What’s a Tax Gap?

August 8th, 2007

There’s been talk recently of a case that the Information Commissioner has taken up against HMRC over the “tax gap”. Seemingly, HMRC are forever going on about how there’s an enormous tax gap and that this is the basis of their anti tax avoidance stance, as well as reason for all manner of other approaches to their “customers”.

So, what is the “Tax Gap”?

It’s simple. You take the economic activity fo the Country and work out what the tax take on that should be. Then you subtract the actual tax receipts, and the difference is the tax gap. It represents the amount of unpaid tax due to the Treasury, but somehow not declared.

The Information Commissioner has taken it upon himself to make HMRC declare the basis of the above calculation. HMRC are reluctant because of issues with the formula still being “tuned”, the effect on the Country if it knew where taxes were paid and where they were not, and so on. The Commissioner is unimpressed and is going to Court.

Why should anyone care? Maybe the Information Commissioner has a point, in that if these broad-brush estimates are being used to determine tax policy (both legislative and in collection terms), then some evidence that the figures can be substantiated might be useful.

Then if there is truly a “tax gap” lets close it for the benefit of all - and if not, then let’s get on with simplifying the tax system (or some other useful occupation).

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