Research and analysis

Tax Gap Analysis for Direct Taxes (2008)

Provisional estimates of the UK direct taxes gap and a discussion of the methods used to arrive at these

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HM Revenue and Customs Working Paper 5b: Tax Gap Analysis for Direct Taxes

This paper provides provisional estimates of the UK direct taxes gap and discusses the methods used to arrive at these. This is the first paper of this type produced by UK direct tax authorities and will be revised as new information becomes available.

The primary reason for attempting to quantify the tax gap is to inform policy and to help the formulation of strategies to reduce the tax gap. This approach accords with the OECD view that “The prime reasons for measuring compliance are first to identify areas and levels of non-compliance and secondly to evaluate the effectiveness of strategies used to address the identified areas of non-compliance.”

This analysis has been undertaken in that spirit and provides a tool for assessing areas, types and levels of non-compliance within the UK direct tax system.

Key terms relating to “tax gap” analysis

In broad terms the tax gap is the difference between the theoretical liability arising from a given level of economic activity and the amount of tax actually collected. The theoretical liability is the amount due to the Exchequer assuming all individuals and companies complied with the letter and spirit of the law.