The ‘Tax Gap’ i.e the amount of uncollected tax = £36 Billion.

The hole in public finances = £40-50 Billion.

£36 Billion = 90% of £40 Billion.

Therefore, the amount of uncollected tax a proportion of which can be settled and collected through Mediation of tax disputes, represents 90% of the hole (at its narrowest) in the public finances. See Part 1 of my article about Mediation of Tax Disputes published today online and in print in Taxation (Tolley). 

Link for Taxation subscribers to my article published today – Off to mediation with HMRC | Taxation

Why do politicians appear to be doing nothing to encourage the use of Mediation as a tool in collecting unpaid tax in order to reduce the massive hole in the public finances? One solution is to make Mediation of certain tax disputes mandatory, which will also save the Exchequer court and litigation costs (which are ultimately funded by all taxpayers). Another reform would be to remove Schedule 36 cases from the category of ‘excluded cases’. However politicians do not appear to be debating the reduction of the hole in the public finances by encouraging Mediation in Tax Disputes. Why? 

Part 2 will be published in the next issue of Taxation on 5 January 2023. The proof-reading is taking place tomorrow morning – and then it is Christmas!

Please note:

The ‘tax gap’ is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid. In calculating the gap, HMRC takes into account both the letter and spirit of tax law. The ‘theoretical tax liability’ represents the tax that would be paid if all individuals, businesses and companies complied with both the letter of the law and HMRC’s interpretation of Parliament’s intention in setting law (referred to as the spirit of the law). The gap does not take account of taxes and charges administered by bodies other than HMRC. These include council tax, business rates, vehicle excise duty and the London congestion charge. Other exclusions include error and fraud in tax credits and in the Covid-19 support schemes.

Because of the legal premise (above) underlying the calculation of the tax gap, unpaid tax is axiomatically in dispute.

The amount of uncollected tax is currently estimated to be £36 Billion (i.e. in excess of 5% of the total annual tax take) – see: https://lordslibrary.parliament.uk/unpaid-taxes-the-tax-gap/. ‘On 8 February 2022, HMRC published an update to correct an overestimation in the corporation tax and overall tax gap statistics for 2018/19 and 2019/20. In 2019/20, the corporation tax gap was estimated at 7.2%, not 8% as stated in the original publication. The overall tax gap was estimated at 5.2% of total tax liabilities, not 5.3%.’ £36Bn was an increase from an estimated £32bn for the previous year, i.e. the gap has increased.

See also: ‘HMRC criticised over £32bn tax gap estimate’ in the Guardian.
‘Tax experts say shortfall between expected income and actual receipts underplays true scale of fraud in 2020-21 financial year. … Rachael Griffin, a tax and financial planning expert at the investment firm Quilter, said HMRC had shown it was unable to reduce the tax gap after a run of six years when it remained at a similar level.
“The stability of the tax gap over the last few years points to there needing to be a radical change if we are going to ensure that the public coffers are refilled, particularly after they have been so heavily drained due to Covid. The Treasury coffers cannot afford the continuation of this level of tax gap, the missing £32bn would be a welcome boost to the economy.”‘ See also – https://oxfordtax.sbs.ox.ac.uk/what-tax-gap#:~:text=The%20%E2%80%9Ctax%20gap%E2%80%9D%20has%20become,tax%20that%20should%20be%20collected%E2%80%9D