How much more money would the UK government get in every year if it managed to collect every penny it was owed in taxes?
There are various estimates of the size of this ‘tax gap’. The government’s estimate puts it at around £45bn. Other estimates suggest something over £100bn.
That’s serious money: look at the chart here and you will see that, even on the lowest estimates, the tax gap could easily cover all our debt interest payments every year.
Clearly a large amount of this is related to corporate tax evasion. However, the more I talk to people about their attitude towards their taxes, the more I think our shadow economy is significantly larger than anyone imagines.
Think about a home wedding. The make-up artist and the hairdresser will both come to the venue. They’ll both get £150-£200 in cash. They wont declare it. Nor will the decorator who came to the family house to do a little touch-up painting before the relatives arrived.
Nor will the classic car enthusiast who drives the bride to the wedding in his fancy car or the musicians who play as she enters the marquee (half of the cost of which will probably have been invoiced by its owners for form’s sake). The daughters of friends doing the waitressing most certainly won’t be declaring.
And if the bride or her husband is, say, a freelance graphic designer, website expert, heating engineer, nanny, builder or eBay salesperson, odds are she and her fiancé will have saved for the wedding out of undeclared income too. And if they are in their late 30s, both own flats and have rented out one so they can live together, they’ll be keeping that to themselves as well.
However, it is hardly just the middle classes that are scamming the honest taxpayer. In the New Statesman last week, Alice Miles pointed to work by an anthropologist in a former industrial area of Sheffield. The average family income in the area was shown in the official statistics as £4,000. However once all sources of undeclared income were taken into account he calculated it to be more like £17,000. Add it all up and the World Bank’s numbers suggest that tax evasion in the UK runs to about 13.5% of GDP. That’s not far off £200bn.
And even that could easily be an underestimate. Like everyone, we worry at MoneyWeek that the average real wage has barely risen in a decade. But if you look at the size and scope of the black economy (which has been growing) you might wonder if it is only those who get their income solely via PAYE who are suffering.
The government recently announced a “Plumbers’ Amnesty” with the idea of getting the self employed to confess to non-payment in exchange for lower fines. But while this might bring in a little from those who think they might actually get caught (a similar scheme for doctors brought in £10m), it isn’t going to make much of a real difference. Ask a hairdresser if she knows she is supposed to declare the £200 she made at last week’s wedding and I suspect she’ll tell you she doesn’t. And even if she does she probably also knows she isn’t ever going to get caught if she just pockets it.