The gap between tax owed and tax paid to HMRC currently sits at £32.1bn and is expected to widen as the UK struggles to combat the cost of living crisis, analysis by RIFT Tax Refunds has shown.

This is despite HMRC seeing a -6.7% annual reduction in the tax gap in the 2020/21 tax year.

According to the latest figures available which were analysed by RIFT Tax Refunds, the biggest contributing factor to the tax shortfall is taxpayers who fail to take reasonable care when recording their transactions or preparing their tax returns, with the tax gap sitting at £6.1bn as a result of their negligence. 

Criminal attacks on the tax system, such as smuggling or VAT fraud, accounts for the second largest tax gap at £5.2bn, while non-payment, largely driven by business insolvency, ranks as the third largest tax gap at £4.9bn.

While HMRC’s data shows that the tax gap has reduced on an annual basis, down -6.7%, criminal attacks and non-payments have still seen an increase at 6.1% and 6.5% respectively. 

Both tax errors and avoidance also ranked as the smallest tax gaps at £3bn and £1.2bn, while the gap caused by legal misinterpretations has seen the largest annual decline at -33.9%.

“Despite a problematic period defined by the pandemic, the total tax gap during the 2020/21 financial year has actually declined on an annual basis,” said CEO of RIFT Tax Refunds, Bradley Post.

“This is certainly a positive given the financial hardship many faced as a result of COVID restrictions, although it’s clear that the pandemic did leave its mark in this respect.”

Post added: “While the tax gap has reduced, it’s likely that this reduction will be short-lived. The expectation is that it could widen quite considerably once the dust settles on the 2021/22 financial year, as many households and businesses have been stretched to breaking point as a result of the cost of living crisis.”

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