On 20 June 2024 HMRC published details of the UK’s tax gap for 2022/23. The tax gap is a measure of the difference between the amount of tax that should have been collected by HMRC, and the amount that was actually paid. The tax that should be collected is the total tax revenue due if all taxpayers comply with the tax law and follow HMRC’s interpretation of the intention of the law.

The tax gap for 2022/23 is estimated at GBP 39.8 billion, amounting to 4.8% of the total theoretical tax liabilities. Although the percentage is the same as last year, there has been a long-term reduction in the tax gap as a proportion of theoretical tax liabilities that could be collected, decreasing from 7.4% in 2005/2006 to 4.8% in 2022/2023.

Of the total tax gap, the tax lost in relation to income tax, national insurance contributions and capital gains tax amounted to 3% in the year and the value added tax (VAT) gap amounted to 4.9%. The corporation tax gap was 13.9% and the excise duty gap was 4.7%.

Taxpayer behaviour

In 2022/23, failure to take reasonable care accounted for 30% of the tax gap. Error and evasion were the second and third largest reasons for the tax gap, accounting for 15% and 14% respectively of the overall tax gap in 2022/23. The proportion of the tax gap due to criminal attacks reduced from 13% in 2019/20 to 9% in 2022/23.

The proportion of the tax gap caused by differences in legal interpretation was reduced to 10% in 2022/23; and the proportion of the tax gap due to non-payment increased was 13% in the year. Tax lost due to the hidden economy was 5% of the tax gap and tax avoidance accounted for 4%.

Tax gap analysed by taxpayer category

The data is also analysed by categories of taxpayers. The tax gap from small businesses accounted for 60% of the total tax gap in the year. The tax gap from high net wealth individuals and for other individuals was a lower proportion of the total tax gap in the year, at 5% for each of those groups.

Use of percentages

HMRC considers that the percentage tax gap provides a better measure of tax compliance over time, rather than using the cash figures for amounts of tax lost. The use of the percentage tax gap can take into account the effects of inflation, economic growth and changes to tax rates, and comparisons over time are therefore more accurate.

Methodology

The calculations of the tax gap estimates use internal and external data as well as a range of analytical techniques. As more accurate data is obtained, the estimates are updated. There are various sources of uncertainty and potential errors in the computation of the tax gap. HMRC therefore considers that the most important consideration in interpreting the data is the trend in the statistics rather than the absolute numbers. Where possible, the tax gap statistics show error margins or upper and lower limits.

The tax gap is mainly calculated using either top-down or bottom-up methodologies. The top-down approach looks at external data on consumption to arrive at an estimate of the tax base. The tax base is then used to calculate a theoretical amount of tax that should be paid, and this is compared to the actual amount of tax paid. The top-down approach is relied on in calculating the VAT gap.

The bottom-up approach looks at internal data and operational knowledge to compute the potential tax loss. Various methods and data sources are employed to estimate the tax lost within each area and these are combined to estimate the tax gap.