The UK’s tax gap has risen to an estimated £35bn, according to the latest figures from HMRC.
This is the difference between the amount of tax that HMRC was expecting to be paid, and the amount that was actually paid in 2019-20. It’s up from the estimated £33bn tax gap in 2018-19.
The biggest share of this missing tax – around £12.6bn – is from income tax, National Insurance contributions and capital gains tax (CGT).
While there are several reasons individuals or companies might not pay enough tax – including criminal tax evasion schemes and avoidance – the most common reason is failing to take reasonable care when reporting your finance figures. It’s estimated that £6.7bn of the tax gap is down to this – and HMRC can charge penalties to anyone it thinks hasn’t taken enough care over their tax return.
Here, Which? explains why the tax gap exists, and how to avoid becoming part of it through human error.
Why is the tax gap important?
While calculating the tax gap cannot reach an exact figure – due to the nature of some people lying about how much they earn, money circulating as part of the shadow economy and criminal activities – the general trend can suggest how effective the current tax rules are.
The slight rise in ‘missing tax’ between 2018-19 and 2019-20 is significant, as before this the tax gap had been consistently in decline since 2013-14. Back then, the tax gap accounted for 7.1% of tax liabilities, whereas in 2019-20 it was 5.3%.
HMRC’s assessment of the tax gap can inform future policies, which will aim to reduce it further.
Reducing the tax gap was one of the driving forces behind the Making Tax Digital initiative, which involves some individuals and businesses having to report their tax liabilities online using certain types of accounting software.
This is in the process of being fully rolled out for VAT reporting, with all registered businesses required to sign up by April 2022.
Making Tax Digital was also due to go live for income tax in April 2023, but it’s recently been announced that this has been delayed until April 2024.
Penalties for not taking care over your tax return
HMRC has a system of penalties it may charge if you make a mistake on your tax return – depending how big the mistake is, and whether it thinks the mistake was made on purpose.
These judgements should take into account each taxpayer’s knowledge, abilities and circumstances – so, in theory, an accountant making a mistake on their own tax return may be judged more harshly than someone who is less likely to know the ins and outs of the tax rules.
If you’ve taken ‘reasonable care’ to fill in your tax return correctly, you won’t be charged a penalty. This may apply if you’ve only made one or two minor errors. If the error meant you didn’t pay as much tax as you should have done, you’ll still have to repay it.
If you’re deemed to have been careless, you may be charged between 0% to 30% of the extra tax you owe as a result of the mistake, in addition to paying back the missing tax.
If HMRC thinks you’ve deliberately underestimated the amount of tax you owe, you’ll be charged 20-70% of the tax owing.
If you’re deemed to have deliberately underestimated the tax you owe, and have attempted to conceal this fact, you could be charged between 70% and 100% of the extra tax owing.
- Find out more: late tax returns and penalties for mistakes
HMRC investigations into previous years
HMRC has the right to investigate anyone’s tax liabilities several years after submitting the tax return if it believes there’s been an error.
You must keep your records for at least five years from 31 January following the relevant tax year. So, after you file your 2020-21 tax return, this means you’d have to keep your records until at least 31 January 2027 – failure to do so could mean you’re issued with a £3,000 fine.
You may decide to hold onto your documents for even longer, as the tax authority can begin investigations up to 20 years after the tax return has been filed if it suspects fraud.
If you own a limited company, you’ll need to keep things like financial and accounting records, details of directors, shareholders and company secretaries, as well as records of your personal income.
If you’re a sole trader or a partner in a business partnership, you’ll need to keep records of your business income and expenses, such as sales and income, PAYE records, VAT records and business expenses.
Proof of these things can include receipts, bank statements and sales invoices.
There are no specific rules on how your records should be kept, but HMRC can issue a fine if they aren’t accurate, complete and readable.
- Find out more: how to keep your records
Avoid mistakes and file early
Careless mistakes are always more likely to happen if you’re racing to get your tax return finished before the deadline.
To avoid this, it’s a good idea to submit your return as early as possible; as P60 documents for the 2020-21 tax year have already been issued, many people will have all of the information they need to file their 2020-21 tax returns.
You could consider using an online tool to file, like the Which? tax calculator. It can tot up your tax bill, suggest expenses and allowances you may have forgotten – and it’s completely jargon-free.
When you’re done, the calculator can also submit your tax return directly to HMRC.
- Find out more: Which? tax calculator