Tax lost in UK due to fraud amounts to £35bn – almost half, say campaigners

UK Tax

The amount of tax lost in Britain through non-payment, avoidance and fraud has increased to £35bn, according to official figures.

HM Revenue and Customs said the tax gap – the difference between the expected income for the exchequer and actual receipts – was estimated to have jumped by about £2bn in the 2019-20 financial year from the period a year earlier.

It said the figure represented a 5.3% shortfall of theoretical tax liabilities due, compared with 5% in 2018-19.

Campaigners said the amount of tax lost to fraud, based on the HMRC figures, was at least £15.2bn, but that billions of pounds more were likely to have been shifted away from the UK to tax havens by multinational companies.

The annual snapshot of tax underpayment comes as the public finances are under the most severe strain since the second world war, as the emergency response to the coronavirus pandemic and the economic slump pushes up government borrowing to record levels.

The government’s budget deficit, the gap between spending and income, surged to £298bn in the financial year to the end of March 2021, the largest postwar shortfall and almost double the deficit incurred due to the 2008 financial crisis.

Boris Johnson’s government has announced £36bn a year of tax-raising measures over the past three months in response to growing pressure on the public finances, in a development that economists expect will lift the UK’s tax take to the highest levels as a percentage of GDP in 70 years.

However, the government has faced criticism for raising national insurance tax on workers, rather than targeting wealthy individuals. George Turner, the executive director of the TaxWatch campaign group, said HMRC’s presentation of the tax gap significantly underplayed the amount of tax lost to fraud. “Our analysis, which puts the tax lost to fraud at least £15bn, demonstrates that fraud is a significant problem in the UK and a much larger problem than many previously understood,” he said.

The latest available analysis for 2019-20, immediately before the pandemic struck, showed HMRC collected 95% of the tax it expected to receive. Officials said failure to “take reasonable care” accounted for a significant chunk of the tax gap at £6.7bn, with avoidance accounting for £1.5bn.

Error is estimated to be the cause of £3.7bn of the gap and £3bn is due to the “hidden economy”, which includes “ghosts” who keep their income secret from tax officials and “moonlighters” who only declare part of their earnings.

HMRC said the tax gap for wealthy individuals fell from £1.6bn to £1.5bn in 2019-20. The shortfall for inheritance tax fell from an estimated £425m to £350m.

HMRC said it recorded an increase in the total revenue paid year on year.
Taxpayers paid more than £633.4bn in 2019-20, an increase of more than £100bn from four years earlier in 2015-16.

Jim Harra, HMRC’s chief executive, said: “It is encouraging to see such a large proportion of businesses and individuals meeting their tax obligations.

“We want to help everyone get their tax right, which will help fund our vital public services like the NHS and emergency services.”

Any impact on the tax gap from the coronavirus lockdowns and economic downturn is likely to be first seen in the 2020-21 figures, which will be released next year, HMRC said.