One-third of people who file a self-assessment return do not pay as much tax as they should, creating a loss to the Treasury of £8bn a year, research has found.
More than 10m people fill out a self-assessment tax return each year. These include self- employed, individuals earning more than £100,000, company directors and those who receive income from renting out a property.
HM Revenue & Customs estimates that £48bn of self-assessment tax should be paid annually. However a study published this week calculated £8bn of this is not collected due to under- reporting of income by taxpayers. Almost as much tax is lost as the UK spends on fire services, buses and nursery places.
Using HMRC data of random audits of self-assessment taxpayers going back 10 years, the research found 36 per cent of people who were randomly audited were found to have errors in their returns that had resulted in underpayment of tax.
The average additional tax owed was found to be £2,320. However, most of the missing tax was owed by a very small minority of people owing more than average. Just 200,000 people — around 2 per cent of self-assessment taxpayers — accounted for £4bn of the underpayment.
The research was conducted by Arun Advani of the University of Warwick and Centre for Competitive Advantage in the Global Economy and published this week by the Social Market Foundation.
“While this might make us sound like a nation of cheats, most of these people owe relatively small amounts,” said Mr Advani. “It might be that some of these cases are genuine mistakes.”
He called on HMRC to increase the number of audits it carries out, which has been falling for several years. Taxpayers who were audited by HMRC tended to declare more tax for around five years afterwards, his research discovered.
The research also revealed a breakdown of the types of people more likely to under-report their income, with men more likely to do so than women. Forty per cent of men were found to owe additional tax revenue in random audits, compared with only 27 per cent of women.
An HMRC spokesperson said in a statement that the figures were a number of years old. “New systems and new ways of working were introduced over the period, meaning that risks that might have been dealt with as a self-assessment inquiry in the earlier years are now being dealt with by new means.
“The small proportion of audits that HMRC carries out randomly do not have revenue as their sole purpose. Instead, they help HMRC gather valuable data about overall non-compliance, and improve the targeting of its activities,” HMRC added.
The study found that 59 per cent of taxpayers declaring only self-employment income were found to have under-reported. Mr Advani said: “This is not surprising since self-employment income is almost entirely self- reported, and income is often received from a large number of small transactions, making it easier both to make mistakes and to obscure deliberately.”
Under-reporting was most prevalent in the construction, transport and hospitality industries, where more than half of taxpayers under-reported.
Self-assessment taxpayers in Northern Ireland were more likely to under-report than those elsewhere in the UK. Half of taxpayers from Northern Ireland were found to be non-compliant, compared with between 35 per cent and 39 per cent across the rest of the UK.
In revenue terms, the largest amount of tax owed by a group of taxpayers came from those declaring property income. While only a quarter of people with property income were found to have under-reported, those taxpayers had under-reported more than half of the property income they had received.
To increase the tax take, HMRC should focus on people whose characteristics suggest they are likely to be underpaying large sums, Mr Advani said.
Robert Palmer, director of Tax Justice UK, a campaigning group, said: “What this research reveals is there’s a big chunk of tax that doesn’t get paid and with some resource [from the government] could bring in quite a lot more money. HMRC has had its headcount and funding slashed in the last 10 years. The government needs to properly invest in HMRC.”
Zena Hanks, partner at accountancy firm Saffery Champness, said the fall in audits by HMRC could be a result of the government’s increasing focus on its Making Tax Digital programme.
“MTD is now live for VAT purposes and we expect to see MTD for income tax come online over the next couple of years,” she said. “Information will be required to be reported on a much more ‘real time’ basis which could improve tax receipts.
Iain McCluskey, tax partner at PwC, added that the shift towards a more cashless society would also lead to a reduction in the amount of tax under-reported.
Source: FT News