The Treasury earns £8 billion less each year than it should thanks to underpayment of tax by self-assessed workers.
One in three (some three million) self-assessed workers pay less tax than they should according to think tank the Social Market Foundation (SMF).
Around 200,000 people account for half the tax lost, underpaying collectively by £4 billion, according to the research conducted by Dr Arun Advani of the University of Warwick and Centre for Competitive Advantage in the Global Economy (CAGE).
The SMF and Dr Advani are calling for more tax auditors to be hired to tackle underpayment.
They say one tax auditor would recover enough to pay for their own jobs plus the jobs of four NHS nurses.
Dr Advani says it is important to distinguish between “small errors” made by some workers by accident, and large deliberate underpayments.
He estimates “conservatively” that a tax audit costing £2,500 brings in on average £10,000-15,000 in extra tax for HMRC.
However, despite this, the number of audits carried out by HMRC has been falling in recent years.
Dr Arun Advani comments: “Few public policies offer better returns than four to one in only five years. With these revenues, the Treasury could pay each auditor’s salary and the salary of four additional nurses as well.
“More money from the Treasury to do these valuable audits would reap significant rewards, paying for itself and bringing in additional funds.”
“Cutting auditors is the hallmark of short-term thinking. It reduces current costs, while money from past audits keeps rolling in. But that is not a sustainable strategy.”
Dr Advani’s research also sheds light on the types of people who underpay. Men are one and a half times more likely to under-report their incomes and also underpay.
Working age individuals under-report more than pensioners as pension income is harder to under-report than self-employed income.
A quarter of people with property income under-report, but that quarter under-report more than half of the property income they receive.
Dr Advani says targeted tax audits have the effect of not just recovering lost money but also correct behaviour of under-reporters for up to eight years after.