Flexible workers and other small and medium-sized enterprises (SMEs) account for almost half of the tax gap, according to a new report by HMRC. The tax authority has estimated that the overall gap is now worth £34 billion, which equates to 6.4% of tax liabilities.
The Government has invested around £1 billion to help HMRC to improve tax compliance, but the tax authority has not revealed any figures related to IR35, despite its belief that it could generate an additional £430 million in tax if it was implemented effectively.
The tax gap is calculated by HMRC’s view on what it should be paid and the tax it actually receives. The figure has fallen from £37 billion a decade ago, but it is unlikely to appease the government following its substantial investment in clamping down on tax.
George Bull, senior tax partner for accountancy firm Baker Tilly, said there was no easy solution to reducing the gap further and urged the government to look to other means to meeting their fiscal obligations.
Despite the modest reduction, Financial Secretary to the Treasury David Gauke said the UK now has one of the lowest tax gaps and stated that the government was determined to continue its fight against avoidance and evasion.
HMRC has been looking at ways to make IR35 more effective and published a consultation document for reform earlier this year. The legislation targets the small minority of freelancers and other individuals that avoid tax payments by acting as a “disguised employee.”