The Tax Gap

There is a famous saying about lies and statistics which is often quoted when anyone doesn’t want to believe the statistics they are being presented with. Indeed, it is true that how you present statistics is as important as the statistics themselves. A recent science experiment on the television presented participants with two plates of bacon sandwiches. One was labelled words to the effect that “eating these will increase your risk of cancer by 20%”; the other label said that “eating these will increase your risk of cancer from 5-6%”. Both labels actually said the same thing. The background incidence for the particular type of cancer was 5 in every 100 or 5%. Eating a lot of processed meat gave an increased risk up to 6 in every 100, or 6%. So eating the bacon did raise the risk from 5% to 6% which was a 20% increase. Guess which plate of sandwiches went first?

Those analysing HMRC’s announcement on the tax gap recently may have had cause to wonder about the use of statistics and how much of the tax gap was fact ad how much extrapolation. In essence, the tax gap is the difference between how much the Revenue expects to collect and how much it manages to collect. Figures for the year 2009-10 show a drop of some £4billion over the previous year to £35billion, or 7.9% of liabilities.

Whilst the gap undoubtedly exists and is partly due to tax evaders, the fact that a large chunk of the reduction, £3.2billion, has been attributed to the fall in VAT from 17.5% to 15% does give rise to some concern on just how accurate are the extrapolations from nationally collated figures. Nevertheless, the figures make interesting reading, when compared on a like for like basis with previous estimates. HMRC attributes almost 50% of the gap to SMEs, around a quarter to larger businesses with the remainder being split between individuals (11%) and criminal activity (17%). It is easy to see therefore why HMRC have been placing such an emphasis on SME activity in the past year.

As tax mitigation specialists Newshams are able to give advice on how tax may affect any private or business transaction and how to put in place an effective mitigation strategy.

Contact us now on 020 7470 8820 and ask to speak to a tax adviser about how we can reduce your tax costs or e-mail us at and we’ll get straight back to you.
28 September 2011

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