Under-declaration of foreign income only a small fraction of tax gap, figures suggest

HMRC yesterday published ‘Undisclosed foreign income in Self Assessment by UK residents, 2018 to 2019’, describing it as ‘Official Statistics in Development’.

The statistics find a net under-declared tax liability in 2018-19 (accounting for HMRC’s compliance yield recovered) for UK residents with foreign income covered by automatic exchange of information¹ (AEOI) of £0.3 billion.

John Barnett, Chair of CIOT’s Technical Policy and Oversight Committee, commented:

“These are helpful statistics to understand the size and scale of the offshore personal tax gap.

“They show the impact of automatic exchange of information on HMRC’s ability to investigate foreign income and the huge amount of data this generates – 7 million accounts, 3.9 million people, around 700,000 of them warranting investigation and around a sixth of those found to be non-compliant. That’s without considering another 700,000 people who don't currently interact with HMRC.

“However, while the number of people estimated by HMRC to be under-declaring is quite large at 119,000, the breakdown of the data suggests that we are talking about a high number of mostly small amounts here rather than large scale tax dodging. The average amount of non-compliance is £2,500 and 98% of non-compliance is for less than £10,000.  This might suggest that most of this non-compliance is about mistakes: complex rules, gaps in double-tax treaties or mistakenly believing that the income would be taxed abroad and therefore not in the UK.  Only about £15 million of the gap is for amounts above £10,000.

“The total offshore personal tax gap of £0.3 billion in 2018-19 is less than one per cent of the overall tax gap which was £32.4 billion in that year and is £39.8 billion on latest figures. It’s true that this is only looking at undisclosed foreign income of identifiable UK resident individuals visible in foreign financial accounts, so does not include companies or income from assets not covered by AEOI data. However, we would expect that what is included would make up most offshore-related non-compliance, given that by 2018-19 most of the world had signed up to AEOI. Our overall sense from these figures is that offshore personal non-compliance is a small part of the overall tax gap.

“We look forward to seeing how the figures can be refined and expanded in the future, bringing in offshore non-compliance not included in today’s figures. This should be seen as the start of a process not the end.

“This analysis demonstrates that HMRC’s compliance activity produces results – around a quarter of non-compliance was identified in the year in question – and shows how, by making smart use of data sharing and analytics, more can be achieved.

“We look forward to seeing what next week’s Budget brings in terms of a plan to tackle the tax gap as a whole. The new government has ambitious plans which will require action on many fronts if targets are to be reached.

“HMRC are right to be putting compliance effort into this area, but far more is being lost in other areas. The small business tax gap, for example, was estimated at £24.1 billion in 2022-23.

“There is no silver bullet for tackling the tax gap - it comes in many different forms requiring many different approaches. Getting it down will require painstaking, methodical work across a range of fronts if it is to succeed.”

Notes

1. Automatic Exchange of Information (AEOI) agreements allow the exchange of information between tax authorities of different countries to help identify tax non-compliance. The information exchanged includes details from financial institutions relating to financial accounts and investments. The UK has AEOI agreements to exchange financial account information under two regimes - the OECD’s Common Reporting Standard (CRS) and the United States Foreign Account Tax Compliance Act (FATCA).