HMRC have published Measuring Tax Gaps 2014 Edition providing their latest estimates of the tax gap to 2012–13, together with an issue briefing. These show that, using HMRC’s methodology, the gap in 2012–13 was 6.8% of tax liabilities (£33bn), up from last year’s revised estimate of 6.6% (£34bn).

The tax gap is, in general terms, the difference between the tax due (in the case of avoidance, the tax that would have been due if avoidance had not been used) and the tax that HMRC have collected.

The tax gap increased between 2011–12 and 2012–13 by £1 billion which, according to the publication is mainly due to:-

• an increase in the VAT gap of £0.9 billion; and
• an increase in the tobacco tax gap of £0.3 billion.

Due to a large amount of new operational and external data received since the last publication in October 2013, the tax gap in 2011–12 was revised down from £35 billion to £33 billion and the percentage tax gap down from 7% to 6.6%.

Overall, HMRC use the report to understand trends in, the nature of and the relative size of individuals’ and companies’ non- compliance.

Breaking the gap down purely on the basis of behaviour, the highest element comes from the hidden economy (£5.9bn) with the lowest coming from error (£2.9bn). The gap is split between the various elements of the ‘tax-bearing’ population (or not as the case may be) as follows:

• Criminal activity – £5.4bn
• Individuals – £4.6bn
• Large business – £9.3bn
• SMEs – £15.1bn

When looking at how the gap is split between tax heads, the largest element comes from income tax, NICs and capital gains tax at £14.2bn, VAT at £12.4bn and corporation tax at £3.9bn with the remainder coming from other taxes and excise duties.