Black economy leaves £42bn hole in Britain's tax accounts

The Treasury missed out on £42bn last year because of tax fraud, avoidance and underpayment – money that would have prevented many public services being slashed in next month's spending squeeze.

HM Revenue and Customs yesterday admitted that the tax gap – the difference between the cash received and the theoretical amount that should have been collected – had widened by £4bn over the last 12 months.

It is already facing bitter criticism over its admission that the tax bills of up to 24 million workers could have been miscalculated. Last night, ministers pledged a fresh drive against tax evasion following the disclosure that 9p in every pound due in tax went unpaid in 2008-09.

An estimated £15.2bn in VAT receipts was not collected by tax officials last year – equivalent to one-sixth of the money that should have been due, and a sharp increase on £11.7bn the year before. The finding chimes with a recent study which concluded that the "informal economy" represented about 14 per cent of Britain's gross domestic product.

But the figure could also reflect the increasing rate of business failures during the recession. Many companies pay their VAT receipts up to 18 months in arrears, by which time they may have gone bust. The country missed out on a further £14.5bn in receipts from income tax, national insurance and capital gains tax, with about 7 per cent of direct taxes unpaid.

The biggest proportion (£5.8bn) was accounted for by individuals under-declaring on their tax self-assessment forms. "Ghost" workers who fail to disclose any of their income dodged £1.3bn in tax, while those not owning up to second jobs evaded £1.8bn. Companies underpaid £6.9bn in corporation tax, almost half of which was put down to deliberate avoidance by large firms.

The total tax gap grew to £42bn after remaining stable at £37bn to £38bn in previous years.

The scale of the underpayments emerged as cabinet ministers continue negotiations with the Chancellor, George Osborne, over cuts they will have to make from departmental spending.

David Gauke, the Exchequer Secretary, said: "The tax gap number is staggering. This government is committed to taking the necessary action to bring it down – by taking steps to reduce tax avoidance and evasion, including by the richest people in our society."

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