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Self-employed most likely to under-report tax

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Men and the self-employed are more likely to under-report the tax they owe on their tax returns, finds the Institute for Fiscal Studies (IFS).

Around 10 million people file self-assessment tax returns each year, a third of all UK taxpayers. Over a third of those randomly audited by HMRC were found to have errors, leading to an average underpayment of tax of £2,320. This is equivalent to around one-third of the original tax owed. 

Most non-compliant taxpayers (60%) owe less than £1,000. A small number of taxpayers – less than 4% – owe more than £10,000, but they account for 42% of the missing revenue.

Men are more likely to be non-compliant than women (40% versus 27%) and non-compliance is greater among working-age individuals, at around 40% of those below state pension age (SPA), compared with only 21% of individuals above SPA.

The problem of non-compliance is particularly bad among the self-employed, with 59% of taxpayers declaring only self-employment income found to be non-compliant. This may reflect the complexities of declaring self-employment income. Non-compliance is highest in the construction, transport and hospitality industries.

It’s not just the wealthy who misreport their tax – in fact, non-compliance does not vary substantially with income. The cash amount of tax not reported by non-compliant individuals averages around £2,200 across all but the individuals with the top 20% of incomes. For those in the top 20%, with incomes above £47,270, it averages £3,530.

IFS estimated that the cost of an HMRC audit is £2,500, so most do not cover their costs. However, targeted audits can raise more than they cost. The group said audits targeting those with the top 20% of reported incomes would have an average total yield of £10,870 per audit.

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