Measuring the tax gap
UK tax administration (HMRC) has faced public demand for more efficient service delivery and greater accountability. Driving much of this is the existence of the “tax gap” – defined as the difference between the amount of tax due to the Exchequer and the amount actually collected in any given year. Historically, widespread evidence of self-employment underreporting has been found in tax audits and empirical studies
Non-compliance by self-employed households (more than 25% of income from self-employment) is estimated to be on average 28%. The link between the estimated income-gap and underreporting was investigated by testing other alternative explanations of the gap. The gap cannot be explained by differing preferences between the two groups, including savings behaviours, financial constraints and measurement error. Self-Employment underreporting varies by sex, age, and region which helps inform about the factors that correlate with non-compliance. The results are consistent with the behaviours found in previous studies, experiments and research conducted using audit data.