The tax gap – the difference between what should be paid in theory and the amount actually received – has narrowed to the lowest rate on record, according to HM Revenue and Customs (HMRC).
There has been a long-term downward trend in the tax gap, falling from 7.5% in 2005/06 to 4.7% in 2018/19, its lowest recorded rate, the revenue body said.
It means that more than 95% of the tax due was paid in 2018/19.
In cash terms, the tax gap is estimated to be £31 billion.
HMRC collected £628 billion in tax revenue in 2018/19.
The tax gap arises for several reasons. Some taxpayers make errors in calculating the tax they owe, while tax evasion and criminal behaviour also plays a part.
HMRC said it would be impossible to collect every penny owed – for example, it cannot collect outstanding tax from businesses that become insolvent.
For the first time, a tax gap for wealthy taxpayers was also included in the report. The total wealthy tax gap stands at £1.7 billion.
A wealthy customer is defined as someone with an income of more than £200,000 or assets of over £2 million.
In 2018/19, over 40% of the tax gap was attributed to small businesses.
HMRC said any impact of Covid-19 on the tax gap is likely to be first seen in the tax year 2020/21.
Jesse Norman, financial secretary to the Treasury said: “At 4.7%, the 2018/19 tax gap is the lowest on record. The coronavirus pandemic has highlighted the importance of everyone playing their part and paying the tax that is due.
“Having a secure and comprehensive tax base is what allows the Government to pay for public services, but also to provide financial support in a crisis, at a time when it is most needed.”
HMRC’s chief executive Jim Harra said: “More than 95% of the tax due was paid in 2018/19. HMRC’s aim is for everyone to pay the tax that is due, no matter who they are.
“Our role is increasingly about making it straightforward for taxpayers to get it right, first time, while also tackling the minority who deliberately set out to cheat the system. I’m pleased that we’re now able to share more information about who pays what.”
Dawn Register, a partner in tax dispute resolution at BDO, said of the tax gap: “This could be a crucial ‘Covid-19 fighting fund’ to help raise tax revenues, without the need to actually increase tax rates.
“Given the summer economic update on July 8, it is clear that Government strategy right now is to stimulate the economy rather than burden individuals and businesses with increased taxes.
“We expect HMRC to use this data to focus its resources and efforts on raising coffers for the Treasury.”
She said tax evasion and criminal behaviour is likely to be a key area of focus.
Here is how the £31 billion tax gap adds up, according to HMRC figures:
– Small businesses, £13.4 billion
– Large businesses, £5.3 billion
– Criminals, £4.5 billion
– Medium-sized businesses, £3.7 billion
– Individuals, £2.4 billion
– The wealthy, £1.7 billion