Last month HMRC published ‘Measuring tax gaps: 2021 edition’, which provides information on the 2019/20 tax gap – the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid. 2019/20 was the first year of Making Tax Digital (“MTD”) for VAT, which according to HMRC should reduce VAT errors. One would therefore expect to see a reduction in the VAT tax gap in 2019/20. However, the VAT gap has increased from 7 percent in 2018/2019 to 8.4 percent in 2019/2020.

It is questionable therefore if MTD for VAT is achieving its objective and this also calls into question the Government’s plans to further extend MTD for VAT in April 2022 as this is premised on MTD leading to a reduction in errors made. The Government’s recent decision to delay MTD for income tax self-assessment is therefore the right one in the context of both the tax gap data and the pressure on businesses as a result of the pandemic.

According to the report, the overall tax gap is estimated at 5.3 percent, or £35 billion in cash terms, an increase from 5.0 percent (£33 billion) in 2018/19.

Overall, there is a long-term downward trend in the tax gap, falling from 7.5 percent in 2005/06, though between 2016/17 and 2019/20 the overall percentage tax gap has remained relatively stable.

Any impact of the COVID-19 lockdown and economic downturn on the tax gap is likely to be seen in the tax year 2020/21 in ‘Measuring tax gaps 2022’ edition. In ‘Measuring tax gaps 2021’ there is no material impact.