Official Statistics

Tax gaps: Background

Updated 22 June 2023

What is the tax gap?

The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC (‘theoretical tax liability’), and the amount that is actually paid.

The ‘theoretical tax liability’ is the amount of tax that should, in theory, be paid if all individuals, businesses and companies complied with the letter of the law and HMRC’s interpretation of Parliament’s intention in setting the law (referred to as the ‘spirit’ of the law). The total ‘theoretical tax liability’ is the sum of the tax gap, plus the amount of tax actually received by HMRC.

Tax gaps are calculated net of compliance yield — that is, they reflect the gap remaining after HMRC’s compliance work. More information on the tax gap and compliance yield and how they relate can be found in the Tax gap and compliance yield: technical note and HMRC’s Annual Report and Accounts.

The ‘Methodological annex’ sets out how compliance yield is reflected in estimations for each component of the tax gap.

The tax gap is stated as a proportion of theoretical tax liability and in absolute terms.

Why do we measure a tax gap?

The tax gap provides a useful tool for understanding the relative size and nature of non-compliance. This understanding can be applied in many different ways:

• it provides a foundation for HMRC’s strategy – thinking about the tax gap helps us understand how non-compliance occurs and how we can address the causes and improve the overall health of the tax administration system

• our tax gap analysis provides insight into which strategies are most effective at reducing the tax gap

• although the tax gap isn’t sufficiently timely or precise enough to set annual targets or manage detailed operational performance, it provides important information which helps us understand our long-term performance

The tax gap also provides the public with important information on tax compliance, creating greater transparency in the tax system.

Why is there a tax gap?

There are several reasons why the tax gap exists. Some taxpayers make simple errors in calculating the tax that they owe, despite their best efforts, while others don’t take enough care when they submit their returns.

Legal interpretation, evasion, avoidance, and criminal attacks on the tax system also contribute to the tax gap. It is impossible to collect every penny of tax that is owed – for example, we cannot collect outstanding tax from businesses that become insolvent.

How is a tax gap calculated?

The tax gap estimate has been produced by HMRC analysts, working in line with the values, principles and protocols set out in the Code of Practice for Statistics. We use internal and external data and a range of different analytical techniques to produce annual estimates, which we revise as more accurate data becomes available.

These annual estimates are our best estimates based on the information available, but there are many sources of uncertainty and potential error. To evaluate the uncertainty of our tax gap, we assign an uncertainty rating for each tax gap component, ranging from ‘very low’ to ‘very high’. Errors are shown using error margins or upper and lower bounds where possible.

Tax gap estimates can change from year-to-year due to the availability of data, improvements in the methods we use to estimate them and revisions to previous years’ data. For this reason, it is best to focus on the long-term trend in the results rather than the year-on-year change in numbers when interpreting the findings.

You can find out more about our data sources, methodology, and the analysis used for calculating our tax gap estimates in the ‘Methodological Annex’.

What taxes does the tax gap include?

The tax gap estimates only cover the taxes administered by HMRC, so they exclude any taxes and duties administered elsewhere, such as Council Tax, business rates and Vehicle Excise Duty for example, as well as charges such as the congestion charge.

Estimates of error and fraud in Corporation Tax research and development tax reliefs are published separately in HMRC’s Annual Report and Accounts. Updated estimates of error and fraud in the Corporation Tax research and development relief will be published in HMRC’s Annual Report and Accounts 2022 to 2023.

Estimates of error and fraud arising through the coronavirus (COVID-19) support schemes are not covered in this publication. The COVID-19 support scheme error and fraud estimates for the year ending 31 March 2021 were first published in HMRC’s Annual Report and Accounts 2020 to 2021.

Read further breakdowns and detail on the estimates in ‘Measuring error and fraud in the COVID-19 support schemes: methodology and approach’. Updated estimates of error and fraud in the COVID-19 support schemes will be published in HMRC’s Annual Report and Accounts 2022 to 2023.