1. Applied tax gap analysis in the United Kingdom - Its use in tax administration, and future research
Mick Thackray
Knowledge, Analysis & Intelligence
Enforcement and Compliance
HM Revenue & Customs
June 2012

2. How does HMRC use their tax gaps?
Annual publication
HMRC Vision & Strategic Objective 1
Performance Management
Strategic resource allocation
Evaluation
Future work

3. Defining the tax gap
We define the tax gap as the difference between the tax that is paid and the tax that we consider should be paid. It therefore includes amounts we consider should be due in accordance with the spirit of the law as well as the letter of the law.
This definition is a product of what we use tax gap analysis for – to assess the threats to the tax base. Differences over the interpretation of the law can lead to substantial losses in tax against expected receipts and increase HMRC’s operational costs so are an important part of the picture.

4. Tax gap broken down by behaviour
The tax gap
On September 21st 2011 the latest estimate of the UK tax gap was published: It related to and amounted to £35bn or 8% of theoretical liabilities. This is the net tax gap – ie after HMRC’s compliance activities.
Tax gap broken down by behaviour

5. Tax gap by tax
In 09/10 VAT had the largest tax gap followed by CT. IT has the smallest tax gap – largely because the bulk is collected through PAYE. This is not unexpected as research shows that tax gaps are higher for taxes that do not operate withholding regimes where there is less opportunity to understate income levels. The tax gap for income tax paid by the self employed is much higher

6. Publication Published in full in September each year
Genuine area of public interest
Allows external analysts to understand - and challenge - methodology
Official Statistics covered by the UK Statistics & Registration Service Act
Current administration’s transparency agenda:
Allows public, and parliament, to monitor HMRC’s performance
Informs public debate on taxation (fiscal deficit and austerity regime)
Counters special interest claims

7. HMRC Vision and Strategic Objective 1
We will close the tax gap, our customers will feel that the tax system is simple for them and even-handed, and we will be seen as a highly professional and efficient organisation
Strategic Objective 1
Maximise revenue to close the tax gap
Our objective is to provide the money for public services by maximising revenue to close the tax gap and improving the extent to which individuals and businesses receive the credits and payments to which they are entitled

8. Tax gap - trends
Overall the tax gap fell in percentage terms between 2004/05 and 2007/08. It rose again in 2008/09 – largely as a result of the increasing VAT gap driven by payment problems arising from the recession.
Note: VAT Gap figures revised in December ( gap.pdf), but tax gap totals not yet adjusted.

9. Performance management
Performance Management Framework
Reporting framework for HMRC senior management
Performance against Strategic Objective 1 reported in tax gap currency:
Direct effects of interventions – ‘cash to bank’
Indirect effects (Future Revenue Benefit): deterrence and prevention effects
Revenue protection: maintenance of tax gaps, eg repayments refused, loopholes closed
Tax gaps themselves are not a target or performance measure
Tax Compliance Risk Overview
Comprehensive assessment of compliance risks and issues for HMRC and HM Treasury senior managers
Financial dimension of risk score based on tax gap estimates
Link to HM Treasury’s fiscal risk management

10. VAT: How has the UK done in recent years?
Discuss trend
£ billion
2005/06
2006/07
2007/08
2008/09
2009/10
2010/11
VTTL
84.7
88.3
92.1
91.7
79.9
94.7
VAT Gap
11.7
10.7
10.1
11.9
8.5
9.2
Source: Provisional VAT gap estimates: Official Statistics Release, HM Revenue & Customs December 2011 (NB: mid-range MTIC estimates)

11. The VAT Gap is only an indicator of levels
Level subject to a margin of error
Robust trend 11

12. Compliance Resource Allocation Management (CRAM)
Main purpose is to inform compliance strategy and resource allocation decisions in Local Compliance, and (under development) Special Investigations & Risk Intelligence Services
Optimal resource allocation decisions require understanding of full impact of resource changes on compliance behaviour, expressed in tax gap currency
Attitudinal segmentation of taxpayers, with conceptual and theoretical models of compliance behaviour, enable us to use a numerical model
Principal uses:
HMRC Strategy March 2010
Spending Review September 2010 (£917m investment)
Ongoing forecasts of Change benefits
PROTECT

13. CRAM – how it works Behavioural change
Population split by customer segment
Split by head of duty CT
VAT EC
ITSA
INPUTS: HMRC activities
Risk identification
Enquiries
VAT Pre-Creds
Compliance Centres
Campaigns
Civil Investigation of Fraud
Prosecutions
Publicity
Current levels of activity
Coverage rates
Hit rates and audit effectiveness
Compliance centres
Evasion referrals (through ERT)
Pre-Creds
Publicity and Prosecutions
Current resource deployment
Resource per activity /
head of duty / segment
OUTPUTS
Average yield per unit
of resource
Current tax
gap estimates
Gross gap per
group / head of
duty
New resource
deployment
New levels of
activity
Changes to
compliance
yield
New gross
and net tax
gap
Behavioural change
New levels of productivity
Customer Group
Large & Complex
SMEs
Individuals
Willing and able
Willing but needs help
Unaware
Potential rule breakers
Rule breakers

14. Segmentation overview for individuals
Stage 1
Stage 2
Stage 3
Mostly Yes
aware of requirement to comply
motivated to comply
Segment 1: Unaware
Segment 2: Potential Rule
Breakers
Segment 3: Rule Breakers
Segment 4: Willing but Need
Help
Segment 5: Willing and Able
Mostly No
opportunity to cheat
able to comply
11% 4%
21%
53%
Note: additional segments for organised fraud and payment defaulters
Individuals Segmentation Summary Pack| 20/04/2017 | 14

15. Evaluation: OECD framework
Outcomes can be viewed over short, medium and long term
Adapted from OECD Forum on Tax Administration: Evaluating the effectiveness of compliance risk treatment strategies

16. Future work Disaggregation or segmentation by: Customer group
Customer behaviour
Customer attitudes (customer-centric strategy)
Bring up to date via synthesis of:
Forecasts
Leading indicators
Business intelligence
Risk Intelligence
Engagement with external academics (credibility)
Continuing research into indirect effects

17. Thank you!