Small businesses failed to pay £20bn in taxes

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The largest share of the tax gap is down to small businesses which do not pay the right amount of tax, either by making careless errors, failing to take reasonable care or deliberate evasion

The latest HMRC figures showed that 56% of the tax gap related to underpayment or non-payment of tax by small businesses, accounting for £20.2bn of the total £36bn tax gap in 2021-22.

Non-compliance by small businesses has become an increasing problem for HMRC over the last five years, up from 40% of the total in 2017-18.

Over the same tax year, large and mid sized businesses did not pay £7.7bn in taxes, an area where HMRC is having some success as non-compliance has fallen from 18% of the tax gap five years ago.

Criminal activity and evasion accounted for £4.1bn loss in tax collected.

Errors, a lack of sufficient care, evasion and criminal attacks all contributed to the tax gap. Nearly a third (30%) of all underpayments of tax were due to a failure to take reasonable care, while only 13% of instances were down to evasion. HMRC breaks down the figures so criminal activity is a separate 11% of the tax gap.  

The overall tax gap was £36bn in 2021-22, equivalent to 4.8% of the £739bn total tax collected. This figure was up from £31bn the previous tax year although the percentage gap did not change. It is also the highest figure recorded since 2014-15 when the tax gap hit £36.3bn and was up 12% on the previous year’s performance.

‘Despite the long-term downward trend, the tax gap has remained doggedly static in recent years and in monetary terms has returned to pre-pandemic levels,’ said Dominic Arnold, tax partner at Evelyn Partners.

‘To reduce this gap HMRC needs more resources and effective compliance programmes to tackle those who don’t play by the rules. A recent NAO report suggested that HMRC compliance yield plummeted during the pandemic by a staggering £9bn.’

Corporation tax was estimated as the second largest contributor to the tax gap at 30% (£10.6bn). This has increased from 18% of the overall tax gap in 2017-18.

Dawn Register, head of tax dispute resolution at BDO said: ‘Small businesses accounted for the largest proportion of the tax gap by customer group. This suggests that HMRC might be having more success in tackling non-compliance by larger businesses and could pay more attention to smaller businesses.

‘It could also reflect the fact that businesses struggling in the current tough economic climate are cutting corners on their taxes: that may be tempting but it is high-risk.

‘Certainly the government needs to provide HMRC with more resources but taxpayers – and particularly small businesses - need more support. The tax system is currently far too complex. Greater simplification and modernisation could help reduce the numbers of those who are failing to pay the right amount of tax. New techniques such as pre-population of data in tax returns or digital on-screen prompts could help taxpayers reduce careless errors and get their tax right first time.’

Income tax, National Insurance contributions and capital gains tax made up 35% (£12.7bn) of the total tax gap when measured by type of tax.

On an individual level, 11% of the tax gap at £3.9bn, was attributed to taxpayers, with wealthy individuals accounting for 5% (£1.7bn) while the remainder of personal taxpayers were responsible for 6% (£2.1bn).

Jonathan Athow, HMRC’s director general for customer strategy and tax design, said: ‘We want to ensure everyone pays the correct amount. These figures show most taxpayers and businesses pay what they should.

‘This important research enables us to better help those making common mistakes or failing to take sufficient care, as well as tackling the minority deliberately hiding their income.’

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