Tax & admin · 27 October 2017

60 per cent of self-employed under-report income to HMRC

The cash amount of tax not un-reported averaged around £2,200
The cash amount of tax not un-reported averaged around £2,200

B&b owners and taxi drivers are among those most likely to under-report income to HMRC, according to new analysis that has suggested as many as six in ten self-assessment tax returns fail to declare the full amount owed.

Using data from HMRC tax audits undertaken from 1999 to 2009, the Institute for Fiscal Studies (IFS) think tank was able to find out which kinds of tax payer were most likely to under-report on their self-assessment returns, and in which industries the widest “tax gaps” were found.

The findings suggested that as self-employment booms in Britain, now representing 15 per cent of the workforce, the Treasury has struggled to recoup the maximum tax revenue. In the last financial year, the UK’s overall tax gap is alleged to sit at £34bn, meaning unpaid tax represents six per cent of the country’s overall tax liability.

Most underpayments were discovered to be below £1,000, but a small four per cent minority owed over £10,000 – accounting for almost of missing tax revenue from self-assessment.

Read more: HMRC looks to small businesses to plug tax gap

The study found that over half of all tax owed from self-employed workers in the hospitality and transport industries was undeclared. In those sectors, bed and breakfast owners and taxi drivers were most likely to under-report their income to HMRC.

Strong gender differences were also uncovered in the analysis. Just over a quarter of women filing self-assessment returns under-reported their income, but among men this figure rose to 40 per cent.

Age could also be a factor in non-compliance. Around 40 per cent of those below pension age were failing to declare entire incomes, while only one in five pension-age workers were guilty of under-reporting on self-assessment.

Commenting on the findings, Helen Miller, IFS assistant director, said the study had been able to shed light for the first time on exactly where tax revenue was lost.

“The self-assessment tax gap is significant,” she said.

“This new research fills in some of the details about where the revenues are being lost. Most revenue is lost to a relatively small proportion of people who evade large amounts of tax. Evasion is highest for the types of income which are easiest to under-report.”

Arun Advani, assistant professor at the University of Warwick and author of the study, said: “Between errors and deliberate under-reporting, a significant share of self-assessment tax goes unpaid.

“Audits bring in tax directly, but also change taxpayers’ behaviour. Audits work not because they scare people into complying in future years, but because they give HMRC more information about people’s incomes. The change in behaviour actually brings in more than the original audit. HMRC have got better at targeting their audits and spotting under-reporting. But, this didn’t translate into more revenue from audits because they did fewer of them.”

HMRC is targeting more small businesses in its crackdown on tax avoidance

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ABOUT THE EXPERT

Simon Caldwell is a reporter for Business Advice. He has a BA in politics and communications from the University of Liverpool, and previously worked as a content editor in the ecommerce industry.

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