|Date:||26 October 2017|
Today HMRC releases new figures on the tax gap – the share of tax due that wasn't collected, for example because of mistakes or deliberate under-reporting (evasion). Around a fifth of this comes from taxpayers filing income tax self assessment.
New IFS research published today uses data from HMRC’s random audit programme to show which types of people are more likely to be under-reporting taxes and how their behaviour changes after a tax audit. The results are based on data from audits covering tax returns for the years 1999–2009.
The analysis shows that:
Other headline results from our new research include:
There are three things to note about all of the above. First, the figures don’t account for avoidance – by definition this is legal (unlike evasion) and therefore does not lead to extra tax payments after audit. Second, some under-reporting will result from genuine mistakes. Third, audits won’t capture all evasion. For example, it may be very difficult for HMRC to capture the full extent of cash-in-hand working and those who fail to declare any of their income will not be in the audit programme at all. As such, the figures above are likely to underestimate the true tax gap for those filing self-assessment.
Arun Advani, Assistant Professor at the University of Warwick, Research Fellow at the Institute for Fiscal Studies, and author of the study said “Between errors and deliberate under-reporting, a significant share of self-assessment tax goes unpaid. Audits bring in tax directly, but also change taxpayers’ behaviour. Audits work not because they scare people into complying in future years, but because they give HMRC more information about people’s incomes. The change in behaviour actually brings in more than the original audit. HMRC have got better at targeting their audits and spotting under-reporting. But, this didn’t translate into more revenue from audits because they did fewer of them.”
Helen Miller, Associate Director at the Institute for Fiscal Studies said “The self-assessment tax gap is significant. This new research fills in some of the details about where the revenues are being lost. Most revenue is lost to a relatively small proportion of people who evade large amounts of tax. Evasion is highest for the types of income which are easiest to under-report.”
Notes to Editors
Who does and doesn't pay taxes? (IFS Briefing Note BN218), by Arun Advani (IFS and warwick), is available to view on the IFS website.
The research was funded by the Economic and Social Research Council (ESRC) through the Centre for Microeconomic Analysis of Public Policy (CPP) at IFS (grant number ES/M010147/1), the Tax Administration Research Centre (TARC, grant number ES/K005944/1), and a University of Warwick Impact Acceleration Award (grant number ES/M500434/1).
The use of HMRC statistical data in this work does not imply the endorsement of HMRC in relation to the interpretation or analysis of the information.