a result, the assumptions used to produce estimates were challenged, and the methodology was refined and improved following the production of these papers.
The work to find the most accurate and reliable way to evaluate the tax gap is ongoing and we will continue to refine this as more data becomes available. However, we are satisfied that the current estimates are robust enough to publish, and these are included in Measuring Tax Gaps 2009:
Work was undertaken to estimate the tax gap for the very wealthy using an analysis of the outcome of enquiries conducted within a group defined as ‘wealthy’ at that time. As a result of this work, we have now formed the view that the figures set out in the document do not provide a useful measure, and are likely to be too low, as they exclude avoidance. The definition of the ‘wealthy’ has also changed considerably since that time. As a consequence, we have made no use of these estimates, and do not use them in calculating the overall tax gap figure.
Paper on 'Tax Gap for the Very Wealthy' (PDF 102K)
The offshore tax gap estimate was an attempt to update the estimate in the 2005 paper that was released in 2008. However, further work on this highlighted serious flaws in the underlying data used to provide the updated calculation, to the extent that the updated methodology used to produce this data was discredited. Therefore we have not used this revised estimate, instead reverting to the original estimate to indicate the scale of the problem in relation to the Offshore Disclosure Opportunity campaign. Nor do we use the revised figures as part of our overall tax gap estimate.
Update on Offshore Tax Gap 2004-05 dated 6 November 2006 (PDF 60K)
This estimate, of £12 billion, was included in the draft paper prepared in the run up to the 2008 budget, and is simply the sum of those components of the tax gap described in that paper. Measuring Tax Gaps 2009 provides for the first time an estimate summing all components of the tax gap.
An overall estimate of the direct tax gap is referred to in:
