Closing the Tax Gap: Insights from the 2021-22 Tax Year

Sep 01, 2023

The recently published tax gap figures for the 2021-22 tax year shed light on the intricate landscape of taxation in the United Kingdom. Despite the encouraging news that the tax gap has hit an all-time low of 4.8%, the staggering amount of £36 billion in lost tax highlights the ongoing challenges that Her Majesty's Revenue and Customs (HMRC) faces in ensuring proper tax collection. This article delves into the key findings of the HMRC's "Measuring the Tax Gap" report, revealing insights about tax evasion, avoidance, errors, and the various contributing factors.

Understanding the Tax Gap

The concept of the tax gap essentially reflects the disparity between the amount of tax that should have been remitted to HMRC and the actual tax receipts collected by the Exchequer. This gap encompasses a wide spectrum of scenarios, ranging from illicit activities in the black economy and deliberate tax evasion to innocent miscalculations by taxpayers and unpaid taxes from insolvent businesses. It encapsulates the intricate relationship between regulatory compliance and revenue collection.

Breakdown of Contributors

The tax gap is a complex amalgamation of factors that intertwine to create a substantial shortfall in tax revenues. A breakdown of the contributors to the tax gap reveals fascinating insights. Small businesses emerge as the largest group responsible for a significant portion of the tax gap, accounting for 56% (£20.2 billion). Following behind are criminals, large businesses, and mid-sized businesses, each contributing 11% (£4.1 billion, £3.9 billion, and £3.8 billion, respectively). Wealthy individuals are responsible for 5% (£1.7 billion), while others collectively contribute 6% (£2.1 billion) to the overall tax gap.

Types of Taxes and Their Impact

The tax gap's complexity extends to the types of taxes involved. Income Tax, National Insurance contributions, and Capital Gains Tax constitute 35% (£12.7 billion) of the total tax gap when categorised by type of tax. Corporation Tax (CT) is the second-largest contributor to the tax gap, accounting for 30% (£10.6 billion). These figures underscore the significant financial implications of individual and corporate tax discrepancies.

VAT Gap and Trends

An intriguing trend arises when considering the Value Added Tax (VAT) gap. Over the years, the gap has steadily declined, dropping from 14.0% (£11.9 billion) in 2005-06 to a significantly lower 5.4% (£7.6 billion) in the 2021-22 tax year. This sustained decrease underscores the effectiveness of HMRC's efforts in tackling VAT evasion and enhancing compliance within this taxation segment.

Behavioural Insights

The report also delves into the behavioural reasons behind the tax gap. Failure to exercise reasonable care tops the list at 30%, emphasising the significance of correct reporting and documentation. At 15%, errors signify the prevalence of unintentional mistakes that can lead to underpayment. Evasion, legal interpretation, and criminal attacks contribute 13%, 12%, and 11%, respectively, while non-payment represents 9% of the reasons behind the tax gap. This multifaceted insight into taxpayer behaviour reveals the spectrum of challenges that HMRC faces in addressing the tax gap.

Global Benchmark: HMRC's Unique Approach

It's worth noting that HMRC stands alone globally in its comprehensive approach to measuring and publishing an annual tax gap. Covering all the taxes, levies, and duties it administers within a single tax year, this unique undertaking provides valuable insights into the intricacies of tax collection. The transparent disclosure of tax gap figures allows policymakers, analysts, and the public to gauge the effectiveness of tax enforcement measures and strategies to narrow the gap.

As the tax gap narrows to an all-time low, the challenges remain considerable. The dichotomy between the reduced percentage and the staggering monetary value of the tax gap highlights the intricate nature of tax compliance and collection. The insights from the HMRC's "Measuring the Tax Gap" report offer a comprehensive overview of the contributing factors, behaviours, and trends that shape this complex landscape. In pursuing a more equitable tax system, these findings will undoubtedly guide policy decisions and strategic initiatives to reduce the tax gap in the coming years.

Using the cash basis scheme

01 Mar, 2024
The cash basis scheme offers a streamlined financial management approach, particularly beneficial for sole traders and unincorporated businesses. However, it is important to note that this scheme is not applicable to limited companies and limited liability partnerships. The primary advantage of the cash basis is its simplicity in recording income and expenditure, catering to businesses with straightforward financial structures, particularly those offering services. For businesses contemplating the cash basis scheme, it is imperative to assess suitability. The scheme may not be the optimal choice if your business falls into any of the following categories: You intend to claim interest or bank charges exceeding £500 as an expense. Your business involves complexities, such as high levels of stock. Finance is required, as banks may request traditional accounts to assess the business's financial standing before approving a loan. There are losses that the owner wishes to offset against other taxable income (utilizing 'sideways loss relief'). The cash basis scheme is most suitable for uncomplicated businesses, particularly service-oriented ones. To qualify, businesses must have a turnover of £150,000 or less, and they can continue using the scheme until their turnover reaches £300,000. Earlier this year, HMRC initiated a consultation to explore potential extensions to the scheme. The consultation, which concluded on June 7, delved into various concepts, including raising turnover thresholds for cash basis eligibility and considering the cash basis as the default method, allowing an opt-out for accruals. Further details arising from the consultation will be published in due course.

What is an SA302 form?

16 Feb, 2024
The SA302 form, obtainable from HMRC, serves as a substantiating document validating one's earnings. Widely utilized for self-employed individuals, the SA302 tax calculation and tax year overview documents have become pivotal evidence of income for loan or mortgage applications, aligning with the heightened need for verifiable income in adherence to mortgage regulations. Covering the last four years of Self-Assessment Tax Returns, the SA302 delineates the breakdown of income declared in the taxpayer's tax return, encompassing commercial variations. Simultaneously, the tax year overview attests to the tax liabilities stemming from the submitted return to HMRC, detailing payments made and cross-referencing the Tax Calculation with official HMRC records. Self-assessment taxpayers can leverage HMRC's online service to requisition an SA302 tax calculation for the preceding four tax years. Post the online tax return submission, a 72-hour processing period precedes the availability of printable documents. Alternatively, those utilizing commercial software, either individually or through an accountant, can access their proof of earnings seamlessly.  Most lenders accept SA302 forms printed from online accounts or generated via the commercial software facilitating return submissions. HMRC, in collaboration with the Council of Mortgage Lenders and their affiliates, has actively expanded the pool of lenders embracing self-serve copies, streamlining the validation process for borrowers.

What is the Annual Investment Allowance

01 Feb, 2024
The Annual Investment Allowance (AIA) is a tax relief mechanism that enables businesses to deduct the entire qualifying expenditure on plant and machinery from their pre-tax profits. Eligibility for the AIA extends to individuals, partnerships, or companies engaged in a trade, profession, or vocation, as well as those involved in a UK non-residential property business, or a furnished holiday let. It is noteworthy that only partnerships or trusts with a diverse mix of individuals and companies within their business structure do not qualify for AIA. As of April 1, 2023, a substantial and enduring adjustment increased the AIA from £200,000 to £1 million. The transitional rules that were previously in effect for chargeable periods spanning April 1, 2023, have been eliminated, as they are no longer deemed necessary. The AIA encompasses a broad spectrum of assets acquired by a business, including but not limited to machines and tools, vans, lorries, diggers, office equipment, building fixtures, and computers. However, it's important to note that the AIA does not apply to expenditures related to cars.  To benefit from the AIA, a claim must be submitted within the period in which the item was purchased. This period is defined as either the date when a contract is signed (if payment is due within 4 months of signing) or the actual payment date (if payment is due more than 4 months later).
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