UK Tax Gap increases

UK tax gap, or the gap between tax due and tax collected, increased 0.2 percent in the fiscal year 2012-13 from the previous year. According to HM Revenue and Customs (HMRC), the tax gap stands at 6.8 percent or £34 billion in FY 2012-13.

The main reason for the higher tax gap is attributed to the gap in VAT collections, which increased to £12.4 billion from £11.4 billion last year. Among the other taxes, the highest gap -- £14.2 billion -- was in income taxes, capital gains tax, and National Insurance. Corporation taxes contributed £3.9 billion and excise duties contributed £2.9 billion to the tax gap. Inheritance tax (£0.3 billion) and stamp duty (£0.2 billion) were the other contributors to UK's tax gap.

Among the reasons of the tax gap, the gap due to tax avoidance reduced to £3.1 billion from £3.4 billion in the last year. Illegal reasons contributing to the tax gap are evasion of taxes (£4.1 billion), criminal activities like fraud or smuggling (£5.4 billion), and the hidden economy (£5.9). Nearly £4.4 billion were lost due to non-payment of taxes.

One of the other reason for the tax gap was human errors by taxpayers. Because of this, some experts fear that people who filed incorrect tax returns may have to face fines. For example, George Bull of Baker Tilly, an accountancy firm, has expressed concern that HMRC may now impose tougher penalties on those who have filed their tax returns incorrectly. If someone made an innocent mistake, the fines could be low, but for those who have hidden their income intentionally may have to pay higher penalties.

On the bright side, the tax gap of 6.8 percent is a major improvement from 8.5 percent in 2005-06. Also, the tax gap in the UK is among the lowest in the world. For instance, Mexico has a tax gap of 25 per cent.