In figures published last month, the measure of the UK ‘Tax Gap’ for 2010–11 showed a fall at 6.7% of tax due, compared to 7.1% in 2009/10. However, the quantum of the Tax Gap rose to £32 billion overall. But how are the figures calculated and what exactly do they mean?

The overall tax gap is an official government statistic and is defined as the difference between tax collected and the tax that should be collected (the theoretical liability). The theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and the spirit of the law (HMRC's interpretation of the intention of Parliament in setting law).

Therefore the tax gap estimate is net of HMRC's compliance activities. But it also includes tax lost through non-payment in addition to use of avoidance schemes, interpretation of the tax effect of complex transactions, error, failure to take reasonable care, evasion, the hidden economy and organised criminal attacks.

The latest figures are estimated to be £32 billion in 2010–11 comparing to the revised tax gap for 2009–10 of £31 billion, with the increase mainly due to increases in the VAT rate from 15% to 17.5% in January 2010 and to 20% in January 2011. Overall the figures reflect a collection rate of 93.3% of all taxes due and administered by HMRC.

HMRC stress that the figures for the gap estimates shown in the report are subject to error due to sampling and systematic errors and assumptions used to derive the estimates.

The largest component of the 2010–11 Tax Gap comes from Income Tax, NICs and Capital Gains Tax which accounts for 45%. Nearly half of the 2010–11 figure is attributed to small and medium-sized businesses, and around 25% from large businesses.

Perhaps what is most interesting about the report is what it does not say. The remit of the report was not to try and explain the reasons for the size of the gap. Thus it has been left to interested parties to draw their own conclusions.

The slight fall in the gap to 6.7% of tax due may be some evidence that the avoidance and evasion activity HMRC have been very focused on over the last few years is starting to bear fruit. The Department is targeted with collecting an additional £7 billion through initiatives to tackle tax avoidance, evasion and fraud by the end of the current Parliament.

This is on foot of various campaigns and disclosure opportunities targeting specific groups and with a programme of taskforces to tackle evasion in specific, high-risk regions and/or sectors. The approach taken to large business is to improve compliance through close monitoring, identifying high risk areas of non-compliance – mainly involving tax avoidance activity and disputes over how tax law applies to complex transactions – and assembling dedicated task forces to tackle the most serious cases.

The figures for 2011–12 will be very interesting – with continued economic difficulties, the ordinary man on the street is very interested in those who aren't seen to pay their ‘tax way’. This year the subject of tax avoidance by ‘big business’ and celebrities has scarce been out of the media.