UK Tax System: Tax Gap, Avoidance, Evasion, and Government Response

This report provides an overview of tax-related concepts in the UK, focusing on the tax gap, tax avoidance, and tax evasion. It explains the differences between tax avoidance, which involves legal methods to minimize tax liability, and tax evasion, which involves illegal methods. The report details aggressive tax avoidance schemes and arrangements used by taxpayers, such as offshore accounts and VAT supply splitting. It also outlines the measures adopted by the UK government and HMRC to minimize tax avoidance and evasion, including legislative amendments, increased scrutiny of large businesses, and international agreements. The report concludes that while the government has taken effective steps, there is a need for continuous improvement to make these steps more taxpayer-friendly. The report references key sources including academic journals and government publications.

Government, HMRC
and Tax

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
1. Tax Gap:.............................................................................................................................3
2. Explanation about “Tax Avoidance” and “Tax Evasion” and persistent and aggressive tax
avoidance scheme or arrangements:.......................................................................................3
3. Measures adopted by government to minimise tax avoidance:..........................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
In UK, tax is major source of income for government. Tax is collected on income,
product and services by government. Tax income of government is classified as Direct and
Indirect, direct tax includes Tax on income, capital gain, inheritance tax and corporation tax
where as indirect tax includes excise duties, value added tax, stamp duty etc. HMRC (HM
Revenue and Customs) is regulatory body responsible for tax collection in UK and provides a
online platform for computation and payment of tax (Braithwaite, 2017). This report provides a
brief discussion on concept of tax gap, tax avoidance, tax evasion, arrangements used by tax
payers, relevant steps taken by government and HMRC.
TASK
1. Tax Gap:
The term tax gap refers to amount of difference arise between income generated by
government though various tax revenue under tax system and amount of tax actually received by
government. This amount of tax gap is expressed by tax reduction system or optimisation
arrangements. However practically it is difficult to determine a fix or certain interval of tax gap.
Such gap is result of tax avoidance and tax evasion and countries across the world are dealing
with this issue (Khwaja and Iyer, 2014).
2. Explanation about “Tax Avoidance” and “Tax Evasion” and persistent and aggressive tax
avoidance scheme or arrangements:
a. Tax Avoidance: It simply refers to application of various legal ways or methods to make
arrangement in income of any taxpayer to reduce or minimise amount of tax on income.
Arrangement used by taxpayers under avoidance are inspired from legal practice or loop holes in
tax regulations. Using various deductions to reduce tax expense, applying tax credits like work
opportunity tax credit, formulate tax deferral plan under scheme of government etc. are some
major examples of tax avoidance.
b. Tax Evasion: It is looks like tax avoidance but in tax evasion illegal methods or ways are
used by tax payers to intentionally avoid or evade source of income to reduce amount of tax
actually payable. It is considered as offence under tax system and penalties are prescribed in acts
and regulations to prevent such act. Producing incorrect or false information to tax regulatory

about source of income and business, payment of tax below the amount payable intentionally etc.
are examples of tax evasion.
c. Persistent and Aggressive Tax avoidance scheme:
There are several tax avoidance and tax evasion scheme which HM revenue and customs
(HMRC) has started to crack when a large number of cases involving some well known
personalities came into picture which they called K2 scheme. This scheme involved companies
which open an off-shore branch. In this scheme the employee resign from his job and after some
time get rehired by these offshore branch which basically have no assets or operations, for a
lesser salary. Then the company give employee a huge amount on loan, which reduces the
amount of tax payable. The second scheme which the companies use to avoid tax is VAT Supply
Splitting. In this scheme the customer splits there single order into different small orders which
results in the lower VAT rate applied to each order (Rogoff, 2017). The HMRC consider it to be
a tax avoidance scheme and technically legal. The commonly used way to get tax benefit is
opening an off-shore accounts. The European Parliament has implemented the fourth legislation
which will require that all the multi-national companies has to report their financial data form
every countries in which these companies are operating. This scheme of tax avoidance came
when document was leaked from 2016 which had the report and financial details of approx more
than 200,000 off-shore accounts known as Panama Papers.

3. Measures adopted by government to minimise tax avoidance:
(Source: What's the government doing to reduce tax avoidance and evasion? Infographic, 2013)
During recent year, UK's Government has taken several steps to avoid or minimise tax
evasion and tax avoidance. In series of these steps government has outlined approx 21 measures
to reduce the tax abuse. From these 21 measures, 12 measures are provided to protect revenue
and rest 9 are for enhancement of tax income flows and resources. In UK amount of tax gap has
been reduced to 5.7 % in 2016-17, which is lowest in five year and considered as remarkable
achievement although there are improvement required. Beside this government and HMRC is
plan to raise £240m tax from VAT by tightening and imposing strict regulations in VAT
collection system, and also issued a notifications and circulars regarding imposition of higher
penalty on late deposit and avoidance of tax. But some times these steps hurts the sentimental of
small traders so government should determine grades to bifurcate penalties. In UK government
makes amendments in laws to stop the use of new arrangement of tax avoidance as per reports
provided by HMRC. It also make initiations to investigate more into large business for this

government continuously expanding the powers of HMRC to identify and deal with such affairs.
Government is going to sign a important contract with Swiss government to ensure that
deposited income in Swiss bank are not black money. Government is promoting tax payers to
settle their accounts and unethical acts before HMRC trace them. A big step towards
empowering DOTAS rules which leads to detection of tax avoidance at initial stage. Therefore
from above discussion it is clear that effective steps are taken by government to minimise tax
avoidance and evasion, however there is improvement required to make these steps tax payer
friendly.
CONCLUSION
From above report its has been articulated that tax gap is major issue before UK's
government and such gap is result of tax avoidance and tax evasion. Taxpayers whether
individuals or corporates always tries to reduce or minimise their tax amount payable and
develops new ideas and way to tax avoidance and tax evasion. So government should track these
such new ideas and ways and make changes in regulations to reduce tax gap. HMRC' s current
steps are impressive and it tries to frame potential steps while considering previous cases and
circumstances.

REFERENCES
Books and Journals:
Khwaja, M.S. and Iyer, I., 2014. Revenue potential, tax space, and tax gap: a comparative
analysis. The World Bank.
Braithwaite, V., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.
Rogoff, K.S., 2017. The Curse of Cash: How Large-Denomination Bills Aid Crime and Tax
Evasion and Constrain Monetary Policy. Princeton University Press.
Online
What's the government doing to reduce tax avoidance and evasion? Infographic, 2013. (Online).
Available through<https://www.gov.uk/government/news/whats-the-government-
doing-to-reduce-tax-avoidance-and-evasion>