HM Revenue and Customs Working Paper 12: The practicality of a top down approach to the direct tax gap
This Working Paper reassesses the practicality of top down methods of estimating entire direct tax gaps.
The HM Revenue and Customs (HMRC) estimates indirect tax gaps using a top-down method, the difference between theoretical tax liability calculated from the national accounts and tax paid. In contrast direct tax gaps are calculated bottom up, by adding up estimates of all elements of the gap, generally using tax data, such as information from random enquiries, risk registers and data matching.
There are a number of benefits of using top down methods. They give a single estimate, which by definition includes all elements of the tax gap, and are more timely. However, the single estimate gives no information on the constituent elements. HMRC has previously taken the view that top down methods cannot be used to measure entire direct tax gaps, because of the lack of independent data.