The amount of unpaid UK tax rose by £5 billion to £36 billion for the 2021-2022 tax year, according to new figures from HMRC. This represents a 16% increase on the £31 billion ‘tax gap’ for the previous tax year (2020-2021).

HMRC’s annual Measuring Tax Gaps report estimates the difference between the total amount of tax expected to be paid and the total amount actually paid.

The latest figures reveal the amount of unpaid tax for 2021-2022 was 4.8% of total theoretical tax liabilities – the same as the revised estimate for 2020-2021. The tax gap has remained at 4.8% because estimated tax liabilities rose from £643 billion in 2020-2021 to £739 billion in 2021-2022.

And when it comes to the main behavioural reasons for the tax gap, the report reveals almost a third (30%) of the unpaid tax is down to taxpayers failing to take ‘reasonable care’.

What are the reasons for the unpaid tax?

The 2021-2022 Measuring Tax Gaps report reveals:

  • At 56% (£20.2 billion), small businesses represent the largest proportion of the tax gap by group, followed by criminals, large businesses and mid-sized businesses at 11% each (£4.1 billion, £3.9 billion and £3.8 billion respectively).
  • Wealthy individuals account for 5% (£1.7 billion), while all other individuals account for the remaining 6% (£2.1 billion) of the overall tax gap.
  • Income tax, National Insurance contributions and capital gains tax make up 35% (£12.7 billion) of the total tax gap when measured by type of tax.
  • Corporation tax is now estimated as the second largest component of the tax gap by tax type at 30% (£10.6 billion), while VAT represents 21% (£7.6 billion).
  • The main behavioural reasons for the tax gap include: failure to take reasonable care (30%), error (15%), evasion (13%), legal interpretation (12%), criminal attacks (11%) and non-payment (9%).

My thoughts on the tax gap figures

It’s interesting that almost a third (30%) of the tax gap is because taxpayers are failing to take reasonable care. This is different to making an error (15%) or deliberately not paying tax due (13%).

‘Failure to take reasonable care’ is a phrase HMRC uses when taxpayers incorrectly account for things because they don’t fully understand what they’re doing.

This significant chunk of unpaid tax backs up what most people in the tax world already know: tax is complicated and it’s very easy for taxpayers to get things wrong.

And with not all HMRC helplines being available and many people unable to afford formal tax advice, this is a real issue. How does a taxpayer take reasonable care to ensure their tax return entries are correct if they don’t have a professional tax adviser and HMRC guidance isn’t particularly clear?

In an ideal world the answer would be to simplify the tax system. But that’s not happening anytime soon.

So, the next best answer must be education.

It’s astounding that financial skills – such as completing a tax return, how to check a P60, the difference between employed and self-employed – aren’t taught as core topics in schools.

We therefore have a mismatch where HMRC relies on taxpayers to produce accurate information, yet most taxpayers aren’t educated sufficiently in terms of how tax works to do this.

We need to start with the education system. And while tax may not be the most fun topic in the world to teach, it could ensure everyone involved understands the system better.

Background to the report – and HMRC comments

The Measuring Tax Gaps report covers a single tax year for all the taxes, levies and duties HMRC administers, and figures may be revised as more data becomes available.

Jonathan Athow, HMRC’s Director General for Customer Strategy and Tax Design, said: “The tax we collect funds the country’s public services and we want to ensure everyone pays the correct amount. These figures show most taxpayers and businesses pay what they should.

“This important research enables us to better help those making common mistakes or failing to take sufficient care, as well as tackling the minority deliberately hiding their income.”

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Steph Churchill

Stephanie Churchill

Managing director & co-owner of Churchill Taxation