Six times more tax lost to illegal activity than avoidance

Tax revenue lost in the UK due to illegal activity is almost six-fold the figure lost through tax avoidance, according to official figures from HM Revenue and Customs (HMRC).

As much as £15.7bn was lost in tax revenue due to illegal activity in 2013-14, compared with £2.7bn through avoidance.

The illegal activity figure consists of £5.1bn from criminal attacks, £4.4bn from tax evasion and £6.2bn from the UK’s ‘hidden economy’.

The Chartered Institute of Taxation (CIoT) commented: “Tax evasion and other illegal activity are costing the Exchequer nearly six times as much as tax avoidance.

“HMRC needs to put more effort into investigating and prosecuting those who seek to evade tax… [and] the government are right to have put extra resources in this direction.”

Tax experts last year criticised the decision to calculate avoidance solely on avoidance ‘disclosed under DOTAS,’ and the CIoT highlighted another omission.

“HMRC’s avoidance figure does not include a lot of what gets described as avoidance in the newspapers, especially in relation to multinational businesses.

“This is because, as HMRC puts it, it ‘is the result not of frustrating UK law but of exploiting the international tax framework’. This is the kind of activity governments are rightly working to tackle internationally.”

As to the activity that HMRC should tackle, the CIoT pinpointed the billions of public funds still being lost thanks to errors and pure carelessness by taxpayers.

John Cullinane, of the CIoT, added: “More than £6bn a year [is being lost to taxpayer errors]. HMRC are still not doing enough in this area.

“There should be a stronger focus on education and making it easier for people to complete their tax returns.

“Additional simplification measures would also help reduce errors as well as making avoidance more difficult.”

According to HMRC, the difference between tax collected and tax which is yet to be collected – known as the tax gap – is approximately £34bn a year; creating a potential tax liability shortfall of 6.4 per cent.

“34 billion is a large amount of tax not to be collecting, but while the headline figure is unchanged it is a slightly lower share of the total tax HMRC think is due,” added Cullinane.

“The figure still compares well to international jurisdictions. The most recent estimate of the tax gap in the United States, for example, puts the tax gap there at more than 14 per cent of total tax liabilities, more than double the percentage share in the UK.”

Date published 29 Oct 2015 | Last updated 29 Oct 2015