IFS analysis of HMRC self-assessment data shows 1 in 3 returns under-report tax owed either in error or on purpose rising to 2 in 3 self-employed
The IFS found that most underpayments involve less than £1,000.
Bed and breakfast owners and taxi drivers are the British workers most likely to underpay their taxes when filing self-assessments, a new analysis shows.
More than half of taxpayers in the construction, hospitality, and transport industries are found to under-report their income to HM Revenue and Customs, according to a study of official figures by the Institute for Fiscal Studies (IFS).
The analysis comes as HMRC figures show £34bn of tax went unpaid in the UK for the 2015-16 financial year. The tax gap, which estimates the difference between actual receipts and what should, in theory, be collected, stood at 6% of all tax liabilities.
Failure to take reasonable care, or negligence when recording sales, was the biggest behavioural trait contributing to the gap, worth an estimated £6.1bn to the exchequer. However, tax evasion, criminal attacks and unrecorded sales in the hidden economy also made up a significant part of the missing money.
The government said the tax gap was the lowest it had measured on record and one of the slimmest in the world, amid a crackdown on avoidance, evasion and non-compliance. It said if the tax gap had remained at the level of 7.9% recorded in 2005-06, it would stand at £46bn this year.
However, critics have strongly questioned the analysis. The tax gap has always been between £30bn and £35bn in the past decade, which has raised questions over the credibility of the HMRC analysis. Richard Murphy, a tax expert and former adviser to Jeremy Corbyn wrote “The risk is that HMRC is producing data that looks like Soviet-style tractor production statistics. And that helps no one.”
The IFS analysis looks at random audits undertaken by government officials covering tax returns for the years 1999-2009 to find which types of people are more likely to have under-reported taxes. It found that more than a third of self-assessment taxpayers have some under-reporting, rising to almost 60% among the self-employed.
Most under-payments are less than £1,000. However, a small minority of taxpayers owe more than £10,000 and account for nearly half of the missing tax revenue from self-assessment. It also found men are more likely to under-report than women.
There has been a boom in the number of self-employed workers in the UK in recent years, standing at 4.9 million – or 15.1% of all people in work – in August. That was up from 3.8 million in 2008.
However, the payment of tax by the self-employed has helped to boost Treasury last year, helping to cut the deficit this year with a jump in receipts.
Although the IFS cautioned that the figures may highlight genuine mistakes by taxpayers, it said random self-assessment was shown to recover an initial £830 for HMRC on average. An additional £1,230 is shown raised in the following five years because taxpayers’ change their reporting behaviour.
Arun Advani, a professor at the University of Warwick and a research fellow at the IFS, said: “Between errors and deliberate under-reporting, a significant share of self-assessment tax goes unpaid.”
The government said it had introduced 75 measures over the past seven years to reduce tax avoidance, evasion and non-compliance, such as taking steps to ensure multinational companies pay the right amount under UK law.
Mel Stride, financial secretary to the Treasury, said: “Today’s data shows how far we have come in tackling avoidance, evasion and non-compliance, but there is still more to do and we will continue to take action to ensure that everyone pays the tax they owe.”
Drivers Tax App comment:
Make accounting and tax filing a problem solved this year. If you are not already, then you must become tax compliant now. Have a look at www.thedriverstaxapp.comit’s been designed to make accounting and tax filing really easy and affordable.