CBI: The falling tax gap

The proportion of Corporation Tax that goes unpaid has fallen to a record low.

But public perceptions of business tax compliance fail to reflect the positive change in business culture and the work of HMRC in closing the gap.

What is the tax gap? Every year, the government estimates the “tax gap”. This is the difference between the total amount of tax that should, in theory, be collected if everyone paid the amount of tax the government is expecting them to pay, against what is actually collected. This includes an estimate of the Corporation Tax gap. Corporation tax is the tax paid by companies on their profits.

In a recent survey that Ipsos MORI conducted for the CBI, 55% of the public said that they thought that the Corporate Tax Gap has been increasing, yet the scale of business tax avoidance has been falling for the last 10 years. The Corporation Tax gap[1] has halved from 14% in 2005-06 to 7% in 2013–14.

Tax gap graph

 

Business pays 70 percent more tax than the public estimate

The most recognised business tax is Corporation Tax. You might not know that the biggest business tax is actually Employer National Insurance. In the next five years, businesses are also expected to contribute more in Business Rates than individuals pay in Council Tax. Find out more »>

People think that business contributes 17% of taxes paid, in reality the business tax contribution is £175 billion and accounts for 29% of all tax paid in the UK. The total tax paid by business in 2014–15 was enough to pay for the government spending on hospitals and schools combined. The amount that the public underestimate the business tax contribution: £72 billion per year, is an amount larger than the entire UK education budget, or enough to pay for over £1,100 of public spending for every man, woman and child in the UK.

HMRC estimates of corporate tax avoidance are a fraction of what the public perceive

61% of the public claim that business does not pay its fair share of tax. Some have claimed that if only business paid its ‘fair share’ the government’s budget deficit could be eliminated without the need for cuts to public services or benefits.

The latest HMRC analysis shows that only 9% of the £34 billion tax gap is due to unpaid corporation tax. This would barely make a dent in government borrowing, which was around £100 billion in the same year. By contrast, £4.1 billion was lost due to the hidden economy from people either not declaring or under-declaring their income.

Business welcomes government action on tax avoidance and evasion

“The CBI strongly supports and has engaged constructively with international efforts to make the international tax system more robust to tax avoidance”

The vast majority of businesses pay the right amount of tax at the right time. Tax evasion is unacceptable, not only directly costing the government but indirectly all the law abiding businesses who face unfair competition from rivals that fail to pay.

The CBI strongly supports and has engaged constructively with international efforts to make the international tax system more robust to tax avoidance[2]. Coordinated action by governments, which creates internationally consistent rules can both simplify the international tax system and help continue the welcomed trend of a falling corporate tax gap.

To help shift public perceptions there is a role for businesses to be more upfront by explaining more about the tax that they pay in an accessible format. In the CBI’s Living the Principles document, the CBI highlights ways in which businesses have adopted the CBI’s Statement of Tax Principles to ensure responsible tax management practices are in place.

 

[1] as a proportion of total CT liabilities

[2] OECD Base Erosion Profit Shifting (BEPS) work


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