In 2023 and 2024, the Government announced additional resources to tackle the UK’s tax gap.

In April 2024, the Labour party stated an ambition to invest further in reducing it (PDF).

Ahead of the newest figures on the tax gap being published in June 2024, this Insight explains what the tax gap is and the challenges with estimating it and addressing it.

How does HMRC define the tax gap?

HM Revenue and Customs (HMRC) describes the tax gap as the difference between the amount of tax that should be paid in theory and what is actually paid.

Therefore, ‘reducing the tax gap’ means ensuring that more tax that should be paid is actually paid.

The behaviours that contribute to the tax gap

The tax gap is not simply the result of intentional tax evasion or avoidance. According to HMRC, there are eight ‘behaviours’ that drive the tax gap. HMRC estimates the impact of each of the eight behaviours on the tax gap; the table below shows this breakdown for 2021/22.

This graph shows the breakdown of the tax gap according to taxpayer behaviour. It shows that the behaviour that contributes the most to the tax gap is estimated to be ‘failure to take reasonable care’, which accounts for 30% of the tax gap. This is followed by error (15%) and evasion (13%).
Source: HMRC, 7. Tax gaps: Illustrative tax gap by behaviour, GOV.UK, 22 June 2023

The chart shows that inadvertent activities (whether negligent or not) make up 45% of the tax gap. Together, evasion and avoidance are estimated to represent 17% of the tax gap.

How much is the tax gap worth?

HMRC publishes its estimate of the tax gap each year. The most recent estimate was for 2023, relating to the 2021/22 tax year. In that year, HMRC estimated the tax gap to be £35.8 billion, or 4.8% of “theoretical tax liabilities”.

As such, HMRC estimates it collected 95.2% of theoretical tax liabilities in 2021/22. This is equivalent to over £703 billion.

There is inherent uncertainty on these figures. This is partly due to the experimental nature of some of the methods used. To improve the certainty of its analysis, HMRC has improved its methodology to measure the tax gap.

How certain are HMRC’s estimates of the tax gap?

The National Audit Office (NAO) has pointed out there are inherent challenges to accurately measuring the tax gap (PDF), because a lot of estimates have to be made about activities that are deliberately concealed from HMRC.

HMRC also has to use experimental methods, which lead to a larger degree of uncertainty. The NAO concludes that (PDF) “the true total tax gap figure is therefore unknown.” Despite the inherent uncertainty, HMRC’s methodology to estimate the tax gap has been widely commended. The Office for Statistics Regulation has praised HMRC’s approach, and the International Monetary Fund said HMRC produced “one of the most comprehensive studies of the tax gap available internationally.”

Additionally, the level of tax gap in an individual year is subject to change, sometimes significantly. This is because, when estimating the tax gap, HMRC reviews its figures from previous years with refined or new methodologies, which sometimes can change previous estimates. This adds another layer of uncertainty about tax gap figures for the most recent years.

How has the tax gap changed over time?

The chart below shows tax gap estimates back to 2005/06, both in percentage and cash terms.

This graph shows the tax gap as a percentage of theoretical tax liabilities, between 2005/06 and 2021/22. The data is described in the text below.
Source: HMRC, Tax gaps: Summary, GOV.UK, 22 June 2023

There has been an overall decline in the tax gap, from 7.5% in 2005/06, to 4.8% in 2021/22.

Does HMRC have a target for the tax gap?

No. HMRC has said that the tax gap cannot be used (PDF) to accurately measure performance as it cannot be measured in a timely way, its estimates are not accurate enough, and data can change over time.

Additionally, in a report on the tax gap, the Public Accounts Committee said that HMRC was “not sufficiently clear about levels of uncertainty when publicising the tax gap” (PDF), and suggested HMRC should report a range in potential values of the tax gap, rather than a single figure.

In response, HMRC began publishing ranges (PDF) for parts of the tax gap where it was possible. For estimates based on experimental methods, estimating ranges is not possible.

How does the tax gap relate to the ‘compliance yield’?

The tax gap is the amount of money theoretically owed to HMRC that has not been collected, after the ‘compliance yield’ is included. The compliance yield is the amount of tax which would have been lost without HMRC work to ensure tax owed is collected.

In contrast to its approach to the tax gap, HMRC sets a monetary target of how much it should regain in compliance yield each year. This is because the compliance yield is directly attributable to HMRC activity.

Although they are related, the tax gap and the compliance yield are not directly correlated. The tax gap may reduce due to factors outside of HMRC’s control (PDF), such as demographic changes in the taxpaying population.

How does HMRC use the tax gap figures?

HMRC’s strategic direction is partly informed by tax gap figures and, more importantly, trends. For example, in its 2022/23 annual report (PDF), HMRC said that it would be improving their systems to ensure customers paid the right tax immediately since “a substantial portion of the UK’s tax gap is caused by taxpayer error or failure to take reasonable care”.

HMRC has also stated that its digital strategy, called ‘Making Tax Digital’ (MTD), will help reduce the tax gap, for example, by making it “easier for individuals and businesses to get their tax right”. HMRC has published research showing that the strategy was already helping to reduce the tax gap.

Further information

HMRC publishes detailed information about the tax gap on a dedicated webpage. It includes breakdowns by type of tax, behaviours, and types of taxpayer, as well as additional detail about its methodology.

Francesco Masala: Francesco Masala is a researcher in the Business and Transport Section of the House of Commons Library. He specialises in taxation policy.

Photo by:  (© By Howard

Corrections and clarifications

This Insight was updated on 31 May 2024 to correct an error in the teaser text. The tax gap is estimated to be £35.8 billion, not £35.8 million.