There’s never a good time to lose money. But the last thing the UK can afford right now is a bigger tax gap.

What’s the tax gap?

The tax gap is the different between the amount of tax HMRC expect to come into the Treasury and the amount they actually collect. They publish an annual ‘snapshot’ of this figure. And for the 2019-20 tax year, it’s not looking good.

The tax gap went up from a 5% shortfall in 2018-19 to a 5.3% shortfall in 2019-20. This is a total loss of £35 billion. In one year.

Where has this money gone?

For the 2019-20 tax year, HMRC received 95% of the expected tax take. This totals just over £633.4 billion.

Where the missing money has gone:

  • Failure to take reasonable care: £6.7 billion
  • Tax avoidance: £1.5 billion
  • Hidden economy: £3 billion
  • Error: £3.7 billion
  • Fraud: £15.2 billion

In the same tax year, the tax gap for wealthy individuals decreased to £1.5 billion. And the Inheritance Tax shortfall also went down to £350 million, from £425 million in the previous tax year.

How does this fit into the country’s overall financial situation?

The budget deficit is another important figure in our national finances. It’s the difference between the country’s spending and income.

For the 2020-21 financial year, the budget deficit is £298 billion. Without context, the significance of this can’t really be appreciated. So, basically this is double our budget deficit after the 2008 global financial crisis.

Of course, this isn’t a surprise to anyone. The fiscal emergency response to the COVID-19 crisis necessitated public spending. Add in the ramifications of leaving the European Union and we have ourselves quite the economic slump. All of this is totally understandable.

But it means that collecting the full complement of taxes is of paramount importance, going forward.

What’s HMRC doing to resolve this tax gap?

In a positive tone, HMRC’s chief executive, Jim Harra, 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.”

And the government has already announced a whole raft of new policies to raise more taxes. This includes the 1.5% National Insurance increase and ‘tax conditionality’ checks for some workers in the so-called ‘hidden economy’. The aim is to make £36 billion extra tax each year.

Yes, the UK needs more income. The arguments lie in how to make that money. Many people would have preferred to wee some kind of ‘Wealth Tax’, rather than the National Insurance tax rise.

And TaxWatch points out the huge amount of money lost to fraud and question why HMRC aren’t placing more weight on solving those issues. Their executive director, George Turner, told The Guardian: “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.”

It’s clear that closing the tax gap means eradicating the ways in which tax currently disappears. For HMRC, this means finding multiple solutions to a complex array of different problems.