Unpaid Tax: The Tax Gap

The Government Claims £35 Billion Annually

HM Revenue and Customs (HMRC) have been making a lot of noise about what they call the UK tax gap – all of the tax which they think is underpaid. They claim it’s £35 billion a year, but I, for one, take issue with this.

The problem with HMRC’s ‘tax gap’ figures is that they include anything which HMRC doesn’t like: they include legal tax avoidance; the tax at stake in cases which they have lost; and the apparent loss arising due to perfectly legitimate interpretations of tax law which don’t happen to be in their favour.

I remember watching a rugby match once which my favourite team lost by a hefty margin. Full of disappointment at my team’s poor performance, I managed to convince myself that, ‘morally’, we had won – we’d scored a try which shouldn’t have been disallowed; the other team had been awarded one which they shouldn’t have had; and we’d missed several easy penalties which we should have got.

I was being ridiculous of course. In a rugby match, the referee is the ultimate authority and how can you count penalties which you think you ‘should’ have got, but which you missed?

The analogy seems obvious. HMRC want to count everything which they think they should be getting but, like a referee, the courts are the ultimate authority and both sides must accept their decisions. To include cases which they have lost and legitimate interpretations of the law which they don’t happen to like in their so-called ‘tax gap’ is every bit as ridiculous as me convincing myself that my team ‘should’ have won.

But what I really dislike about this ‘tax gap’ philosophy is that it’s all one way: they include every conceivable way in which they think tax is underpaid but totally ignore the billions of pounds of tax which is overpaid every year.

HMRC assume that any time a taxpayer makes a mistake, tax is underpaid. Rubbish! By definition, mistakes can go either way and there is every bit as much chance that they are leading to overpayments.

And what about HMRC’s mistakes, of which there are many; what about all the errors in PAYE coding notices which go uncorrected, leaving innocent taxpayers paying too much tax for years; what about all the over-complicated and poorly written pieces of tax legislation which lead to unwarranted additional tax bills for innocent taxpayers carrying out perfectly normal commercial transactions; what about all the tax overpaid by honest taxpayers who simply don’t understand what they’re entitled to claim; what about the excessive enquiry settlements forced upon poorly advised taxpayers by an over-bearing Tax Inspector intent on squeezing as much as possible out of their victim?

In my professional life, I have seen all these factors at play and I know for a fact that there’s another huge tax gap in the UK: all the tax overpaid every year by HMRC’s so-called ‘customers’. If HMRC expect taxpayers to pay their ‘fair share’, why is no-one looking after all the people who are paying too much?