Recommendation 2

Resourcing HMRC’s compliance work to maintain rather than reduce the tax gap means the government is missing out on billions in lost revenue. HMRC estimates that the tax gap—the difference between the amount of tax that should, in theory be paid to HMRC, and what was actually paid—was £32 billion in 2020–21, or 5.1% of all tax liabilities, the same proportion as in 2019–20. This masks changes in the tax gap for each category of tax, with the tax gap for VAT decreasing while the tax gap for Corporation Tax, excise duties and income tax Self-Assessment increasing in 2020–21. HMRC bases its compliance performance and resourcing on maintaining the tax gap and stopping it from growing. However, there remains scope for reducing it; for every £1 that HMRC spends on compliance activities, it recovers £18 in additional tax revenue. The pandemic has created more uncertainty in the data that HMRC uses to estimate the tax gap, but HMRC does not currently report the range of uncertainty in its headline estimate. HMRC told us that this would be difficult to do, but possible. Recommendations: • HMRC should set out what level of investment in its compliance teams would be needed to reduce the size of the tax gap, and confirm what, if any, intention it has to pursue this. • HMRC should also calculate and report an uncertainty range for its headline tax gap estimate to provide more transparency to users of the estimate.