The UK’s £40bn ‘tax gap’ is a pressing concern.
Both major political parties, Labour and the Conservatives, claim they can bridge this gap.
The Tax Gap: An Overview
The tax gap is essentially the difference between expected tax revenues and actual collections. Currently, the estimate stands at £39.8 billion, which is higher than the entire transport budget by about £10 billion. This figure has raised alarm bells across the political spectrum, especially with upcoming elections.
Labour and Conservative Plans
Both Labour and the Conservatives plan to narrow the tax gap by primarily targeting tax avoidance. Labour has pledged £855 million to HMRC, while the Conservatives also intend to increase resources for the tax office. However, experts question whether these measures will suffice.
Expert Opinions
Stuart Adam, senior economist at the Institute for Fiscal Studies, also shares concerns. He notes that most of the tax gap stems from small businesses and the self-employed rather than large corporations. This is an important distinction that needs to be addressed.
Past Efforts and Digital Filing
Despite these efforts, the tax gap remains high due to recent inflation. Improvements in HMRC’s digital filing system have made tax declaration easier but have not entirely solved the problem.
VAT and Income Tax
Small businesses contribute significantly to the tax gap. Their corporation tax gap stands at 32.2%, compared to 6.7% for mid-sized firms and 2.9% for large companies.
Challenges with Small Businesses
Stephen Relf, tax technical manager at the Institute of Chartered Accountants in England and Wales, believes that simplifying the tax system could help. He suggests that the complexity of the current system leads to mistakes and non-compliance.
Need for Simplification and Support
More officers could improve this performance, making it easier for individuals and businesses to comply with tax regulations.
Fiscal Risks and Public Services
Both Labour and the Conservatives promise to enhance public services or reduce taxes by cracking down on tax avoidance. However, the effectiveness of these promises remains to be seen.
Bridging the UK’s £40bn tax gap is a complex issue.
With both Labour and the Conservatives offering plans, only time will tell if they can achieve their goals.
