Small businesses responsible for 60% of tax gap

Billions of pounds of tax remain uncollected as HMRC reports the tax gap has grown to £46.8bn, equivalent to 5.3%, with small businesses the worst offenders for yet another year

Corporation tax is the biggest unpaid tax, at 40% of the total at £18.6bn, with the worst segment being small businesses, which dominate the tax gap and fail to pay taxes at an industrial scale.

The share of the tax gap attributed to small businesses has increased over the last five years, from 48% of the overall tax gap before the pandemic to 60% in 2023-24, failing to pay a staggering £28.08bn in tax in 2023-24, revealed latest HMRC Tax Gap figures.

The £28.08bn small business figure is split between various taxes but is mainly corporation tax. For example, the HMRC Tax Gap data showed that they did not pay £14.7bn in corporation tax, a further £900m in PAYE and also £5.8bn from business taxpayers in self assessment.

This high incidence of non-compliance, errors and failure to pay by small businesses was the same the previous year, highlighting a major problem with poor compliance by sole traders, and  small and micro companies, which needs to be prioritised by HMRC whether it is by provide more help to this segment of taxpayers or improving guidance so it is easier for small businesses to comply with the rules.

For HMRC and the government, they are hoping Making Tax Digital (MTD) for Income Tax will be the panacea to the problem by ‘reducing errors’, but the jury is out on that, and the results will not be seen for years.

The rest of the business community accounts for 21% of tax gap, while criminal evasion is at 5% and estimated non-payment by the wealthy is a further 5%.

Another £3.9bn was lost through total PAYE, while the hidden economy, totalling £1.5bn lost tax, is split between £600m from culprits described as ‘ghosts’, and a further £900m from moonlighters taking cash payments and not disclosing income.

HMRC has made progress on VAT, with a sharp improvement in collection rates, with only 19% of tax gap now down to VAT, compared to an extraordinarily high 28% the previous year. However, this still means £8.9bn of VAT went unpaid, and the improved figure only gets HMRC back to pre-covid levels after the tax authority eased off enforcement and compliance activity during the pandemic.

The overall tax gap was pretty much unchanged from the previous year’s final figure after various adjustments saw the final outcome being adjusted to £46.4bn, or 5.6% in 2022-23.

The tax gap estimate, the difference between what tax is expected to be paid and actually paid, was 5.3% for the 2023 to 2024 tax year, down from 5.6%. Over the years, this figure has improved from 6.9% in 2013-14, although the tax base was smaller so only £36.5bn of tax were left uncollected.

While £46.8bn was unpaid in 2023-24 tax year, HMRC collected £829.2bn, representing 94.7% of all tax due.