Sabiha Chakera, Course Leader for Accounting and Finance, discusses the difference between the amount of tax that should be paid to HMRC, and what is actually paid.
Date: 21 September 2021
Amidst the unprecedented levels of government spending as a result of the pandemic, collection of tax receipts is vital.
HMRC estimates that in 2019-20 the tax gap (the difference between tax that should in theory be paid to HMRC, and the amount of tax that has actually been paid) was in the region of 35 billion, or 5.3% of tax liabilities.
It is impossible to collect every penny of tax. The most significant areas of the tax gap are thought to be income tax, National Insurance and capital gains tax, followed by VAT. There are various reasons for the gaps arising, from simple errors to tax evasion. It's not likely that the HMRC will adopt a significantly different approach to its tax collection and compliance checks to reduce the current tax gap compared to previous years.
HMRC will charge penalties on underpaid tax - the level penalties will be dependent on the reasons for the underpayment, with persistent careless mistakes attracting higher penalties. Some of the obvious measures to take are to make sure that the basic recording of accounting data is as error free and as accurate as possible so that the resultant tax returns and tax liability is correct.
Business owners should be aware of VAT registration thresholds (the point at which businesses must register for VAT). For capital gains tax, any gains in excess of the annual exemption - currently £12,300 - have to be reported on an individuals' tax return. There are of course many other considerations before submitting tax returns and businesses would need to consult their financial and tax advisors to ensure the correct tax is paid.