The UK’s $39 billion tax gap has left a ‘financial black hole’ for its already-battered economy

• The UK’s tax gap, which shows the balance between the amount of tax expected and actually paid, fell to a five-year low of $39 billion in the year 2018-19, official data showed.
• The UK’s revenue department collected a total of £628 billion ($794 billion) in that year, making up about 95% of the tax expected by authorities.
• But any impact from the Covid-19 outbreak on the tax gap will likely only be seen in 2020-21.
• Adding to the economy’s woes, “a financial black hole of £31 billion remains eye-watering by any standards,” a senior analyst at AJ Bell said.

The gap between the amount of taxes expected and what was actually collected by the UK’s Revenue and Customs department was £31 billion ($39 billion) for the year 2018-2019.

Although that seems like a massive number, it is actually a 15 year low in percentage terms, according to a report released Thursday by the Her Majesty’s Revenue and Customs, the government department responsible for taxes in the UK.

The tax gap shockingly equals the amount spent on relief measures to stem an economic downturn from the coronavirus pandemic so far.

The estimate represents 4.7% of the UK’s tax liabilities, which means that the HMRC collected 94.3% of all tax due between 2018 and 2019. In the previous year, it stood at around 5%.

A gap may arise from several reasons such as errors in simple calculation by taxpayers, legal interpretation, evasion, avoidance, and criminal attacks on the tax system.

“It is impossible to collect every penny of tax that is owed – for example, we cannot collect outstanding tax from businesses that become insolvent,” the department said in a statement.

Despite the UK securing its lowest recorded tax gap in percentage terms since comparable data started in 2005, it is still a huge cause of concern because of the country’s grave current economic state.

The UK’s gross domestic product has declined by its largest amount in over 40 years amid the pandemic, and shrank by 20% in just one month alone.

Adding to the economy’s woes, “a financial black hole of £31 billion remains eye-watering by any standards,” Tom Selby, senior analyst at AJ Bell, said in a note.

Selby pointed out that the missing cash equates to the entire budget of Departments for Transport, and Business, Energy and Industrial Strategy (BEIS), and that the pandemic’s strain on public finances would add greater pressure to close the tax gap in coming years.

“These efforts will likely focus on people breaking or bending the rules to artificially reduce the amount of tax they pay,” he said.

“However, simplification of the rules individuals are required to navigate and efforts to further modernize the system of reporting could also go a long way to reducing tax errors.”