Our tax code is too complicated – of course there’s a tax gap

News broke this week from The Treasury that the “tax gap” between what is owed to HMRC and what is actually collected hit £34 billion last year. It’s an eye-catching figure and it understandably makes the millions of taxpayers who pay every penny they’re asked wonder why they bother.

HMRC attributed some £3.1 billion of the gap to tax avoidance, whilst another £14.2 billion came from uncollected Income Tax, National Insurance Contributions and Capital Gains tax. £12.4 billion of the gap came from VAT, whilst £3.9 billion of Corporation Tax and £2.9 billion of excise duties went AWOL.

This is, clearly, a less than ideal situation. That £34 billion would go a way to taking a chunk out of our extraordinary £100 million-plus deficit, so HMRC must do everything they can to close the gap.

However – brace yourself – it actually is possible to have a little sympathy with the taxman in this particular instance. It’s not the fault of the tax staff that politicians over the road in Parliament have conspired to create a tax code so lengthy and labyrinthine that it is borderline impossible to understand all of it, though there’s still no reason other than incompetence that HMRC got 5.5 million tax bills wrong last year. It’s undoubtedly true, though, that one of the reasons that there’s a £34 billion gap in the finances is that our tax system is simply too complicated.

It shouldn’t be a surprise that if you create a 17,000-page tax code, people who can afford it will find accountants who can find loopholes. Nor should it be surprise that it’s difficult to administer the plethora of tax breaks, industry subsidies, and exceptions that have turned what should be a simple document into a rival to War and Peace. We challenged Britain’s fastest reader to reel off the tax code back in 2011 and it nearly killed him; it’s got longer since.

Delving further into the numbers reveals a little more. Some £1.1 billion of tobacco taxes went uncollected, largely because 9% of packets were sold on the black market. This represents a £300 million increase on the year before. Turns out if you put up the price of something through high taxes, people try and avoid them. Who knew?!

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