Widening tax gap casts doubt over MTD

The amount of tax lost in the UK through non-payment, avoidance and fraud increased to 5.3% (£35 billion) in 2019/20, official statistics show.

HMRC secured 94.7% of all tax due in 2019/20 but saw its ‘tax gap' widen, despite the introduction of Making Tax Digital (MTD) for VAT.

Income tax, National Insurance contributions and capital gains tax made up the largest share of uncollected taxes (36%), closely followed by lost VAT (35%).

MTD for VAT kicked in for most of the UK's VAT-registered businesses from 1 April 2019, and will apply to all VAT-registered firms from 1 April 2022.

HMRC said the compulsory digital accounting methods for certain VAT-registered businesses would simplify the tax system and help close the tax gap.

In total, 8.4% of all VAT payments went uncollected, prompting economist and MTD critic Richard Murphy, of Tax Research UK, to state "MTD for VAT had failed".

The Chartered Institute of Taxation (CIOT) said "there's no sign" that MTD for VAT has so far reduced the amount of tax lost to "avoidable errors".

John Barnett, chair of technical policy and oversight committee at CIOT, added, however, the tax gap figures "suggest HMRC is still collecting about 95% of tax due, which compares well internationally".

The UK's overall tax gap rose 0.3% in 2019/20, up from 5% in 2018/19 - the first increase since 2013/14 when the gap was 7.1%.

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