Tax gap revised up to more than £46 billion

The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid. Today’s HMRC report looks at the estimated tax gap in 2023-24, but also revises some figures for earlier years.

The report puts the tax gap at an estimated £46.8 billion, which is 5.3 per cent of tax liabilities. This is the highest the tax gap has ever been in cash terms – but as a percentage of the total theoretical liability it represents a fall (from 5.6% to 5.3%) though it was also at this level in 2020-21 and was at 5.1% in 2017-18 and 2018-19.

CIOT’s observations and comments on the tax gap figures follow.

The tax gap is bigger than we thought

Last year’s figures estimated the total tax gap for the most recent year (then 2022-23) was £39.8 billion, 4.8% of tax liabilities. This was a record high in cash terms, up from an estimated £38.1bn in the previous year (2021-22). However revisions published today further increase the total tax gap for 2022-23 to £46.4billion. The estimate for the latest year now available, 2023-24, is slightly higher at £46.8 billion. Previous years’ estimates have also been revised up though not by as much as that for 2022-23.

CIOT Director of Public policy Ellen Milner commented: “There are once again some huge revisions in these numbers. This is the second year in a row in which we’ve been told that the tax gap for previous years was significantly bigger than was previously thought. HMRC deserve credit for continuing to strive to improve their data, but this does mean that we shouldn’t focus on these latest numbers too closely. We should pay more attention to trends than to individual year changes.”

The tax gap has been fairly steady since about 2015

The best way of measuring the tax gap is as a percentage of the theoretical tax liability rather than as a cash figure. This is because inflation pushes the tax take – theoretical and actual – up every year in cash terms and it will often be affected by tax increases or cuts too. On this basis the tax gap has been on a gradual downward trend since 2013-14 when it was 6.9% of the theoretical liability. It fell to 5.8% in 2015-16 and has been moving around the range 5.1%-5.8% ever since, currently at 5.3%.

Ellen Milner commented: “These figures show the stubbornness of the tax gap and how optimistic the government’s target of a £7.5 billion reduction by 2029-30 is.”

Most of the tax gap is small business

Small businesses comprise the largest component of the overall tax gap by customer group at a 60% share in 2023-24 (£28.0 billion), up from 56% in 2022-23 and 48% in 2019-20. Within this the corporation tax element of the small business tax gap now stands at an estimated £14.7 billion, a massive 36.7% of total theoretical liabilities. This contributes to the overall corporation tax gap increasing from 6.4% in 2011-12 (£3.0 billion) to 15.8% in 2023-24 (£18.6 billion).

Ellen Milner commented: “While large businesses and wealthy individuals are often accused of not paying enough tax these figures suggest that their total share of the tax gap is not much more than a quarter of that of small businesses. The small business figures reflect big upward revisions from HMRC a year ago as a result of a random enquiry programme carried out in 2020-21, which identified greater inaccuracy and non-compliance than previously forecast. We would welcome HMRC publishing, or otherwise sharing with certain stakeholders on a trusted basis, more granular data on the tax gap to help identify where the problems lie and how best to tackle the tax gap.”

Very little of the tax gap is avoidance

Amid an overall picture of previous figures being revised upwards, avoidance bucks the trend by being revised down. 2019-20 through to 2022-23 have all been revised down from 0.2% to 0.1% of total theoretical tax liability being lost to avoidance and the share remains at this record low in 2023-24. The cash figures show that this is not a rounding error with the previous estimate that about £1.5 billion a year was being lost in avoidance being revised down to around £0.7 billion. It is unclear what has prompted this revision. Possibly some activity previously classified as avoidance has been reclassified as another category such as ‘legal interpretation’.

Ellen Milner commented: “Tackling avoidance is the big success story of efforts to tackle the tax gap. Back in 2005 we lost £11 in every £1,000 to avoidance. Now it is just £1. The profile of tax avoidance in political and public debate belies the fact that it remains a relatively small part of the tax gap.”

These figures don’t show the impact of anything the current government is doing

The latest tax gap figures are for the year 2023-24, which ended before the current government was elected. The new government has announced plans to reduce the tax gap including hiring more HMRC compliance and debt management staff, which it estimates will bring in an extra £7.5 billion by 2029-30.

Ellen Milner commented: “The government has made tackling the tax gap a priority and will be judged on their success in doing so, but we are unlikely to see the results of their efforts for at least another two or three years, due to the time lag on turning investment into results. New staff need to be suitably trained and competent.”

Nearly half of the tax gap is due to taxpayer mistakes

The new figures put tax lost due to taxpayers’ failure to take reasonable care in 2023-24 at £14.6 billion (1.7% of total theoretical liability) and tax lost due to taxpayer error at £7.1 billion (0.8%). Both have been fairly steady as a share of theoretical liability over the last five years following previous increases. Together they now total more than 46% of the tax gap.

Ellen Milner commented: “These continuing high findings illustrate the impact of our overly complex tax system. Almost half of the tax gap relates to taxpayers not getting things right through what HMRC categorise as error or a failure to take reasonable care.

“Making Tax Digital (MTD) for VAT came in in 2019. The government’s press release suggests they think it is reducing the amount lost to error and carelessness by £0.4 billion a year, suggesting they think these numbers would be even higher without it. It is hard to discern whether that is correct from today’s published figures, though it is fair to point out that the ‘VAT gap’ has continued a long-term trend downwards during this period. The introduction of MTD for income tax next year is a key part of the government’s strategy in this area, but there remain several policy and implementation aspects to be worked through and it is currently unclear whether it will have the impact they hope on taxpayer record-keeping.

“We remain concerned that HMRC’s own customer service may be having an impact, too. The difficulties being faced by taxpayers and their agents in getting clarity and timely service from HMRC could be leading to increased losses of tax from those who want to be compliant, but are unable to get the support they need. It emphasises the importance of improving service levels on helplines and dealing with correspondence, as well as providing and publicising accessible, clear guidance.”

Note: The tax gap figures are published at Measuring tax gaps 2025 edition: tax gap estimates for 2023 to 2024 - GOV.UK